Bank of Ireland has reported an underlying loss before tax of €1.5 billion for 2012, a decrease of 2 per cent on 2011.

Loan impairment charges at the bank also fell, down to €1.7 billion for the 12 months to December 31st.

Operating income at the bank declined by 9 per cent to €1.9 billion, arising from both a €10 billion (7 per cent) reduction in the group's average interest earning assets and a reduction in the net interest margin (before ELG costs) from 1.33 per cent to 1.25 per cent, which was partially offset by a 14 per cent reduction in ELG (Eligible Liabilities Guarantee) fees.

The decline in margin reflected the relatively high cost of customer deposits, and the "continuing negative impact of historically low official interest rates on earnings from certain of the group's assets", chief executive Richie Boucher said, adding, "re-building the net interest margin is one of the group's key priorities".

Of the forthcoming cessation of the ELG scheme, Mr Boucher noted that this should have a "materially positive impact" on the bank.

Operating profit, before impairment charges, fell to €242 million. When non-core items are also considered, total losses before tax stood at €2.2 billion, up from €190 million in 2011.

The bank took a loan impairment charge of €1.7 billion in 2012, down from €1.9 billion the previous year. Of this, property and construction loans accounted for the largest impairment, at €797 million, or 47 per cent of the total.

This is down from the €893 million write-down taken in 2011. It was followed by residential mortgages, with an impairment charge of €462 million (2011: €469m); non-property SME and corporate loans €413 million (2011: €497m) and consumer loans, €52 million (2011: €80m).

For residential mortgages, the bank noted an increase in the volume of arrears of 90 days or more, but said that the pace of default arrears has reduced since the first quarter of 2012.

The proportion of buy to let mortgages in arrears increased to 23.36 per cent as of end December, compared to 20.77 per cent on June 30th 2012 and 16.81 per cent on December 31st 2011.

According to the bank, this increase is due to the impact on borrowers of "rising repayments as interest only periods come to an end and customers move to fully amortising loans".

Mr Boucher noted that the bank's capital position has remained "robust", with a core Tier 1 capital ratio of 14.4 per cent. Its total capital ratio of 15.3 per cent is up from the ratio of 14.7 per cent reported at end 2011, "partially due to our successful issuance of €250 million 10 year Tier 2 capital in December 2012" Mr Boucher said.

On the impact of Basel III capital requirements, Mr Boucher said that any estimates would be "preliminary" and may be mitigated by both "earnings and management actions", although he noted that if, as expected, the regulatory capital requirement for the bank is 10 per cent, then BOI would expect to maintain a "buffer" above this.

The group's loan to deposit ratio declined to 123 per cent, from 144 per cent the prior year, which meant that the bank reduced its dependence on funding from the European Central Bank to €15.4 billion. Of this, €4.4 billion related to Nama bonds and €3.1 billion related to the Government guaranteed IBRC repo entered into in June 2012, which was redeemed on a no profit, no loss basis in February 2013.

In relation to the bank's redundancy programme, Mr Boucher noted that headcount has fallen by about 9 per cent, or by 1,218 employees, since May 2012, with the redundancy programme continuing this year. As of end-December, the bank's workforce stood at 12,016.

Looking ahead, Mr Boucher noted that the economic environment "remain difficult and the group continues to face many challenges".

"However, we are starting to see some of the benefits flowing from the focus we have had over the past four years on our strategic objectives aimed at enhancing our core franchises and rebuilding profitability within a restructured, robust balance sheet" he said, adding that the bank must "continue to keep this focus during 2013 as we strive to reward our shareholders for their patience and their confidence in the group".