Bank of Ireland to compensate 6,000 more mortgage clients

* Government threatened increased bank levy

* Redress trims core capital to 12.5 pct from 12.8 pct

* New CEO says substantial progress on tracker loans (Adds analysts on dividend, central bank opposition party quotes)

By Padraic Halpin

DUBLIN, Nov 9 (Reuters) - Bank of Ireland (EUREX: 1269463.EX - news) said on Thursday it will make a 150 million euros ($174 million) to 175 million euro provision this quarter to cover compensation for an additional 6,000 mortgage customers it overcharged.

Irish banks are under threat of being penalised by the government if they do not speed redress for at least 20,000 borrowers who should have paid less on their mortgages.

The industry-wide compensation scheme concerns customers who should have been given the option of a cheaper "tracker" mortgage that follows the low European Central Bank rate or kept on a better rate years ago.

Ireland (Other OTC: IRLD - news) 's Central Bank, which launched the probe into the overcharging in 2015, said in a statement that the customers were a group that it had identified as having been impacted but Bank of Ireland had previously disputed.

Putting the pressure back on other banks, the regulator said it would continue to challenge all disputed cases and that it expected the total number of impacted customers to increase as other lenders include previously disputed cases.

Bank of Ireland said its core tier 1 capital ratio would fall back to 12.5 percent from 12.8 percent as a result of the provision, wiping out the increase in capital it recorded in the third quarter.

The additional customers included on Thursday brings the total number due compensation from the bank to 10,300, by far the most identified by any lender under the review so far.

Ireland's largest bank by assets had previously set aside 25 million euros for compensation - less than Ireland's other four retail lenders. The latest provision charge equates to around 15 percent of its pretax profits for last year.

New Bank of Ireland chief executive Francesca McDonagh said the bank had made substantial progress on the issue since she took up her role last month and made it a top priority.

"NOTHING SHORT OF STAGGERING"

While the additional provision was larger than analysts had estimated, Investec (LSE: INVP.L - news) and Davy Stockbrokers maintained their view that it would not constrain the bank from resuming dividend payments as planned for the first time since the financial crisis early next year.

"We view this as an attempt by the bank to draw a line under the issue and move on and we do not believe that the expected restoration of the dividend with FY17 results to now be in doubt," Davy's Stephen Lyons said.

The bank's shares fell 2.5 percent on the news but recovered slightly to close down 1.3 percent at 6.46 euros.

Irish Finance Minister Paschal Donohoe has said he will decide by mid-December whether banks have made sufficient progress to avoid potential sanctions. These could include an increase in its annual bank levy, stricter reporting requirements or shareholder action.

The scandal rose to the top of the political agenda after a number of customers gave evidence in parliament of the problems it caused them, forcing the government to act.

"The bank is telling us two years into the investigation, the number of affected customers has increased overnight by a whopping 140 percent. This is nothing short of staggering," Michael McGrath, finance spokesman for the main opposition party Fianna Fail, said.​​ ($1 = 0.8599 euros) (Reporting by Padraic Halpin; Editing by David Goodman and Alexander Smith)