THE STATE’S shareholding in Allied Irish Banks (AIB) jumped to 18.6 per cent as the bank was forced to give shares to the Government instead of a €280 million dividend due under last year’s €3.5 billion State bailout of the bank.

AIB had to give 198 million ordinary shares, or a stake of 18.3 per cent, to the Government after the European Commission placed a “dividend stopper” pending a review of the State aid support.

The shares were issued to the National Pension Reserve Fund, which already held 0.3 per cent of the bank. Warrants taken by the State under last year’s bailout could increase the stake to about 40 per cent, if exercised.

The bank must raise €7.4 billion in capital this year to absorb mounting losses, which could lead to the State increasing its interest to a majority stake if AIB cannot raise enough cash on its own.

Minister for Finance Brian Lenihan said that the Government would increase its shareholding if the bank needs additional capital.

AIB fell 1.5 cent, or 1.1 per cent, to €1.35. Sebastian Orsi, analyst at Merrion Stockbrokers, said the State’s 18 per cent stake was “an unintended result” but had been factored in by the market.

AIB said trading conditions remained “challenging”, particularly in Ireland, but its overseas operations, which it has to sell to help raise capital, were “performing well”. Analysts expect AIB to require further capital after raising about €4.7 billion selling these businesses, which will ultimately leave the State with a stake of about 70 per cent in the bank.

Conditions improved in the capital markets, British divisions and in Polish unit BZWBK, the bank said, while the US bank MT, in which AIB has a 22 per cent stake, had reported also strong results.

The bank said it had submitted a capital-raising plan to the Financial Regulator as requested and it will detail capital raising “as it occurs in the coming months”.

AIB warned of “downward pressure” on operating profit and net interest margin due to “highly competitive and uneconomic market repricing of customer deposits” and the higher cost of wholesale funding and the State guarantee.

The bank also blamed reduced income on capital and increased interest payments on bonds following two debt swaps in the past year and lost income on loans moving into the National Asset Management Agency (Nama).

Administration costs relating to Nama and a reduction in loans due to a shrinking of the bank’s overall business were also lowering operating profit and interest margins.

Arrears continue to increase on the bank’s €27 billion loan book.

Customer demand for credit remained “weak” and the bank’s costs “continue to be closely managed and reduced”, AIB said.

The bank is planning to cut costs to reflect its reduced size.

AIB warned the 45 per cent discount assumed by the regulator on €23 billion in loans moving to Nama “may differ” as they are sold. Bad debt charges in the first quarter were similar to those incurred for the full year of 2009.

The quality of the property and construction loan book “continues to weaken”.

Following the transfer of AIB’s Nama loans, the bank will still retain €9 billion of investment property and €3 billion in land and development loans on its books.

AIB has raised €6 billion in funding under the extended Government bank guarantee this year. Customer deposits account for just over half the bank’s funding.