State-owned Allied Irish Bank has reported a loss after tax of €2.3 billion for 2011, down from a loss of €10.2billion in 2010.

Operating profit, before provisions, totalled €68 million, compared to €658 million a year earlier.

The reduction in operating profit was attributed to lower levels of income, down by €519 million or 22 per cent, and a rise in costs of €71 million.

AIB said it set aside €7.9 billion for loan losses, from €6.02 billion last year.

This includes € 1.7 billion for the bank's land and development portfolio, €2 billion for the property investment portfolio, €1.6 billion for small and medium-sized enterprise loans, €1.6 billion for mortgages, €0.5 billion for corporate and €0.5 billion for other personal sector loans.

Mortgage arrears of more than 90 days rose to 10.9 per cent by the end of December from 2.9 per cent a year earlier.

Net interest income was €1.4 billion, a decrease of €494 million, or 27 per cent.

Customer deposits rose by 2 per cent during the year to €61 billion. The bank said deposits were stable reflecting increased customer confidence in the bank following its recapitalisation last July. Since the start of 2012, deposits have risen by €1.5 billion.

The core tier 1 ratio - a measure of a bank’s capital strength - was 17.9 per cent for December 2011 compared to 4 per cent at the end of 2010.

AIB, which is 99.8 per cent owned by the Government, said it reduced its exposure to wholesale funding by €13 billion or 20 per cent in the year. It said that 62 per cent of its 3-year non-core deleveraging target of €20.5 billion was achieved in 2011 and added that it was "well positioned to meet non-core deleveraging targets over the next 2 years."

AIB said it is aiming to achieve 50 per cent market share of new mortgages in 2012. It said its share of new business sanctions rose from 20 per cent in February 2011 to 35 per cent by the end of last year.

“Our plan is to return to sustainable profitability by 2014. Achieving this will be key to our ambition to provide an opportunity to attract private investment and return value to our principal shareholder," said AIB chief executive David Duffy.

Earlier this month, AIB confirmed it is seeking 2,500 redundancies in a bid to cut annual payroll costs by €170 million. The bank is to announce the terms of its proposed redundancy programme shortly on conclusion of a consultation process with unions.