By Padraic Halpin DUBLIN (Reuters) - Permanent tsb (PTSB) said it can cover over 80 percent of an 855 million euro capital hole identified in European bank stress tests on Sunday and is finalizing plans to raise capital from private investors to fill the rest. The 99.2 percent state-owned bank, the only Irish lender to fail the tests, said the shortfall at the end of 2013 would largely be dealt with by financial actions taken so far this year and existing contingent convertible bonds held in the bank. PTSB, the smallest and only loss-making lender of Ireland's three domestically owned banks, recently sold two portfolios of mortgage loans and has hired Deutsche Bank and Ireland's Davy Stockbrokers to help raise funds. PTSB chief executive Jeremy Masding said the bank would "very probably" seek to raise additional capital on top of the residual shortfall he put at around 125 million euros. The mechanics of the deal had not yet been discussed. "As of today, we think we have real momentum," Masding, part of a new management team hired in 2012, told a conference call. The bank was stressed against a series of adverse scenarios such as a 1.3 percent fall in gross domestic product this year and a 3.5 percent drop in house prices. The government expects the economy to grow by almost 5 percent this year while house prices are up 15 percent year-on-year. Irish finance minister Michael Noonan, who also controls 99 percent of Allied Irish Banks (AIB) and has a 14 percent stake in Bank of Ireland, said PTSB would seek to raise the capital in the first half of 2015. The government could cut the shortfall by converting 400 million euros worth of contingent capital notes it holds in the bank, known as CoCo bonds, into equity. PTSB also received 2.7 billion euros of capital during Ireland's financial crisis. Noonan said the stress test results would allow his officials to craft plans to recoup some of the state's investments in the banks. In a trading update released on Friday, PTSB said it had for the first time reduced the amount of money set aside to cover losses on bad loans in the third quarter as it made further progress towards profitability. The mortgage lender sees a return to group profit by 2017. PTSB, which has two weeks to respond to the ECB with its capital raising plan, has been awaiting a verdict from the European Commission on a restructuring plan submitted last year to carve a "good bank" out from its troubled loans. It said it would shortly submit an updated plan. (Additional reporting by Conor Humphries, editing by Mike Peacock)