* FY profit 26 mln euros versus 39 mln euro loss last year
* Mortgage lending grows by just 2 percent in 2015
* Analyst questions Return on Equity capability
By Padraic Halpin
DUBLIN, March 9 (Reuters) - Shares in Ireland's permanent tsb (PTSB) fell sharply on Wednesday after the bank's first annual profit in almost a decade was marred by a lack of writeback provisions and disappointment in the pace of mortgage lending.
Shares of the smallest of Ireland's three remaining domestically owned lenders, and the last to return to profit following the financial crisis, tumbled by as much as 14 percent after it reported only a 2 percent rise in mortgage lending last year.
The bank swung to a profit before exceptional items of 26 million euros ($29 mln) for 2015, versus a 39 million euro loss a year earlier.
However, while other Irish banks saw new lending jump by up to 50 percent last year, PTSB was held back by a severe housing shortage in towns and cities in Ireland. Ninety percent of its lending is for mortgages. Its overall lending rose 6 percent after it started lending to small businesses.
"Whilst the year-on-year increase is pleasing, we were not satisfied with the level of growth we achieved. Going forward, we must deliver more without compromising credit standards," PTSB Chief Executive Jeremy Masding said in a statement.
"We believe the growth in the economy will increase the level of new house constructions and therefore the appetite for credit in the coming years."
PTSB said its net interest margin, a measure of profitability it aims to increase to 1.7 percent by 2018, rose to 1.12 percent for the year as a whole but was at 1.30 percent at the end of the year and expected to improve.
The 75-percent state-owned bank also recorded a 35 million euro impairment charge on its loans, compared to a 42 million euro writeback in 2015.
The bank raised the prospect of impairment writebacks returning this year but one trader attributed the drop in its shares to a failure to do so in 2015 as analysts had expected.
The shares pared some losses but were still down 5.3 percent by 0842 GMT.
Analysts also highlighted a number of challenges including the bank's relatively high regulatory costs, constrained mortgage market growth and the timing and cost of selling off its UK business as part of a restructuring plan agreed with the European Commission.
"We are encouraged by the positive underlying performance, we believe provision writebacks are coming in time, but there are questions over sustainable Return on Equity capability and required capital levels," Investec analyst John Cronin said in a note. ($1 = 0.9106 euros) (Editing by Susan Fenton)