The rescue of AIB that began in 2009 has cost Irish taxpayers 21 billion euros, the most given to any Irish bank still trading, and the government hopes to sell up to a 25 percent stake this year or early next.

The bank, which is looking for a new chief executive after David Duff said in January he was stepping down, reported an underlying pretax profit of 1.1 billion euros, its first since 2008, after making a loss of 1.7 billion euros in 2013.

AIB said the improving Irish economy, which is forecast to be the fastest growing in Europe again this year, allowed it to take a provision writeback of 188 million euros versus a 1.9 billion euro charge taken a year earlier.

The bank's impaired loans fell at a faster rate in the second half of 2014, reflecting a restructuring of home loans in arrears, but at 22.2 billion euros they remain considerably larger than Bank of Ireland's at 14.3 billion.

"I would see the same level of momentum and slight increase until we get down to what are normalised levels over the next year and a half," AIB Chief Financial Officer Mark Bourke told Reuters in an interview.

"This is a big portfolio of non-performing loans."

Like Bank of Ireland, which announced a 921 million euro annual profit last week, the pace of loan redemptions at AIB exceeded new lending demand. Its loan book fell to 63.4 billion euros from 64.6 billion at the end of June 2014.

However, after new lending rose 50 percent to 5.9 billion euros in 2014, Bourke said with the exception of mortgages, demand for corporate, personal and business loans had been strong so far this year.

The bank's Core Tier 1 capital ratio, a measure of financial strength, rose to 16.4 percent or 11.8 percent under the so-called "fully loaded" ratios in new capital rules known as Basel III.

AIB's board approved a cash dividend payment of 280 million euros to the state in relation to its 3.5 billion euros of preference shares.

"The majority of underlying fundamentals continue to improve, strengthening the investment case and leaving AIB firmly on track to exceed its medium-term financial targets," aid Ciaran Callaghan, an analyst at Merrion Stockbrokers.

(Editing by Jason Neely)

By Padraic Halpin