* H1 operating loss 171 mln euros vs 449 mln euros in 2013
* Impairment provisions fall 65 pct to 148 mln euros
* 'Core bank' profitable as approval sought for restructuring (Adds details, analyst quotes)
DUBLIN, Aug 19 (Reuters) - Irish state-owned mortgage lender permanent tsb (PTSB) has cut its first-half underlying loss by 62 percent but continues to lag behind its main rivals, who have returned to profit after the country's banking crash.
The smallest and weakest of Ireland's three remaining domestically-owned lenders posted a 171 million-euro ($228 million) loss on Tuesday, with impairment charges on loans falling to 148 million euros, down by two-thirds on a year ago.
That compared with a profitable six months for both Allied Irish Banks and Bank of Ireland, which are recovering faster from a crisis that saw some banks fail, others fall into state hands and led Ireland into a three-year EU/IMF bailout.
"I don't want to get too carried away yet because we're still losing money," Chief Executive Jeremy Masding told the Newstalk radio station.
"We started the journey in 2012, it's a big turnaround. We're on track but I want to get this thing back to profit."
The 99 percent state-owned lender is seeking approval from European authorities to split itself up to move problem loans off its balance sheet but is still awaiting a decision on a revised plan submitted to the European Commission last year.
PTSB said its core "good bank" reported a 3 million-euro operating profit in the first half on a net interest margin of 1.4 percent.
It increased its mortgage lending more than three-fold to capture a 13 percent share of the recovering new lending market. That compared to a low of 1.6 percent two years ago when, with its future in doubt, lending effectively ground to a halt.
With Ireland's economy set to grow by over 2 percent this year, well above the euro zone average, Masding said the economic and commercial environment continued to improve and provide an increasingly positive backdrop for its recovery plan.
Ireland's finance minister Michael Noonan said the bank was now likely to be attractive to private investors well ahead of government expectations. Noonan has not laid out a timeframe for returning the bank to private ownership
DRAG ON PROFIT
Unlike its more diversified rivals two thirds of the bank's loan book comprises expensively funded and lossmaking tracker mortgages that are linked to the European Central Bank's low interest rate.
As a result the net interest margin for the entire operation stood at 0.88 percent at the end of June, less than half the level of market leader Bank of Ireland. Masding said the bank recognised this needed to increase at a faster pace.
Ireland had hoped to shift the so-called "tracker" mortgages from banks' balance sheets but no solution was reached. Their impact will wane as they are offset by profitable new mortgages and as ECB interest rates eventually rise, ptsb has said.
The bank made further progress on its troubled mortgage book with the proportion of homeowners in arrears for over 90 days falling again to 13.7 percent, from 14.9 percent in December, while buy-to-let mortgage arrears fell to 15.5 percent.
Ahead of the stress tests due to be undertaken by the European Central Bank later this year on euro zone banks, PTSB's core Tier 1 capital adequacy ratio fell slightly to 12.7 percent of assets.
"With the impairment charge about 100 million euros lower than we anticipated, if rolled forward, it may help attaining profitability earlier than the prior 2017 timelines," Goodbody Stockbrokers analyst Eamonn Hughes said, referring to ptsb's plans to return the whole group to profit in three years time. (1 US dollar = 0.7491 euros) (Editing by David Goodman and Greg Mahlich)