AIB has begun a substantial cost- cutting drive at its Polish operations announcing the axing of 980 jobs, or 10 per cent of Bank Zachodni WBK's workforce.

Staff were informed of the decision yesterday and are expected to leave the company by year-end. Bank Zachodni employs around 8,700 staff in Poland and is the sixth-biggest bank.

Further measures are expected to be introduced in the coming months to substantially reduce costs in response to the weak economic conditions and the sharp fall in interest rates.

AIB's head of investor relations, Mr Alan Kelly, said other cost-reduction measures were being considered and that it was too early to speculate if some of its 437 branches might be closed. "This is a re-look at the business model to examine where we can make further savings," he said.

In 2002, AIB's polish operation contributed €61 million or 5 per cent of group profits. Bank Zachodni reported a 33 per cent drop in profits to 48 million zloty (€11 million), which was more than three-times greater than market expectations. It blamed weak demand for credit and intense competition for the depressed revenues, and said it would not achieve its earnings targets this year.

A high proportion of the bank's business is in the form of deposits, with the drop in interest rates severely hitting profitability. In February, AIB signalled that its Polish business would deliver a poorer performance.

In a trading statement, the Republic's biggest bank also warned that the group's profits would be adversely affected by currency movements.

It suggested that movements in the dollar and sterling would knock 4 per cent off this year's profits. The bank told investors to expect an increase in profits of 1-2 per cent in 2003.

AIB will announce profit figures for the first six months of 2003 next week and may give further details of its plans in Poland.There has been speculation that AIB might be considering selling its operations there but informed sources say this is not the case.