Bank upbeat on outlook for second half

AIB, the State's largest bank, has said it should continue to benefit from economic growth although it expects the downward pressure on margins to continue.

"Looking ahead to the second half-year, the outlook is for continued strong group profit performance, reflecting a buoyant business environment domestically and favourable economic conditions in our international operations," the bank said.

AIB said it stood to gain from the growing equity culture in the Republic, resulting in increased demand for investment products, while the fees for its role in the Telecom flotation will also come through in the second half.

However, the group also faces costs relating to the euro and the millennium bug. It estimates that the total cost of joining Economic and Monetary Union (EMU) will be €26 million (£20.48 million) with €9 million spent by the end of the first half.

The balance will cover costs associated with currency, coinage and further systems' developments.

The bank estimates the cost of ensuring that it is Year 2000 compliant at €40 million with expenditure of €10 million still outstanding.

In the US, the bank has completed the integration and re-branding of its All-first operation and will now focus on returning to revenue growth after an 11 per cent drop in total income in the first half.

However, Mr Mulcahy said the bank would not grow revenue at any price and was avoiding areas such as unsecured consumer loans, which were likely to be the first to suffer in any downturn.

At home, the bank believes margin pressure is set to continue. Mr Mulcahy said that at group level, he expected to see a contraction of 30 basis points (0.3 of a percentage point) in margins over the year as a whole.

"In the Irish context, I don't believe it's over. The market remains very competitive and we should see further pressure but hopefully not of the same scale," he said.

However, the bank expects strong loan growth to continue. It predicts a 25 per cent rise in lending in the Republic for the full year, with overall group loan growth of 15 to 18 per cent.

With regard to its strategy, Mr Mulcahy said the bank was likely to spend the next year bedding down its two most recent acquisitions - an 80 per cent stake in Poland's Bank Zachodni and a 25 per cent stake in Singapore's Keppel TatLee. The bank is now a significant player in the Polish markets with some 346 branches - more than in the Republic - and a 20 per cent market share in western Poland. But Mr Mulcahy also noted that you could never rule out acquisitions.

"Sometimes you make acquisitions when the timing is not right from your own perspective. But you have to make purchases when the shop is open."

Of the sharp drop in the share price - which has fallen by more than 30 per cent from its year highs - Mr Mulcahy said the bank could only operate "as efficiently and effectively" as possible.

He attributed the drop to a number of factors including weakness in the financial sector generally and the prospect that the company will be dropped from the Euro Stoxx 50 index.

He also suggested the bank did not figure high on lists of take-over targets because of the likely inability of any international bidder to extract cost savings by merging the bank with other operations.