* Underlying 2011 operating profit 411 mln euros vs 1 bln in 2010
* Impairments up 4 pct, mortgage arrears expected to peak in 2012
* Staff cut by 7 pct, deposits growth outstrips peers
* Shares up 6.4 pct after rising strongly since Jan (Adds detail, analyst quote, share price)
DUBLIN, Feb 20 (Reuters) - Bank of Ireland (Irish: BIR.IR - news) said it was attracting deposits, cutting costs and expected home loan arrears to peak this year, raising hopes Ireland (Xetra: A0Q8L3 - news) 's biggest lender had turned a corner after a 60 percent drop in underlying profit in 2011.
The only Irish bank to avoid nationalisation after an unprecedented property crash, Bank of Ireland said on Monday low interest rates would make it harder to achieve its goal for a net interest margin - the gap between what it charges for loans and what it pays to borrow - of 2 percent in 2014.
But Chief Executive Richie Boucher was optimistic of progress after the cost of drawing in deposits and an expensive government guarantee of its liabilities trimmed the margin by 10 percentage points to 1.33 percent last year.
After successfully attracting private capital to meet strict new central bank targets last year, Bank of Ireland is focused on restructuring its cost base, improving funding dynamics and weaning itself off the expensive state guarantee.
By end-December, it had fully exited the costly emergency liquidity assistance (ELA) offered by Ireland's central bank, reduced its dependency on European Central Bank funding to 23 billion euros from 33 billion a year earlier and cut its staff by 7 percent year-on-year.
"These results suggest the bank reached a trough in its pre-provision earnings in 2011 and (earnings) are likely to experience improving trends as the bank has exited the more costly ELA borrowing, can look to terminate its own issued bonds programme and maintains a tight focus on costs," Stephen Lyons, credit analyst at Davy Stockbrokers said.
Shares in the bank, which have rising strongly in the last month, were 6.4 percent higher at 0.149 euros at 0845 GMT.
Operating profit before provisions for 2011 dropped to 411 million euros on high funding costs, a limited appetite for new credit and following the sale of higher-earning assets.
However, the underlying pretax loss more than halved to 1.5 billion euros after the big hit taken in 2010 by transferring loans to Ireland's state-run "bad bank".
While the bank said it expected impairments to reduce over time, it saw them tick up a touch to 1.94 billion euros last year after it made provisions for 1.86 billion in 2010.
"It's within the range as expected by the market and the comment from management is very realistic so a lot of guys are assuming Bank of Ireland is slowly but surely working its way through its issues," one Dublin-based trader said.
"Steady as she goes is probably the word I would use."
ARREARS TO PEAK
Under the government's latest restructuring plans, Bank of Ireland will form the core of a radically pared-down industry beside Allied Irish Banks (Irish: AIB.IR - news) and Monday's results showed Boucher's bank was having far more success attracting deposits.
The bank said its deposits grew by 8 billion euros in the second half of 2011 to 71 billion, mostly thanks to its UK unit, outstripping the 6 billion growth Ireland's finance department said the sector as a whole saw in the second half of last year.
After central bank figures last week showed that nearly one in seven Irish home loans were not being fully repaid, Bank of Ireland also bettered the industry average with its proportion of owner-occupier loans in arrears for more than 90 days rising to 5.6 percent from 3.7 a year ago but below the sector-wide headline figure of 9.2 percent.
The level of arrears among properties bought by investors to rent out, the most distressed part of its mortgage book, almost doubled to 10.8 percent. But with unemployment stabilising, albeit at high levels, Boucher said arrears would peak in 2012.
"We don't anticipate that they have peaked as yet. We think that the ratio of increase will start to ease during 2012 and will peak during 2012," he told reporters.
After the bank used December's injection of ultra-cheap ECB three-year loans to convert 7.5 billion euros of short term drawings into medium term funds, Boucher said it was highly likely it would participate again in next week's second round.
He added the bank was in talks over selling some of its remaining loans under a sector wide deleveraging process that helped push its loan to deposit ratio down to 144 percent from 175 percent at the end of 2010 after it raised 8.6 billion euros of its 10 billion divestment target last year.
He also said the 15 percent state-owned bank would likely cut its staff numbers further as it continues to reduce the size of its businesses, but would not specify by how much.
Boucher may face a probe by Ireland's central bank over his role in the country's banking crisis. One of the bank's major shareholders, U.S. billionaire Wilbur Ross, was quoted as saying on Monday that he was the right man for the job.
The bank's core Tier 1 solvency ratio stood at 15.1 percent at the end of 2011. Last month it converted 1.3 billion euros of bonds at favourable rates in an Irish sovereign debt swap.
It also hopes to boost its liquidity position further in 2012 with the transfer of loans to its UK unit - subject to regulatory approval - which may release a large proportion of the 8 billion euros of cash deposited with the Bank of England. (Editing by Greg Mahlich and Mark Potter)
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