Sir Nicholas, also chairman of the British Bankers Association, said Labour's recent claim that banks were making exorbitant profits by raising charges failed to show any understanding of the banking industry.
Over the past decade as a whole, the returns from banking had not been very good. Banks had sustained bad debts as corporate customers went under during the recession, and the banks were enjoying big profit increases simply from the fall in bad-debt provisions.
TSB's provisions against bad debts fell from £335m to £173m for the year to October 1994, due mainly to improvements in the Loan Administration Unit set up in 1992 to work out £1bn of sour loans, and Mortgage Express.
Sir Nicholas said the results showed "our strategy is working. The banking business, Hill Samuel, asset management and UDT are all capable of future growth."
The Loan Administration Unit ring-fenced loans to such companies as Brent Walker, in the past two years writing down £600m. In 1994, it turned in profits of £4m, compared with a loss of £142m last time. The winding down of Mortgage Express's £2bn loan book has been equally successful. It made a profit of £38m, up from £1m last time.
TSB's final dividend of 5.48p made a total of 9.024p for the year, an increase of 17.5 per cent. Yesterday, the shares fell 5.5p to 220.5p. The group made a 17 per cent post-tax return on average equity, which Sir Nicholas said comfortably beat the target of 15 per cent.
The risk-asset ratio rose slightly to 13.5 per cent, one of the strongest in the sector.
Against this, Sir Nicholas admitted intense competition and overcapacity posed problems for all retail banks. While costs had been contained and were virtually flat at £1.1bn, with 200 branches shut in 1994/5, net interest income was barely up at £1.07bn, and total operating income fell from £2.03bn to £1.9bn. Net interest income for branch banking fell 5 per cent.
Peter Ellwood, chief executive, said that while both branch banking and insurance profits had fallen, TSB's bancassurance strategy was working. Banking profits fell £13m to £247m and insurance profits by £3m to £191m.
Switching many of TSB's 7.5 million customers into higher interest deposits had reduced income, said Mr Ellwood, but this had been necessary to ensure customer loyalty. In 1989, low-interest deposits amounted to £5.7bn, compared with £1.6bn last year.
Hill Samuel, the merchant banking arm which is now defintiely not for sale, increased profits by £5m to £81m, and UDT's profits grew from £34m to £54m.
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