SHARES IN US bank MT, in which AIB has a 24 per cent stake, dropped the most since 1987 in trading in New York after its second-quarter profit plummeted 25 per cent on losses related to the beleaguered mortgage market.

Net income dropped to $160.3 million (€100 million) in the three-month period from $214.2 million in the same period a year ago.

Operating earnings at MT, which accounted for 5 per cent of AIB's group earnings in 2007, fell 24 per cent to $170.4 million (€106 milllion), or $1.53 a share. Analysts on average had forecast profit of $1.50 a share. MT set aside $100 million (€62 million) for credit losses, up from $30 million (€18.8 million) a year earlier, while net charge-offs rose to $99 million (€62.2 million) from $22 million (€13.8 million).

The bank said this reflected declining residential property valuations, making it harder for homeowners, builders and developers to repay loans. Total non-performing loans doubled to $587.4 million (€303.7 million) from a year earlier. The bank said "unfavourable conditions" in the homeloan market had driven up bad loans.

US banks are setting aside more for bad debts as builders default on loans as they are unable to complete projects amid the worst housing slump since the 1930s.

"MT is not immune to the effects of the higher credit costs evident throughout the banking industry," the bank's chief financial officer Rene Jones said in the statement.

Mr Jones said that the bank was "fortunate to have little exposure to some of the high-risk markets" around the US.

The bank said $10 million (€6.2 million) after-tax was cut from net income by the lender's investment in Bayview Lending Group, a private commercial mortgage provider. MT fell $8.78, or 12.6 per cent, to $60.98 in morning trading in New York.