The lender made the admission at its annual general meeting yesterday and said it had set aside €50m to deal with the losses from these mortgages. AIB’s total mortgage book stood at more than €31bn at the end of 2012.

Ratings agency Moody’s had previously predicted that debt forgiveness would become a reality in the struggling nation where house prices halved in the five years from 2007.

Reports in Ireland suggested that customers who were in negative equity and sold their home at a loss were the first to benefit from the bank’s debt forgiveness.

Allied Irish Banks is 99.8% owned by the Irish government and stated that it took a 46% share of the mortgage market in 2012.

Chairman David Hodgkinson said: “Our strategy is to keep people in their homes, wherever possible, where mortgage payments are being prioritised and customers are co-operating with the bank to reach a solution.

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“To add context to the overall arrears situation, over 80% of AIB mortgages on principle dwelling homes, and approximately 65% of our buy to let mortgages, continued to perform at year end 2012.”

Mortgage Solutions reported in May that Irish mortgage lending had plummeted by almost 70% in the first three months of 2013 after the government axed tax reliefs for new borrowers.