AIB's interim operating profits have crossed the €1 billion barrier for the first time but neither that nor an upgrade in its full-year profit forecast was enough to arrest a drop of almost 1.5 per cent in the bank's share price.

In a weak market for European financial stocks, AIB shares lost 28.5 cent to close last night at €18.96. This was in spite of an 18 per cent rise in operating profit to €1.15 billion in the six months to June and a 9 per cent increase in pretax profit to €1.32 billion, a performance that surprised analysts' expectations.

Amid concern in international markets about the possible impact of a downturn in the Irish housing market on Irish institutions generally, AIB said its Irish mortgage book was good and said the overall level of bad loans and loans which were the subject of some concern had declined since the start of the year.

While chief executive Eugene Sheehy noted a 25 per cent drop in mortgage applications, mortgage lending is up by 12-13 per cent since the start of the year and 19 per cent higher than the first half of last year. Irish mortgages contribute only 6 per cent of AIB profits, he said.

Adjusted to offset the impact of once-off property disposals and interest rate hedge volatility, earnings per share rose 16 per cent in the period to 108.8 cent. AIB's interim dividend rose 10 per cent to 27.8 cent per share.

Increasing his full-year profit target to "low teen" growth in adjusted earnings per share from "low double-digit", Mr Sheehy said AIB expansion was underpinned by strong consumer demand across all its franchises.

Operating profits in the core bank operation in the Republic rose 17 per cent to €527 million. More than half of customers are availing of free banking, Mr Sheehy said.

He reported "very, very small leakage" from customers switching accounts and said 75,000 new customers had joined the bank. The capital markets division saw its operating profit rise 12 per cent to €331 million. Pre-tax profits from corporate banking rose 12 per cent and investment banking profits rose 48 per cent. AIB said strong figures from its consumer treasury division offset weakness in its proprietary trading unit.

With the help of a 21 per cent rise in Northern Ireland pretax profits to €101 million, operating profits in AIB's UK unit rose 19 per cent to €223 million. The bank wants to recruit more experienced bankers for the British operation, whose focus is on mid-size business lending.

Operating profits rose 37 per cent to €155 million in Poland, where AIB owns 70.5 per cent of Bank Zachodni WBK (BZWBK). The bank now claims 17 per cent of the Polish market.

Operating profits in the US rose only 1 per cent to €74 million after a mortgage-related charge in its 24.2 per cent-owned affiliate M&T, which was linked to uncertainty around subprime lending in that market. M&T's performance improved in the second quarter after it wrote down some home loans and bought back some troubled loans it had sold in the first quarter.