Shares in AIB rose by more than 2.5 per cent yesterday, before slipping back to close 1 per cent higher, on news that the bank was likely to sell its troubled Allfirst subsidiary in the US by the end of the year.

As reported in The Irish Times, the bank's board is believed to favour a plan of action that would seek to merge Allfirst with a larger American bank while retaining a minority shareholding.

The news lent support to the AIB share price, which bucked the weaker trend on the Irish stock market to close at €12.18, a gain of 13 cents on the day.

An underperformer in recent years, Allfirst became a serious problem for AIB when the bank uncovered a $691 million (€695.6 million) fraud at the Maryland operation last February.

Although the debacle did not lead to any resignations at the Irish bank, it tarnished AIB's reputation by pointing up internal failings in its risk-management procedures.

When it released the results in early July, the bank said it was examining how to take Allfirst forward under its new chairman and chief executive, Mr Eugene Sheehy.

At the time, it said it was working on a restructuring plan that it hoped to have completed by the end of the third quarter.

It also said it would explore options for strengthening Allfirst's position.

As part of plans to strengthen the franchise, Allfirst is proposing to open 29 new branches throughout its "footprint" area in the mid-Atlantic states, a spokesman for the bank said yesterday. Four branches will be opened in October in northern Virginia.

Cost-cutting changes are also being proposed in the bank's pension plan, according to staff members.

As from January 1st, 2003, no new employee will have a bank-funded pension.

They will be offered instead a 401(k) scheme with a bank contribution of a certain percentage. In a 401 (k) retirement plan, the employer and employee both contribute to an investment fund.

Historically in the US, banks have offered pensions to their employees but there has been a trend away from company funding of pensions in recent years.

Between 350 and 400 employees are believed to be eligible for the bank's enhanced early retirement plan, which was put to staff some weeks ago.

It applies to staff who are 55 or over and have 15 years of service. Some staff have been told that if the bank does not get enough voluntary retirements, there will be lay-offs.

As an incentive to early retirement, points allocated on the basis of length of service and other considerations for retiree benefits - mainly health services - are to be cut in half at the end of the year, bank officials said they had been told.

Employees still on the old pension scheme after the end of the year may also have the pension calculated using different criteria than in the past.