UPDATE 2-Allied Irish expects lower provisions
* Bank says has made substantial progress on restructuring
* Prepares to re-enter capital markets
* Achieves 83 pct of deleveraging target, deposits rise
DUBLIN, Nov 27 (Reuters) - State-owned Allied Irish Banks (AIB) said it expected a material reduction in provisions against bad debts this year as the rise in mortgage arrears slows.
The group is also preparing to re-enter capital markets after Ireland and its banks were locked out two years ago, forcing the state into an international bailout and lenders to turn to the European Central Bank (ECB) for emergency funding.
Rival Bank of Ireland raised 1 billion euros this month in its most significant bond issue in more than three years, a move the country's finance minister described as a milestone for the battered banking sector.
IFR, a Thomson Reuters publication, reported that AIB mandated four banks on Tuesday to sell a three-year covered bond. No details on the timing were revealed.
The loss-making bank, which has received over 20 billion euros ($26 billion) of state support, said its provisions would fall sharply from elevated levels in 2011 when it set aside 8.2 billion euros, a hangover from the bursting of a huge property bubble.
Tuesday's trading statement also said that AIB had made substantial progress on its restructuring plans.
It is axing 2,500 jobs - almost 20 percent of its workforce - and cutting wages by up to 15 percent in an attempt to turn a profit by 2014, though the continued low interest rate environment remained a challenge, the bank said.
Deposits continued to increase at AIB despite outflows of 1.4 billion euros as a result of the previously announced closure of its operations in Isle of Man and Channel Islands.
Those closures are part of an extensive deleveraging plan set under Ireland's EU-IMF bailout and the bank said that as of Oct. 31 it had achieved 83 percent of its deleveraging target of 20 billion euros by the end of 2013.