AIB has reported a loss of €758m for the six months to the end of June, down from the €1 billion loss reported the same time last year.
The bank said it has met its key strategic objectives to date, adding that it is now half way through its three year sustainable profitability plan.
In its interim results statement, the bank said its provisions for bad debts fell by 24% to €738m from €973m the same time last year.
It said it was seeing signs of improvement in the housing market in Ireland including the stabilisation of prices and increased demand in certain urban areas.
The bank said that total impaired mortgages increased from €7.9 billion at the end of December to €8.5 billion at the end of new June.
But it noted that the rate of new impairments has decreased when compared to both the first and second halves of last year.
Since the beginning of 2012, AIB said it has approved over €2 billion in mortgage lending in the Irish market.
See how AIB shares did in Dublin trade today.
AIB, in which the State has a majority holding, said it returned to pre-provision operating profit for the six month period. Pre-provision profits came to €162m compared to pre-provision losses of €110m the same time last year.
The bank said its operating loss before tax and exceptional items for the six month period came to €572m, down 47% on the same time last year, while its total operating income rose by 19% to €916m from €771m.
AIB's chief executive David Duffy described the half yearly results as ''encouraging''.
''We have prioritised our focus on lending to customers across a broad range of sectors providing both debt and equity alternatives. We have also seen positive signs of growth in the SME, corporate and housing sectors. We are well capitalised and have the resources available to support the further growth of the Irish economy,'' he added.
Level of mortgage arrears continue to grow
On arrears in its Irish mortgage book, the bank said the level of loans more than 90 days in arrears rose to 22.7% at the end of June compared to 20.7% at the end of December.
The level of loans in AIB's owner-occupier segment which were more than 90 days in arrears rose to 16.4% from 14.9% on a half yearly basis due to falls in household income and the high level of unemployment.
In the buy-to-let sector, the level of three month arrears rose from 43.6% at the end of December to 47.9% at the end of June.
The bank said its continues to engage with, and offer, ''sustainable'' solutions for its SME and mortgage customers, adding that it expects to see further progress in the second half of the year.
AIB said that employee numbers at the bank fell by about 2,300 from 15,064 in June 2012 to stand at 12,718 in June 2013. It said that this, along with changes to pay and benefits, has resulted in a staff reduction of 16% from the first half of last year.
Its net interest margin - measuring the profitability of its lending - rose to 1.06% from 0.91% at the end of last year, partly helped by the lifting of a costly state guarantee on deposits at the end of March.
The bank's deposit base rose to €64.8 billion from €63.6 billion at the end of last year.
The chief executive of AIB has said the level of strategic defaulting at the bank could be in excess of 20% of those in arrears.
David Duffy said some of those mortgage holders were choosing to pay other debt and some were expecting some kind of deal coming down the tracks.
"As we've got into the mortgage book in greater detail, some people are choosing not to pay. That's escalated to levels comfortably in excess of 20% of the book," he said on Morning Ireland today.
"We've seen situations where people are paying other unsecured debt. It's not a sustainable choice if people want to stay in their homes,'' he added.
David Duffy said the bank would pursue any options available to it, including repossessing properties as a last resort.
"A lot of people in this country are working incredibly hard to pay their mortgage. If there are those who have chosen not to, nobody can live rent free,'' he added.