Shares in Permanent TSB tumbled by almost 11 per cent yesterday after the bank said it was profitable in the first quarter of this year but warned of "challenges ahead" from rising regulatory costs, the low interest rate environment and having to hold its residual UK mortgage book for longer than expected.

In a trading update released yesterday, the bank, which is 75 per cent State owned, said: “We are satisfied with performance to date and will continue to manage effectively the controllable costs and grow the business.”

Shares closed at €2.035, down 10.75 per cent.

PTSB said it was “profitable” on a pre- and post-tax basis in the first three months of the year and traded in “line with management expectations”.

The group net interest margin (NIM), excluding guarantee fees, increased to 1.47 per cent and 1.75 per cent for the core bank.

The group “remains on track” to reach its medium-term target NIM of 1.70 per cent, it said.

Its cost of funds reduced to 0.77 per cent. “However, the outlook is for this to increase over 2016 due to the requirement to hold the residual UK mortgage book for longer and a continued reduction in ECB funding, which reflects the group’s return to a more normalised market funding structure,” the bank said.

PTSB said its cost-income ratio continues to “trend downwards” but the outlook is “challenging” with particular regard to the quantum of regulatory costs.

Its non-performing mortgage loans in the Republic fell by €200 million and its fully loaded Core Equity Tier 1 ratio increased to 15.4 per cent.

Constrained

New mortgage lending grew by 4 per cent to the end of April on a year-on-year basis, although this is “still constrained by limited growth in the mortgage market”.

PTSB said the customer response to its 2 per cent mortgage cashback offer has been “positive”, resulting in a 10 per cent increase in applications and a 4 per cent rise in mortgage drawdowns to the end of April.

“However, growth in the mortgage market in Ireland continues to be subdued primarily as a result of the constrained supply of housing,” the bank added.

“This is evidenced by the fall in total market mortgage approvals by 14 per cent in [the first quarter] on a year-on-year basis.”

PTSB said it “continues to explore all options” with regard to offloading its residual £2.4 billion UK mortgage book, as required in its EU restructuring plan.

“The group is in the process of evaluating the impact of funding the UK portfolio for a longer period than previously planned,” it said.

In addition, it intends to strengthen further its balance sheet through increased wholesale market funding, thereby reducing its reliance on ECB funding to a lower level than previously guided, “representing a return to a more normalised funding structure”.

Downgraded

As a result, the bank expects the full-year NIM to be lower than that of the first quarter.

Davy analyst Emer Lang downgraded her rating on PTSB's shares to neutral from outperform after the bank's update, citing the "external headwinds" the bank is facing.

“These factors, which are largely outside the bank’s control, include a disproportionate regulatory cost burden, political pressure on mortgage rates and the cost of a Brexit-driven delay to deleveraging its residual UK portfolio,” Ms Lang said.

“In particular, this latter issue weighs heavily on the bank’s path to normalised returns and is a key driver of the revision in our rating.”