AIB has received approval from the Single Supervisory Mechanism in Frankfurt to restructure its capital base and make a payment of €1.7 billion to the State as part-payment of the preference shares held by the Government.

This will be the first repayment by AIB of its €21.8 billion in bailout funds received from taxpayers after the financial crash in late 2008.

In addition, the €1.6 billion in contingent capital notes (CoCos) held by the State will be repaid in full on July 26th next year.

The repayments are subject to the bank converting the remaining preference shares into ordinary shares, the issuance of a minimum of €750 million of Tier 2 capital, and the issuance of at least €500 million of additional Tier 1 (ATI) capital.

The capital reorganisation is also subject to shareholder approval at an extraordinary general meeting but this shouldn’t prove an obstacle, as the State currently owns 99.8 per cent of the bank’s shares. An EGM is expected to be held before Christmas.

The Minister for Finance Michael Noonan said this capital reorganisation by AIB would ensure the bank had a balance sheet that was “fit for purpose” and was an important first step in the Government maximising its return from taxpayers.

He said the State would receive the cash in the “coming months” following the return of the €1.6 billion in CoCos.

“I am confident that the State is on track to achieve a return approaching €4 billion from our investments in the bank in the near term,” Mr Noonan said, adding that any decision in relation to the sale of the State’s shareholding in AIB would be a matter for the next government after the election in the Spring of 2016.

Mr Noonan said AIB was now back in profit and in a position to facilitate the “continued growth” of the Irish economy and lays the groundwork for taxpayers to “ultimately recover” all of the bailout funds it received.

Under the reorganisation of its capital, AIB will repay some €1.36 billion of the original €3.5 billion in preference share capital that it received from the State. It will repay this at 125 per cent of the subscription price, yielding a payment for the Government of €1.7 billion.

According to the department of finance, the State will convert its remaining €2.14 billion of preference shares into €2.67 billion of ordinary shares at a price to be agreed with AIB.

Commenting on the capital reorganisation, AIB chief executive Bernard Byrne said: “The approval of these capital actions by the SSM represents another key milestone in the transformation of AIB.

“The capital reorganisation will support a sustainable and compliant regulatory capital structure underpinning our business plans and positions the group to repay capital to the State and return to private ownership over time.”

The SSM took over supervision of the euro zone’s banks about a year ago and its approval was required before AIB could restructure its capital base.