BANK OF Ireland has reported a pretax loss of €979 million for the six months to the end of September after setting aside €1.8 billion to cover losses on loans primarily to property developers.

The bank maintained its earlier forecast that loan losses would top €6.9 billion for the three years to March 2011. The half-year loss compared with a profit of €647 million for the same period last year.

The bank’s shares rose 25 per cent, or 34.5 cents, to €1.75 as the results were largely in line with expectations, although the bank’s bad debts were at the higher end of the €1.6 billion-to-€1.8 billion guide range.

Chief executive Richie Boucher said trading conditions were difficult and the outlook facing the bank was challenging.

“There are some indications of a slowdown in the pace of economic decline in the UK and to some extent in Ireland,” he said.

The bank said arrears on mortgages were rising sharply, and there had been much higher levels of stress across loans to landlords due to the decline in rents.

The bank is targeting an equity tier one ratio – the measure of cash and profit reserves set aside to cover losses – of 5 per cent to 6 per cent over the coming two years.

Finance director John O’Donovan said the bank’s net interest margin would drop by 20 basis points (0.2 percentage points) in the full year to March 31st, 2010. A drop of one basis point represented a €17 million fall in profits, he said. Margins are declining due to the higher cost of funding and low interest rates.

Mr Boucher said the bank was at the “very early stages of what could be a very lengthy process” in its negotiations with the EU Commission on its proposed five-year business plan. The bank had “no indication” on how the plan had been received.

The bank said it must approve the sale of its loans to the National Asset Management Agency (Nama) with an extraordinary general meeting of shareholders.

Mr Boucher said the bank’s goal was to start moving loans into Nama before the end of the year but there were “certain things outside our control”. There was “no visibility” on how much Nama would pay for the loans.

The bank plans to reduce its loan-to-deposit ratio below 150 per cent by shrinking its €135 billion loan book by €37 billion, primarily on the UK mortgage book.