Bank of Ireland said today deposits rose 3 per cent in the four months to the end of October as trading remained challenging amid heightened concerns in the euro zone.

The lender said profit margins should stabilise in the second half versus the first half, but further margin recovery would face headwinds in a more prolonged period of low interest rates. It also said it was in advanced talks to sell more non-core assets.

The bank, the only domestic lender to avoid falling into state control following fresh investment in July, is one of only two Irish banks to have so far refused to bow to political pressure and pass on European Central Bank (ECB) rate cuts.

"We have made good progress on restructuring and strengthening our balance sheet, nevertheless trading conditions remain challenging," the bank said in a statement.

"Continued intense competition for deposits in the Irish market, the elevated cost of wholesale funding pending further deleveraging of the balance sheet, along with the high cost of the Government guarantee have maintained ongoing pressure on the group's cost of funding."

The Government has pledged to radically shrink its domestic banking sector following the property crash, and Bank of Ireland has to sell €10 billion in loans and accept repayment of another €20 billion worth by the end of 2013.

After announcing last month that it had sold or accepted repayment of €5 billion of loans, the bank said today its loan to deposit ratio had improved by 9 percentage points to 153 per cent since the end of June.

That was primarily due to a rise in its Irish and UK deposit book to €67 billion from €65 billion at the end of June.

The June figure included €3 billion of deposits temporarily placed with the bank by the country's debt agency and withdrawn in July in line with the €3.85 billion capital the bank has raised this year.

Bank of Ireland added that it had a core tier one ratio, a key measure of financial strength, in excess of 15 per cent and reiterated its expectation that total impairment charges had peaked and will reduce.

The pace of that reduction though will be dependent on the future performance of its Irish residential mortgage book and commercial real estate markets, the bank said.