BANK OF IRELAND, the country’s only domestic lender to avoid nationalisation, has reported underlying losses of €723m for the first half of 2011.

Overall losses at the bank narrowed from €1.3bn recorded in the first six months of 2010 as charges on bad loans declined substantially.

In its half-year statement this morning, Ireland’s so-called pillar bank noted declining operating profits as wholesale funding costs squeezed margins. However, the group benefited from a 22 per cent decrease in charges on bad loans.

In the six-month period, the bank saw €842m in impairment charges on loans, down from €1.08bn for the corresponding period last year.

Of these impairments, €386m related to property and construction loans, while €251m were associated with SME and corporate lending.

Chief executive Richie Boucher said that, whilst impairments at the bank remain high, today’s statement provides evidence that loan losses did peak in 2009.

There were also lower charges on assets sold or held for sale to NAMA, said Boucher. Just €43m in impairment charges were reported, down significantly from last year when the majority of transfers to the bad bank occured.

However, losses on residential mortgages increased to €159m, up 12pc from €142m a year ago.

The bank’s UK mortgage book is performing better this year with impairments falling 44pc to €19m.

Bank of Ireland said the poorer performance in the Irish residential mortgage book is due to higher arrears, elevated unemployment levels, lower disposable incomes and falling house prices.

There is currently €28bn worth of residential mortgages on Bank of Ireland’s books. The number of customers in arrears for more than 90 days increased to over 5 per cent at 30 June. The bank says 4.55 per cent of owner-occupied mortgages are in arrears for more than 90 days, while about 7.8 per cent of buy-to-let mortgages are in trouble for the same duration.

On a more upbeat note, the bank said its deposit base in Ireland is stable despite intense competition. The group’s loan-to-deposit ratio improved from 175 per cent at 31 December to 164 per cent at 30 June.

On new consumer loans, Bank of Ireland claimed that demand remains subdued.

Bank of Ireland, which avoided complete nationalisation last month when a group of private investors agreed to provide €1.05bn of capital, expects its Core tier 1 ratio to hit 15.4 per cent.