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By
Eamon Quinn
May 12, 2014 6:34 a.m. ET
DUBLIN— Allied Irish Banks ALBK.DB -2.86% PLC, one of the few Irish lenders to survive the country's banking crisis, on Monday became the second of the country's dominant banks to say that after several years of posting huge losses it has returned to profitability.
The lender, which required large sums from Irish taxpayers when the country's overblown property market crashed in 2008 and is now almost totally owned by the government, said it had seen a "significant reduction" in impairment charges on its loan books and is considering ways to pay back the government some of its large bailout costs.
The timing of the turnaround is of some importance. AIB is among the major Irish lenders that face stress tests by the European Central Bank this year. The sooner it started making profit, the sooner it would stop eroding its precious capital reserves. The government also wants in time to test the market by selling a minority stake in AIB.
In an interim trading statement on Monday, the lender said "progress is evident across a number of fronts." Excluding the cost of government guarantees, the bank said it posted a net interest margin of around 1.57% in the first quarter. That compares with a net interest margin on the same basis of 1.45% at the end of 2013, it said.
AIB has a small number of shares traded on the stock market. Including the €3.5 billion ($4.82 billion) worth of preference shares Ireland injected into the lender in 2009, the government says its 99.8% ownership of AIB is worth about €10 billion.
Rather than paying a €280 million annual cash dividend it owed on the preference shares, the bank last month said that "following careful consideration" it would pay the government in "bonus" ordinary shares instead. Under the 2009 deal, AIB said that the cost to the bank to redeem the preference shares increases by 25% to €4.37 billion from this Tuesday.
AIB's main rival Bank of Ireland BIR.DB 0.00% PLC—which is 13.9%-government owned—said earlier this year that for the first time since the crisis it has returned to sustainable profitability. Bank of Ireland is therefore facing the ECB's comprehensive tests with a degree of confidence.
Irish lenders have been helped along the road to profitability because the small number of lenders to emerge from the country's banking bust means there is now limited competition for financial services in Ireland.
Analysts say that while there is strong evidence that Ireland's economy is on the mend, Irish banks continue to carry some of the largest problem loans in Europe, a legacy of the country's banking ills.
Economic recovery is under way, but the high level of government and household debt "will continue to pose a significant test for all policy makers," the Irish central bank said last month.
Ireland exited its three year bailout with the European Union, International Monetary Fund and the ECB in December. That deal included requirements that bailed-out lenders should "deleverage" balance sheets by selling off loan books and meeting other funding targets.
AIB said Monday that it had started talks with the Ireland's finance ministry about a so-called simplification of its capital structure and "the bank will consider options in respect of repayment of capital to the state."
