AIB expects its bad debt provisions to fall from the “elevated levels” recorded last year despite the continued challenges facing its core business.

In an interim management statement, the bank said it was beginning to see signs of stabilisation and had made “substantial progress” in restructuring its operations.

“Although economic conditions remain challenging, we have seen signs of a stabilisation in underlying economic indicators, including house prices,” it said. “We have materially accelerated the rate of engagement with customers in difficulty and are now providing forbearance and restructuring options to customers to ensure sustainable repayment schedules.”

AIB said non-core deleveraging of €17 billion had been achieved by the end of last month, which it said amounted to 83 per cent of a Central Bank target of €20.5 billion, to be achieved by the end of next year.

It said the value of liabilities covered by the Eligible Liabilities Guarantee had fallen from €40 billion at the end of last year to €32 billion at the end of October.

The bank expected some 1,700 staff to have departed under a redundancy programme by the end of the year and that this figure will rise to 2,500 by the end of 2014. It has also sought a 15 per cent pay cut at senior levels, pay freezes at more junior levels and the transfer of all staff from a defined benefit pension scheme to a defined contribution scheme.

AIB said it was ahead, year to date, of both a €3.5 billion SME lending target set by the Government and a new internal mortgage lending target of €1 billion.

The bank had sanctioned 23,040 credit facilities to SME customers to the value of €3.4 billion and €1.1 billion in lending to 5,922 mortgage customers in the year to September.

“Arrears in our Irish Mortgage and SME portfolios have increased, however the pace of increase in criticised loans is slowing,” the bank added. “New customer lending demand remains muted in the current challenging economic environment and therefore overall credit growth is limited.”