THE City greeted the TSB results with something akin to ecstasy and is

convinced that what was a disaster prone institution is now a sensibly

and tightly run bank.

Spurred by a hefty reduction in bad debt provisions, pre-tax profits

in the year to October shot ahead from #5m to #301m and should be able

to surpass the #420m achieved in 1988 when previous management began

using the #1500m flotation proceeds like water.

But the real excitement was the 20% increase in the dividend total --

7.68p with a 4.53p final. Effectively this was a catch-up on the

standstill years of 1991 and 1992.

The shares pushed ahead 15p to 267p for a market capitalisation of

#4040m or a half billion above that of the Royal Bank of Scotland --

arguably its closest competitor in terms of the geographic spread of the

branch network and dependence upon insurance.

The bank has taken what advantage it can of the criticisms currently

being directed at Barclays and National Westminster which are cutting

6400 jobs. About 110 small TSB branches will be closed this year but

there should be no specific TSB redundancies.

Chief executive Peter Ellwood indicated that there will be further

cutbacks but was not prepared to disclose their extent.

But in the drive to reduce the ratio of costs to income even further

-- still 57% in High Street banking and insurance services activities --

TSB is gambling that the closures will not lose too much income if

customers vote with their feet and take their custom elsewhere.

Staff numbers dropped 1700 last year and total redundancy costs

amounted to #70m.

The improvement in bad debts for the whole of the UK banking sector

had been foreshadowed last month by the Royal.

TSB's full-year total provisions and write-offs slid from #597m to

#343m and with the latest half year down to #138m. In the retail banking

business, there was an improvement from #82m to #50m, a most encouraging

pointer to a return to something approaching normality in the banking

sector.

However, the retail banking side's operating profits were under some

pressure, dropping #31m to #260m albeit with about #25m of the damage

occurring in the first half. The squeezing of deposit margins will

continue for some time yet -- the price of persuading customers to

switch from low to high yielding accounts to retain their loyalty -- so

the emphasis is on building up the mortgage book which rose 25% to

#5900m.

A telephone banking system should be up and running by the autumn.

Overall, insurance increased its contribution by half to #194m thanks

to the bank's above-average ability to sell products to customers,

helped by a decline in the claims ratio from 56% to 45%. This was a

result of a mild 1993 winter and #10m of realised investment portfolio

gains.

Happily, the Mortgage Express intermediary-introduced mortgage

business is now showing a small profit compared with a #67m deficit. The

business will move to the sidelines as it is further run down.

TSB has written to all 55,000 pension customers affected by scheme

transfers. It is holding its cards close to its chest as to the extent

of possible provisions but it is still continuing to sell policies.

The obvious concern is that of saturation in both the mortgage and

insurance markets as the traditional, rather dozy general insurers

getting their act together with the new telephone-based entrants such as

Direct Line.

But so far, TSB has outperformed in gaining young people's cheque

accounts.

Mr Ellwood finally put to rest any speculation that Hill Samuel will

be sold particularly after quite encouraging results from the merchant

bank where profits edged ahead #2m to #58m. This reflected the impact of

businesses sold during the year and the withdrawal from branch banking

with 11 office closures.

About 500 staff left and the cost savings will accrue in the current

year. Income will likely increase on the corporate and treasury

activities in particular.

The Loan Administration Unit, which took on the dud Hill Samuel loans

and which are chiefly in commercial property, saw its losses decline

#237m to #142m. But it will be a long battle to reduce the problem to

negligible proportions because the property letting market is still

comparatively slow.

So where does the TSB go from here?

It has a strong capital base with core-tier one capital of 8.7% and

little immmediate prospect of increasing its non-mortgage lending book

given the slow improvement in the domestic economy.

Chairman Sir Nicholas Goodison indicated that the surplus capital will

not be repaid to shareholders through dividends and instead pointed to

the need of the insurance activities for additional funds for expansion.

There is also the prospect of its making an acquisition with one

logical move being that of a building society, possibly in southern

England to counter the bias towards Scotland and and the North of

England.

Whatever the expansion, shareholders can be assured that after the

lessons of the Target, Mortgage Express and Hill Samuel acquisitions

which more than wiped out the flotation monies, any purchase will be

top-notch quality.

The shares having almost doubled in the last year are selling at

around 14 times likely 1994 earnings and yielding an historic 3.6% which

could rise to 4.2%.