Falling bad debts allowed AIB to writeback provisions and build on its capital reserves in the third quarter, the state-owned bank said in a trading update today.
The rescue of AIB that began in 2009 has cost Irish taxpayers more than €20bn, the most given to any Irish bank still trading.
AIB marked a milestone in its recovery when it returned to profit in the first half of this year.
It said today that the economic environment in its main markets continued to improve in the three months to September 30. Its net interest margin, a key metric showing the profitability of its lending, edged up to 1.64pc from 1.6pc at the end of June.
The bank, 99pc state-owned, took up €1.9bn of funds available through the European Central Bank's (ECB) new long-term refinancing operations and said that lending approvals were up 39 percent on the same period last year.
However, like its main rival Bank of Ireland, the pace of loan redemptions continued to exceed new lending demand, though the pace of decline in net loans reduced.
The volume of impaired loans is down €4.6bn euros, or 16 pc, this year, with an 11 pc drop in home loans in arrears. The bank said success in restructuring loans resulted in an overall net provisions writeback in the year to date, against a charge of €92m at the end of June.
AIB, which passed last month's ECB stress tests along with Bank of Ireland, said its Core Tier 1 capital ratio - a measure of financial strength - rose to 16.5pc on a transitional basis from 16.1pc at June 30.
The government has said it would like to sell a portion of its AIB shareholding next year and the bank said that talks over the state's preference shares and its contingent capital notes (CoCos) are expected to continue.
"With capital-build and profitability stronger than anticipated in Q3, AIB's financial progress continues to defy expectations, leaving it very well placed to approach capital markets in the near term," Merrion Stockbrokers analyst Ciaran Callaghan said.
"Moreover, the vastly improving fundamentals give us further scope to increase our full-year earnings forecasts."