AIB said it was on track to return to profitability in 2014 as it reported lower underlying losses and provisions for last year.

But its overall losses widened as operating income dropped dramatically last year, fuelled by lower loan balances and customer transactions, and higher funding costs.

The bank, which is State owned, reported an operating loss of €2.8 billion before exceptional items were taken into account, a 65 per cent reduction compared with the €8.1 billion in 2011.

Provisions for bad loans throughout the group were 70 per cent lower year on year, falling to €2.5 billion. It expects loan losses to fall further this year.

Overall losses for 2012 rose to €3.6 billion, from €2.3 billion a year earlier.

The bank said it had reduced its reliance on funding from the European Central Bank by 29 per cent, or €9 billion, by the end of December 2012, bringing it to €22 billion.

Customer accounts were up 5 per cent last year, a figure that rose to 8 per cent when the closure of certain offshore operations was taken out of the picture.

AIB said 17.7 per cent of buy-to-let mortgages and 9.1 per cent of private residential mortgages were in arrears of more than 90 days. This year, the bank predicts residential mortgage arrears will peak around mid-year.

The company is currently shedding jobs in a bid to trim costs, with 2,500 redundancies announced last year.

Chief executive David Duffy said the bank had now largely completed the restructuring phase of its strategic plan.

“While 2012 was another very challenging year for the group, a number of important steps were taken to position the bank for recovery over the longer term,” he said.

Mr Duffy said the bank would prioritise the assistance of both small and medium sized businesses and mortgage customers experiencing difficulty in the coming year. He also pledged to exceed the Central Bank’s sustainable mortgage solution targets.

According to the bank, it beat its €3.5 billion lending target, loaning €4.8 billion to SMEs, and approved €1.5 billion in new mortgages, about 50 per cent ahead of target.