ALLIED IRISH Banks reported higher loan losses and large increases in mortgage arrears after posting a loss of €2.6 billion for the first half of the year.

This compared with a loss of €2.1 billion for the same period last year as bad debt provisions rose 26 per cent to €2.9 billion.

Executive chairman David Hodgkinson said he expected loan impairments to peak this year and hoped that AIB would secure private investment next year.

The bank had “positive” talks with potential long-holding investors but deferred an investment until the loan losses were clearer.

Mr Hodgkinson said he was still hopeful that AIB would return to operating profitability on a net basis in 2012. “We do need the economy to show some signs of bouncing back as well,” he said.

Impaired loans rose to 18 per cent of total loans at the end of June from 13 per cent a year earlier, while “criticised” loans – loans which have either become impaired or about which there are concerns – had increased to 34 per cent of loans from 29 per cent.

Arrears of 90 days or more in the bank’s €26.8 billion Irish mortgages rose to 7.8 per cent at the end of June from 4.8 per cent at the end of last year. The bank attributed the increase to the “lag effect” from rising unemployment.

The bank’s buy-to-let mortgages showed a higher level of distress as arrears of 90 days or more increased to 16.5 per cent in June from 9.6 per cent last December.

Plans to appoint a new chief executive in late September or early October were “still realistic”, Mr Hodgkinson told reporters.

There was “a slate of good candidates” in the final selection, he said. Each had been made aware of the €500,000 pay cap and were “all still in the game”, he said.

The candidates included Irish and non-Irish bankers.

Mr Hodgkinson said the bank has raised with Government the possibility of linking the chief executive’s pay to a recovery for the State on its €20 billion injection.

"The concept is one that we have discussed and one that we haven't had a door slammed in our face," he told The Irish Times.

“It is an ‘if’ rather than a ‘when’ – and it would have to be sufficiently long term to be aligned to the Government’s own interests.”

AIB stopped drawing on emergency loans from the Central Bank in April and doesn’t anticipate borrowing from this facility again.

The bank said that it was unable to execute a “big bang” approach to implementing 2,000 planned job cuts as it was “way too risky”.

Deposits fell by about €5 billion, excluding the acquisition of Anglo’s €8.6 billion deposit book.

The Anglo book declined to €6.4 billion as deposits matured.

Some €11 billion in deposits placed by the National Treasury Management Agency will be injected as capital later this week.

The State’s stake will rise from 93 per cent to 99.8 per cent.

Mr Hodgkinson blamed “herd mentality and naive assumptions” rather than “malevolent or sinister intent” for AIB’s heavy losses on property lending during the boom.

“It was inappropriate behaviours, often at senior levels in some parts of the bank, that caused much of the damage.”