By Padraic Halpin
DUBLIN (Reuters) - European bank stress tests have found that Ireland's permanent tsb (PTSB) had a capital shortfall of 800 million euros (630.14 million pounds) to 850 million euros (669.53 million pounds) at the end of 2013, a source familiar with the process said on Friday.
The shortfall will drop to around 200 million euros (157.54 million pounds) after taking into account the bank's financial actions so far this year plus the potential conversion of 400 million euros of contingent capital notes, known as CoCo bonds, the source added.
Finance Minister Michael Noonan said last week that the 99.2 percent state-owned bank would be able to raise any additional funds it might need from private investors. All other Irish lenders passed the tests, the result of which are to be released on Sunday, the source said.
The smallest and weakest of Ireland's three remaining domestically owned banks, PTSB remains the only loss-making lender. In the first half of this year, however, it cut its underlying loss by 62 percent to 171 million euros.
Two thirds of PTSB's loan book is made up of expensively funded and loss-making tracker mortgages, which are linked to the European Central Bank's low interest rates.
PTSB, one of European 25 banks that have failed the tests, according to two people familiar with the matter, said it would release a response to the test results on Sunday.
The state-controlled mortgage lender recently sold two portfolios of mortgage loans, which it said improved its regulatory capital position. It has appointed Deutsche Bank to advise on its capital market plans.
In a trading update released after the stock market closed on Friday, PTSB said that it had reduced the amount of money set aside to cover losses on bad loans in the third quarter as it made further progress towards profitability.
PTSB, which forecasts a return to profit across its businesses by 2017, said it expected impairment charges on loans to fall significantly in the second half of the year, allowing it to release some provisions.
"Notwithstanding that the group has maintained a conservative peak-to-trough fall assumption of 55 percent for Irish residential property prices, the group saw a net provision release in the third quarter," the bank said, without specifying the level of provisions it was writing back.
"In future periods this positive trend is anticipated to continue, driven also by improving macroeconomic indicators, particularly the improvement in the residential property prices and reducing levels of unemployment."
The bank said its net interest margin, a key metric that shows how profitable its lending is, was rising steadily, while its mortgages arrears continued to decline and its deposits and its market share of new mortgages were going up.
(Editing by Jane Baird)