The rebirth of the TSB

What's happened?

Amid publicity about the return of "local banking" and an embarrassing first day plagued by website crashes one of Britain's oldest banking brands, the TSB, has been reborn after an 18-year hiatus. The Trustee Savings Bank was founded in 1810 by Dumfriesshire minister, the Rev Henry Duncan, to help the working poor of southwest Scotland manage their incomes and savings.

In the 1980s the bank floated on the stock exchange, but after overpaying £777m for investment bank Hill Samuel before the 1987 crash, TSB struggled and was swallowed up by Lloyds in 1995. It's ironic its rebirth should result from another questionable acquisition Lloyds' decision to buy HBOS at the height of the 2008 crisis.

What's the link?

Within months, the renamed Lloyds Banking Group collapsed into the arms of the state, requiring a £21m bail-out in exchange for a 43% stake (now 39%). Under European competition law, Lloyds had to sell off 631 of its 1,948 branches (originally within four years).

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In April this year, a planned sale to the Co-operative collapsed, leaving Lloyds to go ahead with its Plan B rebranding as TSB ahead of a flotation next year. For customers, the transition is intended to be seamless: 4.6 million TSB account holders will keep existing account numbers and loan terms and conditions. In this sense, TSB remains a wholly owned Lloyds' brand. But it's already a separate bank Britain's eighth biggest with an independent IT system, banking licence, treasury function, management team and board, with deposits (and matched loans) of £25bn. Creating a separate saleable entity is believed to have cost Lloyds at least £1.3bn.

How are customers affected?

The 631 TSB branches are made up of all 185 Lloyds TSB branches in Scotland, all 164 Cheltenham & Gloucester branches, and a further 282 Lloyds TSB branches in other parts of Britain. Customers affected were contacted last year, well ahead of the split. But anyone in doubt, or needing further information, can visit Lloydstsbtransfer.com, or call 0800 028 0428 (8am to 8pm Monday to Friday; 9am to 5pm at weekends).

Prior to the split, only about 4,112 Lloyds TSB customers had chosen to say "no" to the bank that likes to say "yes" and asked to stick with Lloyds. TSB customers can still switch back to Lloyds (call the number above), but will be treated as new customers with new accounts. The same goes for Lloyds customers who prefer TSB.

Will the TSB spur competition?

In theory there's no reason why not. As TSB's bosses have told the media, it has a healthy balance sheet and significant scale and geographical spread. Unlike genuinely new "new entrants", such as Metro Bank, TSB begins its new life with 4.6 million personal banking customers, 125,000 small and medium-sized enterprise (SME) customers, and a network of local UK branches.

Moreover, the new TSB does not suffer from the legacy issues, such as insurance mis-selling liabilities, that the rest of the industry face. But the circumstances of its rebirth make it pretty unlikely it will force competitors into offering better service and products.

Why not?

TSB will probably be owned by Lloyds until next summer's flotation. Its chief executive, Paul Pester (the former Virgin Money boss), reports to a chairman, Mark Fisher, who is also the operations director of Lloyds. As Patrick Hosking says in The Times, Lloyds "has no interest in nurturing a beast that might start to eat its own lunch". For now, TSB products are identical to those of its owner's. And despite TSB's slogan of "Welcome back to local banking", the local boast looks superficial.

How so?

TSB has tailored its advertising so that Bristol posters, for example, read "Hello Bristol". Each branch will have the name and photo of the manager on the wall, and the bank plans a "local economy index" to show how savers' deposits are being put to work in the area. But the branch manager will have no more power over loan decisions than in rival banks; decision-making will be done via computer by centralised loan assessors in Edinburgh.

TSB's forswearing of casino banking and foreign expansion may appeal to personal customers looking for clarity, but might not be so attractive to fast-growing SMEs looking for forex or hedging advice. If TSB does open up competition in UK banking, it will take time. But disgruntled customers can switch banks more easily under the new seven-day switching regime that starts next week.

Tidying up Lloyds

The sell-off of 631 branches is just one part of Lloyds' return to stability: the other is a dramatic upturn in the bank's financial results. After three years of losses totalling £4.3bn, the bank is on course to generate about £2.6bn this year. The main reason, says The Economist, is that Antonio Horta-Osorio, who took over as chief executive in early 2011, has been "quietly refitting the bank's inner workings" stripping out layers of management and improving computer processes and automated processes. "With earnings rising and a pledge by Mr Horta-Osorio to start paying dividends again within a few years, the government looks set to turn a tidy profit on its stake in the bank."