RISING tax rate, high cost levels and the need for capital investment are the main challenges now facing TSB Bank. As the bank moves towards paying corpora at the full rate, and the profit margin of its core-business comes under more pressure, buoyant markets will be needed if the rate of profit growth is to be maintained.
TSB Bank intends to pursue a vigorous investment and development programme while it waits for the Government's decision on its future, according to chairman Dr Dermot Whelan.
"We can wait indefinitely for the Government decision, but we will not put on hold any investment or development programme which is proper for a bank of our size", Mr Whelan said.
About £4 million will be spent this year on branch and technology development. Staff expertise will be increased, particularly in the agri-business sector, where the bank sees new lending opportunities.
Along with other banks, TSB plans to offer customers the debit card later this year and is considering other distribution methods including telesales.
Nonetheless, Dr Whelan urged "a speedy resolution" of the third banking force issue which arose in April 1994 when the TSB asked the Government to approve a bid for the bank from National Australia Bank. And the reasons are clear.
WHILE TSB has been very successful at increasing its lending in competitive markets, the bank is facing a margin squeeze. Its current cushion - derived from switching funds historically held at low interest rates by the Minister for Finance into higher-earning customer loans - is disappearing. This is coinciding with a fall in product margins in competitive markets.
The negative impact could be even greater if loan demand falls in the market, leading to even more aggressive competition.
In addition, investment will be required to keep up with rapidly changing technology in the industry. The bank's costs are very high. At 69.6 per cent, its cost income is one of the highest in the Irish market.
These pressures come at the same time as the bank moves towards paying full corporation tax. TSB will pay at the full rate from 1997, having gradually been eased into the tax net since 1993.
But TSB is confident. Admitting that it will not be as insulated in future from margin erosion, Dr Whelan said that all these changing conditions have been "factored into our planning process". TSB plans to reduce its cost/income ratio by generating more income. Investment in development will have an incremental impact over time. As a small player in the market, TSB expects to record strong lending growth again this year.
