Bank of Ireland has warned of a bad first half with borrowers struggling to repay loans as Ireland faces recession for the first time in 20 years.

The bank will slash its dividend by half as it battens down the hatches.

“We anticipate that the current difficult trading conditions will continue and will negatively impact our earnings for our financial year,” the bank said.

Construction is slowing down and house prices are slumping across the country. As well as curtailing the divi to preserve cash, chief financial officer John O'Donovan has ruled out a rights offering to strengthen the company's finances.

The bank said bad loans might climb to about 0.35% of its book loans in the first half, up from 0.12% a year earlier, and rising to 0.45% for the year to March 2009 and between 0.6% and 0.9% in the following financial year.

It said, however, that its finances were sound enough to weather the storm. “Bank of Ireland's funding position remains strong with significant growth in deposits,” it said.

The bank added: “In this difficult environment our key strategic priority is to continue to strengthen our capital and funding ratios until we are confident that stable trading conditions have returned.” On the bright side, deposits rose 20% from a year ago. It is forecasting a Tier 1 capital ratio, the reserve banks keep to protect depositors against potential losses, of 6% in September, up from 5.7% in March.

It did not provide explicit guidance on full-year earnings, but said costs would remain broadly in line with last year, while income would be marginally lower.

Until recently the Irish banks have remained outwardly confident but housing exposure is beginning to take its toll.

Bank of Ireland, the country's second-biggest lender, has exposure to residential property developers of some €9 billion (£7.15 billion) and many times that in mortgages.

It said it had been indirectly impacted by the failure of Lehman Brothers in the US.