Allied Irish cuts mortgage rates after making first-quarter profit

* AIB becomes first lender to cut rates since govt request

* Net interest margin up to 1.87 pct, makes 300 mln eur writeback

* Govt will decide on potential share sale after H1 results

By Padraic Halpin

May 1 (Reuters) - Allied Irish Banks (AIB) remained profitable in the first quarter after clawing back more money put aside for bad loans, the lender said on Friday, and announced a cut to its standard variable mortgage after political and public pressure.

After exceeding expectations with the sale of a 25 percent stake in permanent tsb, the Irish government has turned its attention to AIB and is considering a similarly sized sale in the next country's number 2 lender.

Finance Minister Michael Noonan said this week he would wait until the bank's half-year results before making a decision and AIB said on Friday its net interest margin, loan book and capital ratios, all key measures, had increased in the three months.

"Positive momentum has continued into 2015. The provision write-back in the first quarter is reflective of the improving economic environment," CEO David Duffy said in a statement, though AIB gave no profit figures.

Irish lenders have come under pressure to cut standard variable rate mortgages, with Noonan saying he expected them to cede to a request to do so, while other ministers have threatened to hike the state's annual bank levy.

While rivals have resisted the pressure, AIB said last week it would cut rates if its performance continued to improve and on Friday became the first lender to announce a reduction, with cuts of between 0.25 and 0.38 percentage points set to come in in June.

Like most Irish banks, AIB returned to profit for the first time since the 2008 financial crisis last year after making an overall provision writeback of 200 million euros, having previously racked up billions of euros in provisions.

The 99.2 percent state-owned bank said it was able to write back around 300 million euros in the first quarter as its total stock of impaired loan volumes fell 1.7 billion from the end of 2014, to stand at just over 20 billion euros.

Its net interest margin, excluding government guarantee fees, rose to 1.87 percent, while net loans increased marginally to 64 billion euros, although, like rival Bank of Ireland , this included positive foreign exchange movements.

The bank, looking for a replacement for Duffy who announced plans to leave in January, said its Core Tier 1 capital, a measure of financial strength, increased to 12.2 percent from 11.8 percent at the end of December under the so-called fully loaded Basel III ratios. (Reporting by Padraic Halpin; Editing by David Holmes)