PRETAX PROFITS at KBC Bank Ireland, the fifth largest mortgage lender in the State, dropped 25 per cent to €115 million in 2008 as loan losses jumped tenfold and financial turbulence drove up funding costs.

Operating income grew 7 per cent €235.5 million, but profits were affected by a €55 million loan loss charge and a €35 million provision in higher funding costs due to volatile liquidity markets.

The bank expects “continuing challenges” from arrears and losses on loans through 2009 due to further economic deterioration.

The loan book rose 6 per cent to €18.8 billion, with home loans amounting to €13.7 billion at the end of the year, giving the bank about 9 per cent of that market.

Profits after tax, credit losses and funding costs dropped to €103 million from €137 million in 2007. Chief executive-designate John Reynolds said KBC had seen a sharp rise in mortgage arrears in the last three months of 2008 due to higher unemployment and tougher economic conditions.

Mr Reynolds will succeed chief executive Ted Marah next month.

The bank, which was rebranded from IIB to KBC (the name of its Belgian parent bank) last year, lost €6.5 billion in deposits over the second half of 2008 and particularly after the Government introduced the guarantee scheme for banks.

The bank’s deposits stood at €5 billion at the end of 2008, down from €9 billion a year earlier.

Mr Reynolds said that the bank experienced increased deposit withdrawals until the Government said the bank was eligible to join the guarantee when deposits rose.