UPDATE 2-Allied Irish trims H1 loss, cost cuts take hold
* H1 after-tax loss 758 mln euros vs 1.05 bln euros year ago
* Provisions fall 24 pct to 738 bln, deposits stable
* CFO says arrears not yet peaked, hopes for later this year
* 20 pct of those in arrears strategically defaulting-CEO
By Padraic Halpin
DUBLIN, Aug 1 (Reuters) - State-owned Allied Irish Banks (AIB) trimmed its half-year losses by over a quarter and returned to operating profits, excluding a big charge for impaired loans, as job cuts and reduced funding costs began to feed through.
During the financial crisis, AIB cost taxpayers more than 20 billion euros ($26.6 billion) - the most handed out to any Irish lender still open. Over the past year it has shut branches and cut its staff numbers by 15 percent in a bid to make an overall profit by 2014.
While lenders have shrunk their balance sheets dramatically as part of Ireland's financial bailout, soured loans have made a return to profitability elusive. AIB announced an after-tax loss of 758 million euros for the six months to June.
After excluding a provision of 738 million euros for impaired loans, however, the bank made an operating profit of 162 million euros.
Its shares, which no longer trade on the main Irish stock exchange, rose 3 percent to 0.06 euros at 0800 GMT.
"I think it is still looking okay," AIB's acting finance chief, Paul Stanley, said in a telephone interview on Thursday, referring to the bank's goal of returning to profit in 2014.
"The main risks are credit demand, provisions and credit losses. They are moving in the right direction, so I wouldn't be expecting surprises."
After a property crash forced AIB to sell interests in Poland and the United States, its fate is now tied to a recovery in the Irish economy, which has slipped back into recession.
AIB said in its results that there were some positive trends emerging in loan demand from small and medium-sized business, but Stanley added the caveat that the bank's plan to return to profit is based on higher levels of credit demand than it is seeing so far.
Allied Irish's net interest margin - measuring the profitability of its lending - rose to 1.06 percent from 0.91 percent at the end of last year, partly helped by the lifting of a costly state guarantee on deposits at the end of March.
Excluding the three months it still had to pay the fee, the figure was 1.28 percent, ahead of its expectations. Stanley said it should be in excess of 1.30 percent for the year as a whole.
"AIB's first-half results show some encouraging trends, including margin expansion, cost reduction and a stabilisation in impaired loans," Davy Stockbrokers analyst Emer Lang said.
The bank's deposit base grew 2 percent, while it completed a programme of shedding billions of euros of loans, and its funding from the central bank fell in the first half from the previous six months.
Its loan book is still under pressure, however, from mortgage arrears resulting from the protracted housing crash and high unemployment.
Chief Executive David Duffy said that although AIB had forecast that arrears would peak this year, its view was now uncertain.
The bank's proportion of owner-occupiers in arrears for more than 90 days rose to 10 percent, which compared with an industry average of 12.3 percent. The igure for buy-to-let mortgage holders in trouble, 20.9 percent, was above the 19.7 percent industry average reported by the central bank at the end of the first quarter.
Duffy said the bank was well ahead of central bank targets to address troubled loans. Its main challenge comes from the more than one-in-five homeowners in arrears who choose not to pay, he said, warning they will face action, including repossession.
"Nobody can live rent free, so we have to pursue any option available to us," Duffy told national broadcaster RTE.