* AIB boosts margins, capital in Q1 as bad loans fall
* Chairman says bank ready whenever government launches IPO
* Government issues warrant to allow it profit from upside (Adds chairman's comments on IPO, government 10-year warrant)
By Padraic Halpin
DUBLIN, April 27 (Reuters) - State-owned Allied Irish Banks reported improved trading in the first quarter on Thursday in what could be its last financial update before the launch of a long-awaited initial public offering (IPO).
Ireland has appointed several banks to act as bookrunners and global coordinators for the potential sale of a 25 percent stake in AIB and has said the nearest window to sell the shares would be between mid-May and early July.
Chairman Richard Pym told a shareholders meeting that AIB will be ready whenever finance minister Michael Noonan decides to sell. The bank also said the government had issued a warrant allowing it to buy as much as 9.99 percent of the bank's shares at twice the IPO price for up to 10 years after a floatation.
The move could help Noonan's minority government counter any accusations it is selling state assets cheaply and avoid the kind of criticism the British government received when Royal Mail shares surged following its privatisation in 2013.
The warrant means if AIB's shares more than double at any point over the next decade, the government could buy 9.99 percent below the market price, giving it the potential to add more revenue to state coffers over and above the IPO receipts.
The potential IPO, which was held back last year by unfavourable market conditions and is "not inevitable yet", according to Noonan, would be one of Europe's largest bank listings since the financial crisis.
AIB, whose 21 billion euro ($23 billion) taxpayer bailout was the biggest for any Irish bank still trading, was valued at 11.3 billion euros at the end of last year, meaning a share sale could bring in about 3 billion euros.
The bank, which last month became the first Irish-owned lender to resume dividend payments since the 2008 financial crisis, said on Thursday it had made a good start to the year, showing the ongoing success of its strategy.
The 99.9 percent state-owned lender said it had achieved a 10 percent increase in new lending drawdowns, with growth across all businesses as its share of Ireland's booming mortgage market rose to 38 percent from 36 percent in December.
Its net interest margin, which shows how profitable its lending is, rose to 2.46 percent from 2.42 percent in the fourth quarter. Its core tier one capital ratio, a key measure of financial strength, increased to 16.0 percent from 15.3 percent.
Impaired loans fell by 0.5 billion euros to stand at 8.6 billion euros, which was down from a 2013 peak of 29 billion. ($1 = 0.9177 euros) (Editing by David Clarke)