AIB Group has reported a pre-tax loss of €0.9 billion for the six months to the end of June, as it took a charge of €2.37 billion for impaired loans, or 3.58% of average customer loans.

This compares with €137m or 0.21% of average customer loans the same time last year.

AIB said its asset quality deteriorated further in the period, mostly in its property portfolios. Criticised loans, or loans that are being watched closely by the bank, have increased to 25% of customer loans. 8.1% of these are impaired.

The bank said it was heavily affected by the serious deterioration in the construction and property sector, especially in its Irish and UK divisions.

AIB said its operating profits for the first six months of its financial year - before provisions - amounted to €1.7 billion, while it posted an adjusted loss per share of 164.4 cent.

In the six month period, AIB said that its customer loans decreased by 2% and customer deposits fell by 12%.

AIB said its operating environment continues to be extremely difficult, but added that the roll-out and creation of the National Assets Management Agency will be a key event for the bank and the industry. However, it said it would be premature to estimate the effect of NAMA on its capital 'at this point'.

AIB reports worsening conditions in Irish market

AIB said its Irish operations reported a loss of €1.5 billion for the first half of the year, compared to a profit of €506m the same time last year. The division's operating profit before provisions was €394m, down 33% with total operating income down 22%.

'This half year has been particularly difficult for AIB Bank ROI, with the pace and severity of the economic downturn adversely impacting all key business lines,' the bank said in its results statement.

'The financial effect of a worsening climate has spread beyond property and construction, with key sectors now experiencing difficult trading conditions. There is also evidence of a more cautious approach by customers to investment opportunities, and this is reflected in subdued demand for credit facilities,' it added.

AIB said that gross customer loans grew by 3% in its Irish division, with mortgages up 8%. However, total customer accounts fell by 3%.

The lender said that the provision for loan impairments in Ireland for the first half of 2009 showed a significant increase over the same time in 2008. The impairment charge for the period was €1.9 billion or 4.95% of average loans, up from €1.2 billion (3.19%) for the second half of 2008. Property and construction accounted for about 82% of the total June charge.

The bank's UK division reported a 17% decline in operating profits for the six month period to £139m as deep recessionary conditions worsened. The impairment provision was £168m compared to £19m the same time last year and was due mainly to declining property values and reduced consumer demand.

In its Polish division, Bank Zachodni WBK recorded an underlying profit before tax of €70m, down 49% on the same time last year as the bank adopted a 'conservative' approach to lending due to the slowing economic conditions.

Pre-tax profits at AIB's Capital Markets division fell by 13% to €252m, while operating profit few by 55% to €475m.

Difficult environment set to continue

AIB said it expects the operating environment to remain extremely difficult through the remainder of 2009. It said there are many risks and uncertainties with recessionary economic conditions continuing to prevail and little compelling evidence of recovery. Customer loan demand is weak and there is continuing strong competition for deposits, it added.

'We maintain an active focus on costs in this difficult revenue generation environment,' it said.

'Asset quality and risk management remains under intense focus and we are comprehensively dealing with credit issues. AIB is relatively well positioned for recovery through its geographically diverse franchises, strong competitive position and firm resolve to manage the business efficiently, it added.

AIB also said its practice now was not to replace people who had left the bank.

Sheehy says rates remain under review

Speaking to RTE Radio this morning, outgoing chief executive Eugene Sheehy said he did not know exactly what amount in loans would be sent to NAMA.

He said loans under €5m may not go to NAMA. When those are excluded from AIB's land and development book, the remainder amounts to about €16 billion and 660 customers.

Mr Sheehy said possibility of increasing interest rates at the bank is under review as the the bank's net interest margin declines.

He said the bank's business is diversified, with more than half of its business outside Ireland and that 88% of the bank's loans can be 'repriced'. He added that the bank is very aware of its customers' stresses.

He said AIB is on track to meet its commitments to the Government under the terms of its recapitalisation in lending to small business this year.

Mr Sheehy said the bank had sanctioned 30,000 facilities in the year so far. That means it has processed either renewals, extensions or new applications for loans since the start of the year, amounting to €1.3 billion.

AIB has €15 billion extended to the SME sector, giving it a 40% market share in lending to small business. Mr Sheehy said AIB is meeting eight out of ten requests from businesses.

'Clearly not all businesses are in a strong position and can get what they want at the moment. The stresses that businesses are under relate to day-to-day cash flows - can they finance their stock, can they collect the debt they're owed, can they get paid for the work they've done?', Mr Sheehy said.

Eugene Sheehy said he believes the bank can meet its €1.5 billion target without selling overseas assets. It had been thought that to raise additional capital AIB would need to dispose of its shareholdings in M&T Bank in the US and Polish Zachodni Bank.

AIB shares closed up 14 cent at €1.86 in Dublin.