Bank of Ireland readies dividend return with capital deduction

* H1 underlying profit 480 mln euros vs 560 mln year ago

* Pension deficit stabilises,

* Backs up plan for first dividend in a decade next year

* Shares (Berlin: DI6.BE - news) up 2 percent at 7.0 euros at 0710 GMT (Adds share price)

By Padraic Halpin

DUBLIN, July 28 (Reuters) - Bank of Ireland (EUREX: 1269463.EX - news) said on Friday it had taken a 70 million euro ($82 million) capital deduction to allow it to recommence dividend payments early next year, after reporting further boosts to capital and margins.

The bank said in February that it expected to pay its first dividend in a decade in the first half of 2018, a year later than hoped as it awaited further clarity on Brexit and visibility on fluctuations in its pension deficit.

The pension deficit stabilised at 490 million euros at the end of June and the bank said additional clarity was emerging on the impact of the Britain's decision to leave the European Union with its level of lending there broadly in line year-on-year.

Bank of Ireland is more exposed to the British property market than any other lender in Ireland (Other OTC: IRLD - news) . Its mortgage books in the two countries were almost identical in size in 2016 and the UK accounts for 20 percent of the bank's income.

"Obviously the board will make the ultimate decision at the end of the year but we do expect to recommence dividend payments in early next year," Bank of Ireland chief financial officer Andrew Keating told Reuters in a telephone interview.

"In that regard the regulatory framework requires that we make a deduction for that foreseeable dividend and we've effectively accommodated the payment of that dividend in our capital ratio at June that equates to 15 basis points (of capital) and is about 20 percent of the first half profits."

The bank's shares were up 2 percent at 7.0 euros at 0710 GMT as it reiterated that it expects to build the dividend over time towards a payout ratio of around 50 percent.

Ireland's largest bank by assets, which has led a return to profitability across the Irish sector over the last three years, reported an underlying first-half pretax profit of 480 million euros versus 560 million euros a year ago.

That was mainly due to almost 150 million euros fewer one-off gains this year and Keating said the underlying performance was up around 15 percent year-on-year, reflecting a rise in net interest margin to 2.32 percent and core tier 1 capital ratio to 12.5 percent.

The results, which also showed strong mortgage lending growth in Ireland and a further cut in non-performing loans, were the last under chief executive Richie Boucher's before HSBC Holdings Plc executive Francesca McDonagh takes over on Oct (Shenzhen: 000069.SZ - news) . 2. ($1 = 0.8551 euros) (Editing by Alexander Smith)