* AIB H1 profit 437 mln euros vs 838 mln loss year ago
* Impairments tumble to 92 mln euros, net interest margin up
* Confident on stress tests, repaying state bailout (Adds detail, CFO quotes analyst comment)
By Padraic Halpin
DUBLIN, July 30 (Reuters) - Allied Irish Banks (AIB) returned to profit in the first half of the year as bad debts fell sharply, marking a milestone in the bank’s recovery that potentially paves the way for Ireland to start selling its stake.
The Irish government has already cut its holding in part-state owned Bank of Ireland and is keen to offload the remaining stakes acquired when it had to rescue the country’s banks during the financial crisis.
AIB chief financial officer Mark Bourke said the bank was in a good position to attract investment but that the timing was up to the government. Finance Minister Michael Noonan said the results were very good news for taxpayers. “A profitable bank is a more valuable bank, which will, over time allow the state to maximise the return on its investment.”
AIB, whose rescue cost taxpayers more than 20 billion euros ($26.8 billion) - the most given to any Irish bank still trading - made a pretax profit of 437 million euros compared with a 838 million loss a year ago.
The return to profit could also enable the bank to start repaying its state bailout next year.
The bank, 99 percent state-owned, reaped the benefits from higher income, lower costs and a significant fall in provisions.
“We’ve made huge progress,” Bourke told Reuters on Wednesday. “We still have more to go obviously to get the (loan) book to a point where we are growing and that is an important feature of the bank’s next phase.”
Ireland’s economy is forecast to expand well above the euro zone average this year as employment grows strongly. Bourke said this was reflected in improvements in AIB’s small-and-medium enterprise (SME) and corporate loan books, although the mortgage market remained depressed.
AIB had reported a first-half profit in 2011 but only after it imposed losses on junior debtors and sold foreign businesses. It was last in the black prior to that in 2008 before a banking crisis pushed Ireland to take a bailout from the European Union and International Monetary Fund that it completed last year.
The bank flagged its return to profitability in May, highlighting a big fall in impairment charges, which fell to 92 million euros in the six months to June from 738 million in the first half of 2013.
The swing to a profit of 437 million euros was well ahead of the 209 million forecast by four analysts surveyed by Reuters.
Rival Bank of Ireland, which publishes half year results on Friday, said in March that its first two months of the year had been profitable.
With its net interest margin - gauging the profitability of its lending - up to 1.60 percent and moving towards a medium term target of 2 percent, AIB said it expected to remain profitable for 2014 subject to continued economic stabilisation.
AIB said tackling its impaired loan book remained a challenge. The level of bad loans in Ireland - where almost one in five home loans are in arrears - had made a return to profitability elusive for its banks.
The bank’s proportion of owner-occupiers in arrears over 90 days stood at 10.5 percent end-June, while 25.7 percent of all buy-to-let mortgage holders were behind on payments. The bank said the total level of arrears fell by 6 percent in the period.
Ahead of stress tests by the European Central Bank (ECB) later this year, AIB’s core Tier 1 capital ratio, a measure of financial strength, rose to 16.1 percent at the end of June.
Bourke said the bank was confident about its “robust” capital position and the results showed that in the unlikely event AIB had to raise capital, it had the ability to generate more through attributable profits or other internal means.
“These are a very strong set of results with AIB setting a high bar for the other Irish banks reporting H1 numbers,” Ciaran Callaghan, an analyst at Merrion Stockbrokers, said.
“With underlying profitability and capital build strongly exceedingly our expectations, we think the bank is comfortably positioned to navigate the ECB stress tests and to begin the repayment of its first large tranche of state aid by year-end.”
The results raise the chances of AIB partially repaying the government’s preference shares in the bank as part of a review of its capital structure, rather than having to fully convert them into equity, Davy Stockbrokers’ Stephen Lyons added.
$1 = 0.7455 Euros Reporting by Padraic Halpin; Editing by Mark Potter and Jane Merriman