* H1 net interest margin 1.65 pct vs 1.34 pct in H2 2012
* Margin target of 2 percent a little less challenging-CEO
* H1 underlying loss 383 mln euros vs 933 mln eur year ago
* Shares jump more than 5 percent
DUBLIN, Aug 2 Bank of Ireland's net interest margin grew sharply in the first half of the year as the only Irish lender to escape nationalisation declared itself a normal bank once again after four difficult years.
The bank said on Friday its net interest margin - a key metric that shows how profitable its lending is - jumped 31 basis points to 1.65 percent in the six months to the end of June, helping it trim its underlying loss by almost two thirds.
The greater than expected increase compared to an 8 basis point rise reported by main rival Allied Irish Banks on Thursday. State-owned lender AIB is targeting a more modest margin of 1.32 or 1.33 percent for the second half of the year.
Irish banks faced huge losses after property prices began to tumble in 2008, pushing some lenders into state hands, closing others and eventually seeing the government seek an EU/IMF bailout.
With provisions for impaired loans falling, mortgage arrears growth slowing and the bank comfortable with the resilience of its deposit base, Bank of Ireland Chief Executive Richie Boucher said the 15 percent state-owned lender was firmly on the mend.
Shares in the bank opened 5.4 percent higher at 0.19 euro.
"It's been a hard four years," Boucher told reporters.
"But we now have a normalised bank which has strong momentum towards profitability... We are in the more pleasant place of having the challenges of ordinary businessmen and women."
The momentum pointed to earlier this year saw its underlying loss before tax fall to 383 million euros ($507 million) from 933 million euros a year ago. Excluding a provision of 780 million euros, it made an operating profit of 380 million euros.
Ahead of sector-wide stress tests due next year, Boucher said Bank of Ireland, which earlier this month won a battle with European regulators to keep its life insurance arm, had also completed its own internal capital review during the past six months and that it was comfortable with its level of capital.
"My eyes are glued to the net interest margin," said Stephen Lyons, credit analyst at Davy Stockbrokers, which expects to upgrade its estimates for the bank, believing it looks well on track to return to profitability next year.
"Most metrics are similarly trending positively but I keep getting drawn back to that margin and its substantial jump."
The margin was well ahead of the 1.50 forecast by six analysts surveyed by Reuters thanks to a repricing of products and the removal of a costly state guarantee on deposits.
Bank of Ireland said that, by the end of June, the margin was higher than the reported six-month average of 1.65 percent. Boucher said its goal of increasing it to 2 percent was now a little less challenging compared to six months ago.
It moved the bank closer to its third main rival, Royal Bank of Scotland's Irish unit Ulster Bank, which reported on Friday that its net interest margin was unchanged on the year at 1.85 percent as its losses almost halved.
GRADUAL ECONOMIC RECOVERY
The problem for Bank of Ireland and other Irish lenders is that they are applying a better margin to a shrinking asset base. Bank of Ireland's loan book decreased a further 6 percent to 87 billion euros as loan repayments continued to outpace new lending despite a pick-up in demand in the last couple of months.
Another major issue for the recuperating sector is the high level of mortgage arrears resulting from a devastating housing crash and unemployment which, although falling, remains among the highest in Europe at 13.5 percent.
The bank's proportion of owner-occupiers in arrears for more than 90 days rose to 7.9 percent, the lowest in the industry where the average is 12.3 percent. Buy-to-let mortgage holders in trouble amounted to 17.6 percent, closer to the 19.7 percent average reported by the central bank.
While AIB's chief executive said more than one in five of its mortgage holders in arrears were strategically defaulting, Boucher said half of the "meaningful portfolio" of homeowners in trouble that had initially refused to engage with the bank had now had their mortgages restructured.
Despite Ireland slumping back into its first recession in four years late last year and economists predicting a second successive year of scant growth, Boucher said the economy was recovering as expected.
"We're seeing signs of a gradual, gradual, slow recovery which is what we anticipated. There will be ups and downs, and it's never going to go in exactly a smooth path," he said.