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AIB Returns to Profit in First Quarter as Losses Fall

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May 12 (Bloomberg) -- Allied Irish Banks Plc, the country’s largest government-owned lender, returned to profit in the first quarter as its impairment charges dropped and lending margins rose.

The amount set aside to cover loan losses fell significantly, the Dublin-based lender said in a statement today, without giving details. Impaired loans dropped 2.4 percent to 28.2 billion euros ($38.8 billion) during the quarter from the year-earlier period.

“The bank’s achievement of its return to profitability already in the first quarter, compared to a communicated target of ‘at some point’ during 2014 is eye-catching,” said Stephen Lyons, an analyst at Dublin-based securities firm Davy. “This reflects a much stronger rebound in the net interest margin and greater fall in loan losses than anticipated.”

AIB follows Bank of Ireland Plc and Royal Bank of Scotland Group Plc’s Ulster Bank to become the third Irish bank to signal a return to profit this year as losses from western Europe’s worst real estate collapse ease. The bank’s owner-occupier home loans arrears fell during the quarter, it said today.

“We remain focused on supporting the Irish economic recovery, continuing to build profitability and ultimately returning capital to the state,” David Duffy, the bank’s chief executive officer, said in the statement.

Duffy, who won European Union approval last week for the bank’s 21 billion-euro bailout since 2009, said in March he may start repaying the state after European bank stress tests this year.

Ireland’s second-largest bank by assets said it “hopes to” reach agreement in the second half of the year on talks with Ireland’s Finance Ministry on converting the state’s 3.5 billion euros of preferred stock into ordinary equity.

Net Margin

The bank’s net interest margin, the difference between the average rates at which it borrows and lends to customers, rose to 1.57 percent. The figure in the second half of last year was 1.45 percent, according to the bank’s annual report.

The government controls 99.8 percent of the bank’s stock, leaving 0.2 percent available for investors. AIB rose 2.7 percent to 11.5 cents as of 12:50 p.m. in Dublin trading, giving a market value of as much as 59.9 billion euros, almost three times the pre-crisis peak of February 2007.

The bank is trading at eight times its December net asset value, it said today. European peers are trading at a median of about one times NAV, it said.

Irish Finance Minister Michael Noonan said in January that only by the government selling shares in AIB, possibly before the next election in 2016, would the market be able to establish a proper valuation for the bank.

A full package including full conversion of the preference shares and a renominalisation of the share price is the best way to simplify the capital structure before a possible sale of a stake to private investors in 2015, Fiona Hayes, an analyst with Cantor Fitzgerald in Dublin, said in a note.

The bank “explicitly notes that the share price is too high,” Hayes said. “The small free-float has created this mispricing.

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net Dara Doyle

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