M&T Bank, the US group in which AIB has a 22.5 per cent stake, has reported a 15 per cent increase in profits for the final quarter of 2004.

The performance, which was better than most analysts had expected, came on the back of solid growth in business lending. M&T was less bullish on the consumer side of its business, warning that a growing reluctance to borrow could eat into its 2005 performance.

Many big US banks have credited consumers with driving higher profit over the last several quarters. M&T is the first of the 20 largest banks to report fourth-quarter results. Its shares fell by more than 2 per cent in early trading.

M&T, based in Buffalo, New York, said fourth-quarter net income rose 15 per cent to $192.2 million (€146.3 million), or $1.62 per share, from $166.9 million, or $1.35 per share, a year earlier.

Consensus expectations had pointed to an earnings per share of $1.59 for the quarter. For the year, M&T posted a profit of $6 per share, after earlier guiding a range between $5.90 to $6.10.

"We are seeing some stirring in commercial activity," as the pipeline of expected borrowing increases, M&T chief financial officer, Mr Michael Pinto, said.

Offsetting that, he said, is "a real slowdown on the consumer side", especially in auto lending.

"As rates have gone up, we've seen margins in that business that really aren't acceptable to us."

AIB's 22.5 per cent stake in M&T provided about 12 per cent of the group's pre-tax profits last year.

Merrion analyst, Mr Séamus Murphy, noted yesterday that while AIB's dollar exposure was hedged in 2004, this is not the case for 2005.

This could reduce M&T's profit contribution when it is translated into euros on AIB's balance sheet, he suggested.

Speculation over the long-term prospects for AIB's stake in M&T has been circulating at a low level for some time.

Analysts point out that a sale of AIB's holding in the US group would release significant value for shareholders.

Shares in AIB closed five cents weaker at €15.50 last night.