Allied Irish Banks is aiming to cut its bad debt charge next year despite rising arrears and a challenging outlook for the Irish economy.

Provisions for soured loans are expected to peak this year after the Central Bank said it wanted all lenders to take a tougher line on bad debt charges in time for end of year results.

AIB said today a tougher approach this year should enable it to reduce its bad debt charge in 2012 but it admitted impaired loans continue to increase and over 12,000 customers were now in difficulty with their mortgage repayments.

It has 800 staff, up from 600 last year, dealing with struggling small business customers.

AIB said it had shrunk its assets by some €10.7 billion through disposals, repayments and redemptions and said it was aiming to sell assets worth over €1 billion by the end of the year.

So far, AIB's deleveraging has focused on loans located in the United States and Europe.

Disposing of assets in Ireland, still locked in a property downturn, may be more difficult.

AIB said its net interest margin, effectively the profitability of its lending, had stabilised in the third quarter but it warned that income pressures may intensify as the ECB starts to cut interest rates.

AIB was forced to pass on the most recent ECB rate cut to customers following pressure from the government, the bank's ultimate owner. Rival Bank of Ireland, which has avoided majority state control, ignored the state's request.

AIB said deposits had stabilised and there were some early signs of inflows.

Reuters