I thank the Chairman and members of the committee for inviting us here today. In my opening remarks, I would like to provide the committee with an update on Permanent TSB's current performances and the specific areas of new lending activity to retail mortgage customers and SMEs, retail mortgage lending rates, macro-prudential mortgage lending guidelines, how we are managing customers in arrears and the strength of our capital position.
The job I took on in 2012, namely, that of turning Permanent TSB into a best-in-class retail and SME bank with an exclusive focus on the Irish market, remains a work in progress and will do so for a few years to come. However, we have achieved much over the past four years and we are well placed to finish the job, to return capital to taxpayers and other shareholders and to create a well governed, competitive and profitable retail bank that works for the community, our customers and our shareholders.
When we announced our half-year results in July, we reached a major milestone in our turnaround story by returning to bottom line, pre-tax profitability for the first time since 2007. That progress may be temporarily interrupted for the full year as we will have to take account of the losses arising from the recent sale of our remaining CHL loan book and the completion of the group's deleveraging programme. The trajectory is clear and positive.
We have shown that, at an operating level, we are capable of generating capital organically after a lengthy period in which significant amounts of capital were depleted. As we agreed with the troika in 2012, the group's turnaround involves three phases, that is, rescuing, rebuilding and growing the group. By now we have completed the first two of these phases and, in doing so, have earned the right to embark on the third with confidence.
With our return to profitability, we have settled the argument about whether we can survive. Now we have to prove that we can thrive and build a compelling commercial and competitive business. Recent news that we have completed the sale of the final piece of the deleveraging target means we have delivered on all of the commitments we made to the authorities to support the recapitalisation by the State at the time of the financial collapse.
There are a couple of areas about which I would like to say a few words, starting with lending. I am happy to confirm that we are growing our new lending volumes. We recently announced that new mortgage lending drawdowns were 12% higher at the end of quarter 3 on a year-on-year basis. We plan to keep growing our new lending profitably on a responsible and sustainable basis, by developing competitive, consumer friendly propositions for new and existing customers.
Earlier this year, we launched a highly competitive variable rate mortgage product and a range of very competitive fixed rate mortgages which we believe are appropriate and offer good value to new customers given the current economic outlook. We are also making good progress with our consumer finance offerings, such as personal loans, car loans and credit cards. We are competing actively in this segment of the market.
In terms of our new SME offering, I have told the committee in the past that the owner managed enterprise sector is an area in which we are keen to grow our presence. It is a logical move for us, given our retail banking strengths.
Our initial entry into this market earlier this year has been well received. Although it is still early days, we are encouraged by our performance so far.
Turning to variable rate mortgage pricing, I am conscious that this remains an area of significant interest to the committee, particularly in light of recent initiatives to legislate for giving the Central Bank powers to regulate mortgage pricing. The challenge my team and I face every day is striking the right balance between being as competitive as we can be in what is already a highly competitive market and ensuring we lend in a responsible, sustainable manner. The price of any retail banking mortgage asset must reflect five key inputs: the cost of funds, the cost of operations, the cost of risk, the cost of capital and the portfolio mix. If we price our loans too aggressively, we will fail to manage these inputs and we could ultimately cost the State and our other shareholders money.
I will quickly go through each of those inputs in turn. It is correct to say that the group's cost of funds remains low in the present interest rate environment at approximately 0.73 basis points, but that is not the only input. The group's cost of operations has risen markedly since the advent of the Single Supervisory Mechanism, the design of a new pan-European deposit guarantee scheme and the extension of the bank levy. In simple terms, the group's cost base through these line items alone has risen by €60 million in 2016, and it is the customer who eventually pays.
The group's cost of risk on its most recent lending activity has stabilised since the nadir of the financial crisis. However, the scale of the crisis means we are not yet at a stage where we can claim the back book has been cleansed of all its problems. This, together with the ongoing difficulties faced by all lenders in realising collateral when customers fail to repay their loans, will continue to be felt in the level of ongoing provisions.
In terms of the cost of capital, the group, as well as other Irish banks, has to allocate far more capital relative to its mortgage book than its European peers due to the scale of the non-performing loan, NPL, challenge for Irish banks. In addition, the cost of that capital has risen as investors price the underlying risk of the Irish banking sector to reflect the scale of the NPL, stock, the length of time to realise capital and the possibility of political intervention in asset pricing.
The final input is the portfolio mix and particularly the impact of our relatively large exposure to tracker mortgages based on historic decisions. The level of tracker mortgages in our overall mortgage book means that the level of relative interest received from trackers generally is low. Therefore, the sum of all these inputs, together with the lack of an arrangement fee culture in Ireland of the type we see in other markets, means that relative variable rate mortgage prices are necessarily higher here than some of the rates we see elsewhere in Europe. That major European banks have not demonstrated an appetite to enter the Irish market with cheaper offerings tends to confirm that our pricing in this market is about right for our particular conditions.
In terms of what are the best counterbalancing forces, first, it is my job to minimise the input costs within my control and, second, the market exercises a controlling function. If we charge excessive prices on an ongoing basis, our lending volumes will suffer. Those are the most effective ways of protecting consumers from any bank seeking to apply excessive lending rates and protecting Ireland from a dangerously under-profitable banking system.
We have a track record of responding to those competitive dynamics. We have demonstrated our credentials as a strong competitor by effectively abolishing our standard variable rate, SVR, for any customer who wants to move to a lower rate from our managed variable rate, MVR, range. This move offered cuts of between 20 basis points and 80 basis points for every SVR customer, and approximately one in four of all our SVR home loan customers has taken it up so far. We use this as an example of a key principle whereby we and our competitors must do all we can to provide fair pricing in respect of both the front and the back book to customers in negative equity as well as those with positive equity. We have also demonstrated that we can compete strongly with our fixed rate offerings, aimed at customers who want certainty over their monthly repayments, and with innovative new products such as our Home Mover offering. Our rates are among the most competitive in the market and it is important to remember that when our cashback incentives are factored in, our overall offering is better value for customers than other banks with lower headline rates but no cashback.
Turning to our lending criteria, the amount that we can lend to any individual customer is limited by the Central Bank’s guidelines that place a ceiling on the maximum loan-to-value and loan-to-income ratios that we can offer. These guidelines are intended to prevent excessive borrowing by individual borrowers. As my management team and I are committed to responsible lending, that is an aim that we share. If the guidelines change as a result of the consultation process that the Central Bank is currently engaging in, then we will change our lending policy to reflect any such change. We are well placed to increase our lending volumes in the event of any change in the current guidelines, but without ever losing sight of our overarching requirement to ensure we continue to lend on a responsible, sustainable basis, and the customer’s ability to afford his or her repayments is always paramount.
Turning to the critical issue of customers who are in arrears with their repayments, we have witnessed encouraging trends over recent years. We have seen the benefits of engaging with customers. The bottom line is that engagement works for the bank and for the customer. We invested heavily in putting the right people and the right systems in place in our group to manage this engagement. This investment has allowed many thousands of people to stay in their homes. We have provided more than 24,000 sustainable long-term treatments to our customers since 2013. A very high percentage of these customers are meeting the terms of their restructuring agreements and we will continue to look for the best treatment for these customers. Our goal is to minimise the capital at risk for the bank and the taxpayer and to reduce the likelihood of, for example, a forced trade down for the customer at maturity of the treatment.