Allied Irish Banks aimed to put the collective madness of a homegrown property bubble behind it on Tuesday with a jaw-dropping annual loss of 10.4 billion euros and a plan to axe over 2,000 jobs.

A former stock market darling with international ambitions, AIB has been effectively nationalized and saved from collapse by emergency ECB funding after being shut out of debt markets and losing 22 billion euros in deposits last year.

There were further slight deposit outflows this year, mainly from overseas corporate funds, but end-March stress tests which require AIB to raise 13.3 billion euros in capital and a big bang overhaul of the sector had stopped that outflow.

The news of the bank's recapitalization has been viewed positively by the market and we hope that that now represents a turning point and we can now rebuild the bank from here, executive chairman David Hodgkinson told state broadcaster RTE.

Dublin has pledged to radically shrink its banking system as part of an EU-IMF bailout and AIB will be one of two so-called pillar banks left from what was once a crowded field.

AIB is hoping that 2010 will mark the nadir in terms of group losses but it has said it is too early to call the peak in arrears. The IMF slashed its 2011 growth forecast for the Irish economy to just 0.5 percent from 0.9 percent on Monday, underlining the challenge ahead.

Dublin has put a 70 billion euros price on drawing a line under its banking crisis and AIB is second only to Anglo Irish, the poster child for Ireland's casino-style property lending, in the burden it is putting on recession-weary taxpayers.

There was almost a kind of collective madness, everyone went crazy and for a very long time, said Hodgkinson, a former chief operating officer at HSBC who hopes to appoint a new chief executive to the bank in late Q2 or in Q3.

A charge of 6 billion euros, representing 5.25 percent of loans, against potential losses helped drive AIB's loss, a company record, and more than four times higher than the 2.3 billion euros shortfall generated in 2009.

AIB said the scale of losses going forward would be very different and that it hopes to return to profit on an operating level in 2012 and possibly on a net basis too.

Analysts said AIB had taken a lot of pain up front.

They are hoping that 2010 is the peak. There is no sense in not coming out and putting as much forward as you can in 2010 numbers when everyone is expecting the numbers to be poor, said Oliver Gilvarry, head of research at Dolmen Securities.

Three analysts had forecast a net loss of 4.6 billion euros in a poll by Reuters I/B/E/S.


Crunch stress tests, carried out as part of an EU-IMF bailout, showed that AIB had to raise 13.3 billion euros in additional capital to bullet-proof it from future shocks and any losses arising from the sale of some 19 billion euros worth of assets over the next three years.

Much of the 13.3 billion euros is expected to come from state coffers although AIB is expected to generate some capital from buying back 2.6 billion euros in subordinated debt at a discount.

Under the stress tests, which were conducted on the country's four remaining banks, AIB had the worst loan loss rate under a stress scenario -- 13.4 percent -- compared with a sector average of 10.1 percent.

In its full-year results, AIB said nearly 30 percent of its loans, excluding any loans still to be transferred to a state-run bad bank, were criticized, meaning that they were either exhibiting signs of weakness or were impaired.

Total impaired loans, excluding those earmarked for the bad bank, had more than doubled to 12.9 percent.

Chief Financial Officer Bernard Byrne told Reuters it was too early to call the peak for arrears, which nearly doubled to 2.87 percent of AIB's owner-occupier mortgage book in Ireland.

The reality is that the economy is still in difficulty, he said.

The group will split itself into a core bank with 61 billion euros in loans and will park 25 billion euros of loans into a non-core operation.

It will cut over 2,000 jobs during 2011 and 2012 on a phased basis out of a staff of over 14,000 in Ireland and the UK. Such cuts come ahead of a merger with state-controlled EBS Building Society.

Hodgkinson said EBS would remain as a standalone business for a material period and that its brand would be retained beyond that while Byrne said the merger would not spark another large round of job cuts.

The big headcount numbers that you are seeing now are the big piece of it.

($1=.6916 Euro)

(Editing by David Cowell; Editing by Jon Loades-Carter)