Allied Irish Banks, Ireland's largest bank, today reported that it plunged into heavy losses in the first half of the year on the back of surging loan defaults.

However, the lender, hammered by the property market meltdown, said it hoped that Irish government plans to create a new “bad bank” would take billions' worth of high-risk loans off its books.

Allied Irish Banks said it lost €872 million (£739.3 million) in the first six months of 2009, in stark contrast to a €1.04 billion profit for the same period a year ago.

Operating profits excluding exceptional items fell to €1.12 billion from €1.24 billion a year ago, reflecting weaker business and lost deposits in the core Republic of Ireland market and in the UK.

AIB said its loan book was increasingly riddled with customers late-payments and non-payments.

As a result, it wrote off €2.37 billion of loans, reflecting 3.6 percent of all its loans, a steep increase on the €137 million write-off in the first half of 2008. AIB categorized 8.1 percent of its loans as impaired.

“We expect the operating environment to remain extremely difficult through the remainder of 2009,” AIB said in its outlook statement.

“There are many risks and uncertainties ... with recessionary economic conditions continuing to prevail and little compelling evidence of recovery. Customer loan demand is weak and there is continuing strong competition for deposits.”

Chief executive Eugene Sheehy said AIB was reviewing its mortgage interest rates but the bank had no plans to sell either of its key overseas assets — its 24 percent holding in M&T Bank of New York and its 70 per cent share in Bank Zachodni of Poland — as part of its recovery plans.

Mr Sheehy said it was too early to say how much of AIB's loan book could end up being sold, at an undisclosed discount, to the government's proposed National Assets Management Agency.

He said AIB's property development books include 660 customers who owe the bank €16 billion.

The outlook for the rest of the year remained "extremely difficult".

"The Irish economy, together with other economies in which we operate, is in a very challenging phase with continuing uncertainty as to the depth of the slowdown in the global economy, uncertainty in relation to interest and currency exchange rates, unemployment and the direction of property markets."

Anglo Irish, Irelands's third biggest bank, was nationalised in January and has received a €3 billion recapitalisation from the government.

AIB and the second biggest lender, Bank of Ireland, have each received a €3.5 billion capital injection from the government.

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