AIB's Polish subsidiary, Bank Zachodni WBK, has reported a 33 per cent drop in profits to 48 million zloty (€11 million), almost three times greater than market expectations, writes Siobhán Creaton, Finance Correspondent.

The bank, which contributes about 4 per cent of AIB group's profits, blamed weak demand for credit and intense competition for the depressed revenues. It also signalled that it would not achieve its earnings targets this year.

Bank Zachodni's chief executive, Mr Jacek Ksen, said its plan to raise its return on equity, one of the key measures of profitability, from 11.6 per cent to 15-17 per cent, would now be difficult.

"We are doing our best to achieve the best possible result at the end of the year. But with interest rates falling that rapidly, it will be a difficult task," he said.

Bank Zachodni shares dropped by close to 20 per cent following the news.

The bank has made net provisions of 37 million zlotys for bad debts, up from 32 million zlotys in the previous year.

Large reductions in interest rates have depressed lending margins, while growing competition has led to aggressive pricing by banks trying to protect their market share.

Bank Zachodni is Poland's sixth-biggest bank. It had said it would consider participating in the wave of consolidation in Poland, which is expected to gather pace next year ahead of its entry into the European Union.

The bank has 437 branches.