OUTLOOK: Behind the TSB headlines

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The Independent Online
Ignore the two-thirds increase in profits at TSB, no matter how much it may anger Gordon Brown, the shadow chancellor. The fact is that the performance of the group's high street banking operations is lacklustre at best, just as the City expected.

Indeed, far from extracting ever larger quantities of cash from banking customers, TSB appears to be doing the opposite, by encouraging them to move into high interest accounts from old-fashioned, low-yielding deposit accounts.

This is not an altruistic move, but a rational long-term strategy, pre-empting what the customers were bound to do anyway. In customer relations terms, it is better for the TSB to offer an improved account than risk thousands of angry people suddenly waking up to the fact that they are being robbed and stalking off to another bank.

But in the transition period, which is proving longer than expected, the strategy adds to the depressing effect on TSB margins of intense competition for deposits in the high streets. Profits from straight retail bank lending - the net interest income - actually fell.

There is also little evidence of any across-the-board increase in charges. Fees and commissions for the group, admittedly including insurance and fund management as well as banking, rose only 2 per cent. This hardly bears out Mr Brown's claim of soaring bank charges.

The TSB has kept costs under control in the bank and shed staff, but the combined effect of all these pressures on retail banking profits before bad debts was a fall of £31m to £351m. Even after bad debt charges there was a drop of £13m to £247m.

The TSB's much vaunted strategy of bancassurance - selling insurance on the back of banking services - also suffered from the effect of falling stock and bond prices on funds under management. So insurance profits fell £3m to £191m.

The result was that group pre-tax profit, before bad debts, hardly changed, and falling bad debts created most of the profits rise. Since by far the biggest part of that fall was in the old Hill Samuel loan book - to the likes of Brent Walker - this improvement had very little to do with high street banking.

As the bank reporting season progresses, there will be further dramatic profit increases to hit the headlines - and just as much doubt among serious investors about whether the trend of banking profitability is improving fast enough to pay for the next round of bad debts as the banking cycle turns down.