AIB has beaten market expectations by posting a 10 per cent increase in pre-tax profits for the first half of the year.

The bank said yesterday that it had made a profit of €699 million before tax over the six months to the end of June.

This compares to an equivalent profit of €635 million in the first half of 2003, with the climb attributed to growth in both loans and deposits and tight cost management.

AIB chief executive, Mr Michael Buckley, described the results as "a pretty good set of numbers".

The first-half profits came after AIB took a €45 million exceptional charge to reflect "investigations" into the recent overcharging debacle at the bank.

Analysts took comfort from the profit numbers, which came in ahead of most commentators' forecasts. NCB analyst Mr David Odlum said the results would have been a "blow-out set of numbers" in the absence of the €45 million charge. As it was, Mr Odlum said he would probably be raising his full-year forecasts for the bank by 2 per cent.

AIB itself is guiding adjusted earnings per share (EPS) growth of between 123 and 126 cents for the full year.

EPS growth in the first half came in at 64.4 cents. AIB will award an interim dividend of 20.9 cents, up 10 per cent on the first six months of last year.

Mr Séamus Murphy of Merrion Stockbrokers welcomed signs of improving earnings momentum within AIB's core businesses over the first half, but was cautious on continued margin attrition at the bank.

The group's overall net interest margin in the first six months was 2.46 per cent, down 34 basis points on a year earlier. Eight basis points of the fall was attributed to technical factors relating to the reinvestment of capital, with the remainder due to "business reasons".

Mr Murphy pointed out that the bank was still having "to run fast to stand still", but he acknowledged that the global upward trend in interest rates should see the rate of margin attrition slowing over the coming year.

AIB drew 44 per cent, or €308 million, of its pre-tax profits over the first half from its domestic retail banking operations.

This marked a 1 per cent increase in profits within the division, although this would have been a 16 per cent climb without the €45 million charge.

Mr Buckley said the bank's retail business had recorded 14 per cent volume growth in lending since the start of the year. AIB is concentrating on developing its presence in the personal loan market as growth in its mortgage book, which has boomed over the past few years, falls more into step with the wider market.

Within the retail division, AIB's insurance arm, Ark Life, saw its profits drop from €26 million to €24 million, with the fall blamed on lower margins due to sales of Personal Retirement Savings Accounts pensions.

Retail and commercial operations in the UK delivered a 20 per cent increase in profits, lifting their group contribution to €148 million.

Business was also buoyant at AIB Capital Markets over the first half, with profits increasing by 25 per cent to €162 million.

The contribution from AIB's Polish operations rose by €30 million to €38 million, with the gain enhanced by an exceptional profit of €12 million on the sale of a card-processing business in April. Mr Buckley said the bank's Polish subsidiary, WBK, was not yet managing to develop a market for business lending.

With this in mind, the bank has asked experts from its part-owned US subsidiary, M&T, to visit Poland to help advise on market growth.

M&T itself, in which AIB has a 22.5 per cent stake, contributed €95 million in operating profits over the half, up from €42 million in the previous year.

Shares in AIB closed five cents weaker at €12.40 last night, having strengthened substantially in the run-up to the results.