Allied Irish Banks issued a profits warning as it more than doubled provisions for future bad loans to reflect the deteriorating domestic property market.

The bad debt provision in the year to the end of December is now expected to be about €950m (£766m), equivalent to 0.75 per cent of average loans or 75 basis points. This was driven in large part by a 300 basis-point charge on the Republic’s biggest bank’s residential development book.

At the time of the interim statement in July the bank was guiding that the full-year bad debt provision would be about 35 basis points. It also expected full-year earnings per share of 185 to 190 cents, guidance that Eugene Sheehy, chief executive, reiterated at a conference in London last month.

However, after the latest revision in the provision, the bank now expects earnings to be about 120 cents this year.

AIB’s statement is the first comment by any Irish bank since the country’s government guaranteed all bank liabilities – deposits and debt – at the end of September amid concerns of a run on one of the banks.

AIB said there had since been an improvement in funds available, although no material reduction in costs as a result of the government move.

AIB is forecasting Irish gross domestic product to contract 3 per cent this year, considerably more gloomy than the government, which forecasts a 0.7 per cent decline.

Its Irish loan growth next year is targeted to rise 6 per cent, with deposits increasing 2 per cent. It expects group bad debts to peak at 90–110 basis points in 2009. This implies 120–150 basis points on its Irish loan book.

The bank compared this with the last severe downturn in Ireland in the early 1990s, when the peak charge was 100 basis points.

Meanwhile, the bank repeated that it considered itself well capitalised. It said its core tier one ratio – a key measure of a bank’s solvency – is targeted at 6 per cent for 2008, and assumes no final dividend is paid. It is targeting “at least 7 per cent over time”.

AIB said the overall deterioration in loan book asset quality had been “moderate” in all but the residential development portfolio, where the bank has €10.7bn of loans to developers and builders who have been hit by the collapse in demand.

Of the book, €7bn is lent for the purchase of undeveloped land, where the bank anticipates prices will fall by 40 per cent. The rest is lent to owners of housebuilders.

Shares fell 5.6 per cent in early trading but closed up 1.49 per cent at €4.30.

AIB said it expected losses on its €6.2bn commercial development loan book to be “materially lower” than in the residential development portfolio. The €12.5bn commercial and residential investment book is supported by strong income and low vacancy rates.