RAISING business volumes, controlling costs and reducing bad debts are the key strategies of the AIB group chief executive, Mr Tom Mulcahy.

While further reductions in bad debt provisions gave a £10 million fillip to 1995 profits, there was solid lending growth in all markets and a reduction in group costs. However, 1996 will be a more difficult year for the banking group.

Intense competition for loans and deposits in all AIB's markets led to further erosion of net interest margins in 1995. This margin the profit on lending less the cost of funds has been on a declining trend since 1993. By the end of December 1995, the margin had fallen to 3.82 per cent from 4.33 per cent at the end of 1993.

While Mr Mulcahy said that AIB has no immediate plans to cut interest rates, the short term trend is downwards following last week's move by National Irish Bank. Further rate cuts would put more pressure on margins.

Also, lending growth is expected to slow this year. Mr Mulcahy forecast growth of 8 to 9 per cent following an increase of 12 per cent in 1995.

With falling interest rates and slower loan growth there is a danger of a significant acceleration in competition for loans. This would further intensify pressure on margins.

In addition, while mortgage lending is growing strongly it now accounts for 18.7 per cent of total group loans from 17.9 per cent in 1994 and the bank reckons it has 17 to 18 per cent of the domestic home loan market this is a relatively low margin though very secure business.

Margins at AIB's domestic operations are expected to suffer further this year. Lending margins in the US and in Britain will remain under pressure.

At 0.4 per cent of average loans, bad debt provisions must now be at or about the lowest prudent level, and some increase must be expected as lending growth continues. This will put further pressure on profit growth. AIB will continue to concentrate on expansion of its franchise in the US and on expanding its funds management operations in the Far East and other markets.

In the US, the bank has a clear cut strategy of expanding in a defined geographical area where it can get the advantages of synergies with its existing operation. The business will be grown organically and by acquisitions.

The bank will continue to open branches in supermarket malls it expects to have about 20 supermarket branches by the year end. These branches are about one third of the cost of traditional branches.

By the end of the decade, AIB aims to have a US operation with assets of $15 billion to $20 billion compared with $11 billion today. In Mr Mulcahy's view "size is not as important as profitability".

Expansion outside the European Union is, in part, a defensive strategy against the likely losses on foreign exchange and money market activities and the costs for the bank if European Monetary Union is implemented. But Mr Mulcahy emphasised that Ireland could not afford to stay out of EMU.