STATE-CONTROLLED Permanent TSB swung to a loss of €566 million for the first half of the year from a profit of €413 million for the same period in 2011 as bad debts rose and the bank didn’t benefit from another gain this year from burning bondholders.

The bank also booked a one-off charge of €130 million in the half-year, which included €52 million towards the cost of 250 redundancies and closing 16 branches, and a €72 million write-down primarily on the value of a car finance loan book, which the bank is selling.

The provision for bad debts was €437 million for the first half, up from €333 million on the same period last year, mostly due to a further writedown on €2 billion of commercial property loans.

The State owns 99.5 per cent of Permanent TSB, resulting from a €4 billion public bailout, which includes the Government’s purchase of Irish Life, the bank’s profitable life and pensions business, for €1.3 billion.

The bank’s net interest margin, before the cost of the State bank guarantee, was squeezed to 0.76 per cent at the end of June from 0.97 per cent 12 months earlier. Net interest income fell to €166 million from €205 million.

The net interest margin, the gauge of the profitability of a bank, is the difference between the interest rate the bank pays for deposits and other funding, and what it charges on loans.

“The Irish banking system will only survive and be replenished under a rational banking system, so at the heart of that is the old net interest margin challenge and all of us at the moment struggle from [that],” said Permanent TSB chief executive Jeremy Masding. “We basically are caught in a difficult place between trying to make sure that we have got competitive lending rates but at the same time our cost of funding is too high.”

Those with arrears of 90 days or more on Permanent’s €18 billion Irish home loans rose to 19,489 or 13.2 per cent of 147,425 accounts at June 30th, from 16,947 loans or 11.3 per cent six months earlier – higher than the Central Bank’s industry average of 10.9 per cent.

The bank modified 10,883 Irish home loans to help people meet repayments, an increase of about 510 mortgages in the half-year.

Mr Masding said the bank had “no illusions about the challenge ahead”, but it has made “huge progress” and identified “tough decisions” it had to take “to recover from this unprecedented crisis”.

Permanent TSB’s Irish business is being split into a good bank and asset management unit, with its UK mortgage business forming a third separate unit of the business.