AIB said it had returned to profitability during the first quarter of 2014 - well ahead of schedule - on the back of continued income growth and further cost cuts.

In an interim management statement, AIB said it had seen a significant reduction in impairment charges, while its overall stock of impaired loans also continued to reduce in the three month period.

"The underlying operating performance of the bank returned to post-provision profitability in Q1 with performance moderately ahead of expectations both in terms of income generation and provisions," the bank said today.

AIB said that its total impaired loans eased from €28.9 billion in December 2013 to about €28.2 billion at the end of March.

It said the reduction in impaired loans was due to restructuring activity and write-offs, which were offset by new impaired loans. 

The pace of formation of new impaired loans continued to reduce, it added. The total arrears in its Irish residential mortgage portfolio was stable in the first quarter with both early arrears and arrears of over 90 days declining.

It said it continues to meet targets in relation to the resolution of both SME and mortgage customers in arrears, which it described as a "key priority" for it.

AIB said its loan drawdowns totalled €1.1 billion in the first three months of the year, a 60% increase on the same time last year.

Its mortgage drawdowns in Ireland were about 50% higher in the first quarter compared to the same time last year, while the approval rate also improved.

There is also increased activity in the SME sector, reflecting positive trends in key macro economic indicators and increased engagement across key sectors.

AIB noted the improvement in its net interest margin (excluding ELG fees) from 145 basis points in the second half of last year to 157 basic points in the first quarter of this year on the back of lower funding costs and an improvement in yield on interest earning assets. 

"Our operating performance is trending positively and notwithstanding the challenges that lie ahead, I believe the bank will continue to deliver against our strategic objectives," its chief executive David Duffy said. 

"We remain focused on supporting Irish economic recovery, continuing to build profitability and ultimately returning capital to the State," Mr Duffy added.

The European Commission last week approved billions of euros of Government restructuring aid for AIB. The Commission said the aid granted by the Government to AIB and its subsidiary EBS were in line with European Union state aid rules.

AIB said today that talks with the Department of Finance have started in relation to the possible conversion of some of all of the €3.5 billion 2009 preference shares into ordinary shares and options in respect of the Contingent Capital Notes.

The bank said it hopes to reach agreement in relation to these talks with the Department during the second half of this year. As part of these talks, the bank said it will consider options in respect of repayment of capital to the State.

The bank is 99.8% owned by the State.