In its first set of annual results since the state sold a 29 percent stake in Europe's largest initial public offering (IPO) of 2017, AIB proposed dividend payments at 12.0 euro cents per share, totalling 326 million euros (289.5 million pounds).

That compared to a 250 million euro payment made to the government a year ago when the then 99.9 percent state-owned bank became the first domestically owned lender to restart dividend payments since the financial crisis.

AIB's tier one capital ratio rose to 17.5 percent from 15.3 percent a year ago, far above its medium term target of 13 percent. Its expected level of excess capital over the next two to three years was a key selling point in last year's IPO.

AIB plans to return the excess capital to shareholders in the first part through normal dividends with the remainder available via special buybacks or other means.

AIB, whose original 21 billion euro taxpayer bailout was the biggest for any Irish bank still trading, reported a full year pretax profit of 1.3 billion euros, down from 1.7 billion.

Excluding exceptional items, its annual profit rose 6 percent to 1.57 billion euros.

AIB's net interest margin rose to 2.58 percent from 2.57 percent in the third quarter while its impaired loans fell by 2.8 billion euros to 6.3 billion.

($1 = 0.8193 euros)

(Reporting by Padraic Halpin; editing by Jason Neely)