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Bank of Ireland has said its operating profit, before adjustments, for the year to December 2010 will be about 35-40% lower than the 1.5bn euros (£1.28bn) reported in 2009.

It said the reduction was mainly due to lower operating income and the higher cost of Irish government guarantees.

It also cited intense competition for deposits and the higher cost of wholesale funds.

The bank believes that impairment charges on loans peaked in 2009.

An impairment charge is the amount written off by a company when it realises that it has valued an asset more highly than it is actually worth.

Bank of Ireland said that although economic conditions remain challenging, the overall charge will progressively reduce in 2010, 2011 and 2012.

However, the bank said the cost of the government guarantees for the second half of the year are expected to amount to 150% of the 151m euros (£129m) charged in the first half of the year due to the extension of the scheme.

It said its corporate banking loan book had started to benefit from the general improvement in world economic conditions.

Although arrears in its Irish mortgage book continues to rise, there is evidence of some stabilisation, especially for owner occupiers.

Arrears in the bank's UK mortgage book have stabilised over recent months and loan losses are less than its previous expectations.

Bank of Ireland said the retention of 2.1bn euros (£1.794bn) of loans that had been due to go to the National Asset Management Agency (Nama) before the agency changed its threshold rules was not expected to materially alter its previous loss estimates.

In August, the bank announced pre-tax loss of 1.24bn euros (£1bn) for the first six months of this year, compared to a a loss of 668m euros (£569.82m) in 2009.

An underlying profit was wiped out by 1.8bn euros (£1.4bn) the bank set aside to cope with bad loans.

Losses of 900m euros (£746m) were linked to loans it has transferred to Nama, the Irish Republic's "bad bank".