AIB fell out of favour with investors after reporting a €1.01 billion pre-tax profit for last year. The outturn, some 26 per cent down on the almost €1.4 billion posted in the previous year, was only slightly below market expectations, but the extent to which its profit margins on core lending activities were eroded during the year unsettled investors.

AIB shares slumped on the news with sentiment towards the stock said to be particularly negative in London. By close of business yesterday the shares had shed one euro, falling from €13.30 to €12.30. The 7.5 per cent reduction in the bank's share price wiped more than €850 million off AIB's stock market value, bringing it to €10.4 billion.

Profits were hit by a range of exceptional items and adjusted earnings per share fell 11 per cent to 109.5 cent. However the bank said that stripping out once-off items, underlying adjusted earnings per share rose 3 per cent,giving a more accurate measure of its progress during the year to December 2003. When currency impacts are netted out - the bank lost out when translating sterling and dollar profits - the rise is 7 per cent.

AIB group chief executive, Mr Michael Buckley, said he expected AIB's earnings growth to be back in "double digit territory" by 2005.While the strong euro would continue to have an impact on profits, Mr Buckley said that business so far this year was strong, volumes were buoyant and he expected a "significant turnaround in the bank's Polish operation and double digit earnings growth from the US. The total dividend for 2003 was 54 cent per share, a 10 per cent increase.

It was the extent to which the bank's net interest margin, the profit earned from its core lending and deposit activities, had fallen during last year that was viewed most negatively. The bank pointed to the surge in lending, suggesting that the increase in volume had helped to offset the smaller margins.

Most analysts were yesterday adjusting the bank's earnings outlook to slightly lower levels, largely to reflect the continued weakness of key currencies such as sterling and the US dollar. Davy Stockbrokers suggested that AIB's earnings per share would rise by 5 per cent at best in 2004 and by 8 per cent the following year. However Mr Scott Rankin, of Davys, said AIB's results were broadly in line with its forecast and suggested the negative market reaction was overdone.

Last year was a tough one for the bank, as it incurred substantial exceptional costs to fund the restructuring of its banks in Poland and continued the integration of its US bank, Allfirst, into M&T, in which it retains a 22.5 per cent shareholding. The bank's overseas revenues, which account for 50 per cent of its earnings, were also affected by the rise in the euro.

Exceptional costs included the write-off of €153 million following the sale of its Govett fund management business to Gartmore Investment Managers last year.

The figures also included a €62 million provision for an early retirement scheme under which 200 staff in the Republic and UK are expected to leave the bank. Another €20 million was incurred as a restructuring charge following M&T's purchase of Allfirst and the bank wrote off another €10 million as a result of branch closures in Poland. AIB also had to pay €29.5 million euro to the Exchequer as a result of the Government's bank levy.

AIB's core businesses performed strongly in 2003 with profits at the bank's Irish retail operations - before the cost of the retirement package - up 14 per cent to €637 million and its UK and Northern Ireland banks posting a 15 per cent increase to €252 million.

Profits in its capital markets division were hit by the charge for the Govett disposal and fell from €239 million to €102 million. However excluding this the underlying increase in this area was 12 per cent.

In Poland, where the bank operates the fifth largest bank, the bank's underlying profits dropped by 17 per cent to €20 million as a sharp fall in interest rates hit its income from deposits. A €10 million restructuring charge cut the bottom-line contribution from Poland to just €10 million.