* AIB expects to convince investors of viability by 2014
* Must first double net interest margin to 150 bps
* Says capital remains within stress test scenario
DUBLIN, Oct 31 (Reuters) - State-owned Allied Irish Banks will need to double its net interest margin before it can convince investors to take a stake in the bank over the next two years, executives at the bank said on Wednesday.
Having set the state back 20 billion euros ($26 billion) during the financial downturn - the most handed out to any lender still open - loss-making Allied Irish is cutting staff, branches and its funding cost base to turn a profit by 2014.
The bank reiterated that it is at the early stages of talks with investors but that it was too early for prospective stakeholders to put a price on any investment.
"The view is that... they could not possibly calculate how they would see us in terms of value," Chief Executive David Duffy told a parliamentary committee.
"We would seek to produce a return for the bank in the 8-12 percent range and believe that is attractive to investors and... they have confirmed that. Over two years, we would expect to be able to convince those investors."
The Irish government is separately trying to convince euro zone leaders to allow its rescue fund to buy its stakes in viable banks like AIB. Duffy said it was too early to take a positive or negative view on such a move just yet.
Fergus Murphy, the bank's head of products, added that the bank would have to increase it net interest margin, the profitability of its lending, to 150 basis points from the current mid-80s levels before any investors would be interested.
Murphy, the former head of the EBS building society, folded into AIB last year, added that deposits were up 3 billion euros on the year and that monthly increases in the bank's mortgage arrears have been slowing down for the last 9 months.
Rising mortgage arrears are seen as the chief threat to the government's hopes that it will not have to inject any more capital into its lenders and AIB's chief financial officer said its capital remained within the stress scenario in central bank tests performed last year.
Irish banks are also under political pressure to increase lending. While AIB said it would meet a government target to lend 3.5 billion euros to small and medium-sized businesses, to date only 600 million of this was classified as new lending with the rest seen as a re-granting of facilities.
Duffy, who was appointed to the bank last year, said this was chiefly down to a lack demand.