AN UNEXPECTED surge in mortgage arrears led to losses at Irish Life and Permanent of €349 million for the first half of the year – a ten-fold increase on last year.

The company, which was effectively nationalised last month with a €2.7 billion State injection, said that 8.8 per cent of mortgages were in arrears of 90 days or more at the end of June, up from 6.8 per cent six months earlier.

Permanent TSB set aside €333 million of an impairment charge to cover bad debts, more than doubling from €150 million.

Kevin Murphy, chief executive of Irish Life and Permanent, blamed falling house prices and higher arrears for the bank’s loss.

“Arrears continue to deteriorate, house prices continue to fall - that is leading to an increase in our provisions,” he said.

Mr Murphy said the company would have to set aside heavier provisions for the full year to account for the higher losses estimated in the Central Bank’s stress tests last March.

The company, along with other banks, is in talks with the Central Bank, which wants the lenders to reflect the severe losses estimated in the “PCar” tests that raised recapitalisation targets for the banks by a further €24 billion.

An increase in provisions would be the inevitable outcome of these talks, Mr Murphy said.

“I suppose the view of the regulator is they would like to try and develop some consistency between the various banks,” he said.

Provisions would have to be taken in line with accounting rules limiting how much a company can set aside in a year, he said.

The life business, which is being sold to help cover a €4 billion recapitalisation bill, is the subject of talks with potential buyers.

“We are progressing discussions with a number of interested parties and are encouraged by the progress so far,” said Mr Murphy.

A flotation of Irish Life, which has an embedded value of €1.6 billion, is still being considered.

Losses at Permanent TSB’s rose due to fees for the Government guarantee more than doubling to €94 million and a €43 million charge for a redundancy plan under which staff numbers are being reduced by more than 400.

Earnings in the life business fell 46 per cent to €64 million due to lower margins on new business, increasing lapses in life and pensions policies and a one-off €13 million cost of the pension levy.

The company hopes to sell Permanent TSB’s £6.8 billion (€7.5 billion) UK mortgage book by the first quarter of next year.

The company was focusing on how its executive team would be split up following the separation of Irish Life before considering the Central Bank’s fitness and probity tests into long-standing directors and executives and their role in the lead-up to the financial crisis.

The company’s decision not to lend to developers would help the directors’ case in the tests, he said.

“We don’t expect any particular issues given the nature of what happened to the bank but ultimately I suspect that we need clarity on who goes where after the separation,” he said.

Permanent TSB has repossessed 80 houses, mostly through voluntary surrender, this year, compared with about 50 last year.