Allied Irish sees an end to the pain but reports big losses

Allied Irish Bank plunged into the red yesterday thanks to soaring bad loans and its home market's stricken economy.

Ireland's GDP is expected to fall by 9 per cent this year thanks to the bursting of a property bubble and the international financial crisis. But Allied Irish Bank chief executive, Eugene Sheehy, said he believed bad loans – which came in at €2.37bn (£2bn) in the first half – would peak this year. The bank wrote off just €137m in the first half of the previous year.

Investors took heart from that and the shares closed up 14c at €1.86. The bank, one of Ireland's "big two" along with Bank of Ireland, reported an €872m pre-tax loss against a €1.3bn profit a year ago, as the bad debt charge outweighed a €623m gain from a bond swap. Customer deposits fell by 12 per cent and loans dropped by 2 per cent.

AIB sold a 25 per cent stake to the Irish government earlier this year for €3.5bn to prop up its finances.

One in four loans are now at risk compared to just one in 10 at the end of the year and mortgage rates are under review. A substantial chunk of the bank's assets are set to be taken over by the Irish government's National Asset Management Agency. It will particularly focus on property assets which have sent the country's banking sector into a profound tailspin and left its economy as the worst performer in the developed world this year.

Mr Sheehy said: "Land development assets have been the key driver of bad debt. We do though feel that 2009 will be the peak for bad debt. We think we are getting to the bottom of it but the risk to our bad debt charge is still there."

In the land and development book, which contains €10.9bn, three in four of the loans are classified as "criticised" or at risk.

However, the bank is enjoying some support from its British operation, which is focused on business lending and its Polish division, where the economic fall has not been as sharp. "This British business is going very well. The fact that we are a mid-market bank with no exposure to consumer debt has helped. We expect this to continue, although it is facing headwinds," Mr Sheehy said.

There was better news from France where Societe Generale reported a €309m second quarter profit that was down 52 per cent on the previous year but was more than twice what analysts had forecast.