AIB has increased its estimate of how much it will have to set aside to cope with bad loans this year to €4.3 billion. This represents 3.25% of its loans, and is higher than the worst-case scenario of 3% outlined when it presented its 2008 results in March.

In a trading update issued to the Irish stock exchange this evening, the bank blamed the worsening economic conditions in Ireland for the bigger charge. AIB said the creation of the National Asset Management Agency would be a 'key event' for the bank and it would work with the Government to speed up its implementation.

It also said mortgage arrears in Ireland were climbing - and stood at 2% of total mortgage loans at the end of March, compared with 1.5% at the end of December.

What AIB describes as 'criticised loans' - which include those it is watching closely - have jumped by around €9 billion to €24.3 billion in the first quarter. 70% of the increase was from its business in the Republic.

AIB said, however, that when the bad debt charges were excluded, its trading profits so far this year were ahead of the same period last year. It said this was mainly due to strong performances in its Capital Markets and Global Treasury divisions.

But AIB said the performance in its other divisions was down on the same period in 2008, with demand for lending weak, though there had been a recent pick-up in home mortgage applications.

The bank also said customer deposits had stabilised after some deposits from foreign institutions went out of the bank earlier this year. Customer resources - which include deposits and current accounts - are around 10% lower so far compared with a year earlier.