STRONG lending growth and interest income from Government bonds led to a 10 per cent rise in pre-tax profits at TSB Bank to £17.8 million last year.

But a rising tax rate meant a 3.6 per cent fall in after-tax profits to £13.8 million for the year to the end of October 1995. TSB's surplus at the end of the year was £85.7 million, a return of 1.03 per cent on average assets.

TSB chairman Dr Dermot Whelan said the bank had "an exceptionally good year in an extraordinarily competitive environment". TSB customers "have every reason to be optimistic about a reduction in interest rates" he said, stating that a decision would be made within a week. TSB's £1.7 million rise in pre-tax profits was made up of a £3.5 million increase in income, a £2.1 million rise in costs and a £300,000 fall in bad debt provisions.

Total income increased by 5.3 per cent to £68.4 million with net interest income up by 4.2 per cent to £54.3 million. Net new loans of £101 million - an 18.4 per cent increase in lending - led to a rise of £11 million in interest payments from customers and interest income from Government bonds increased by £2.1 million to £9.4 million last year. Other income, including commissions and fees, rose by 10 per cent to £14 million.

Costs increased by 4.7 per cent to £47.6 million with a 4.1 per cent rise in the wage bill and a 6.6 per cent increase in other administrative expenses. Staff numbers fell marginally from 1,010 full-time employees to 996.

There was a marginal improvement in the cost/income ratio which fell from 70.1 per cent to 69.6 per cent. Trustee remuneration rose by 5.5 per cent to £153,000. The bad debt provision fell by £330,000 to £2.9 million, representing 0.49 per cent of average loans.

The £101 million rise in lending included a 25 per cent increase in mortgage lending. TSB did about 8 per cent of all new mortgage lending in 1995, according to Dr Whelan.

TSB's net interest margin - profits on lending less the cost of funds - was marginally lower. It fell to 4.19 per cent from 4.24 per cent. Intense competition is squeezing margins at financial institutions.

TSB's stable rate is explained by two factors the increase in the proportion of its assets loaned at market rates and the strong growth in its current account balances.

Some 72 per cent of the bank total assets are now lent to customers, banks or invested in gilts, and earning market interest rates. This figure rose from 63 per cent in 1994 as the bank moves funds away from the low interest deposits with the Minister for Finance. Balances on customers' current accounts, a low-cost source of funds, increased by 20 per cent last year.