AIB said today the Government's stake in the bank would rise to more than 18 per cent as it increased the holding instead of paying the State a dividend.
The National Pension Reserve Fund Commission was due to be paid a dividend today on €3.5 billion preference shares, amounting to €280 million. However, the European Commission had requested the bank would not make discretionary coupon or dividend payments on certain securities, as discussions on a restructuring plan are ongoing.
The shares will be issued instead of the divident, and the NPRFC total ownership of AIB ordinary shares will rise to 18.61 per cent as a result.
Minister for Finance Brian Lenihan welcomed the announcement, saying it ensured taxpayers are remunerated in a "timely fashion" for the investment.
"The €280 million in ordinary shares issued to the fund will count towards the additional €7.4 billion equity capital requirement determined by the Financial Regulator so that AIB will meet the new base case capital standards," he said.
Mr Lenihan said the State is willing to convert some or all of its preference shares as required if the bank requires extra capital. "If additional State money is required, it will be provided through investment in ordinary shares by the National Pensions Reserve Fund," he said.
In an interim management statement, AIB said mortgage arrears at its Irish operations continue to climb, but provisions for bad debts in the first quarter were "modest".
"Our residential mortgage book of almost €27 billion continues to perform better than the sector average. The bad debt provision rate requirement in the first quarter of 2010 remains modest and not materially above the rate for the full year 2009," the bank said in an interim management statement.
Bad debt charges on its loan book in the first quarter were at a rate similar to that incurred in the full year of 2009, it said, and warned future loss levels would be affected by unemployment in Ireland.
AIB said the competitive and uneconomic market repricing of customer deposits, the increased cost of wholesale funding and the Government guarantee, and the cost of transferring loans to the National Asset Management Agency (Nama) would put pressure on its net interest margins and operating profit for the year.
Although trading conditions in the year to date remain "challenging", the company said, there had been some improvement in Britain, and its capital markets and Polish businesses were performing well.
Meanwhile, in the US, its M&T business reported strong results in the first quarter of 2010.
"Customer demand for credit is weak in Ireland where we have increased lending capacity to the business and mortgage sectors," the bank said.
AIB said it was also developing a cost reduction programme to streamline the business.
Shares in AIB were down 1.6 per cent on the Dublin market, trading at €1.34 by 3.15pm.