THE chief executive of TSB has said the cash to be handed out to challenger banks by Royal Bank of Scotland is a “once in a generation opportunity to break the shackles” of big bank dominance in the small business market.

Royal Bank is giving £775 million to challenger banks to satisfy European authorities as an alternative to selling its Williams & Glyn network, which was a condition of its £45bn government bailout in 2008.

The money can be provided to the likes of TSB, Virgin Money and Clydesdale Bank to boost competition in the small business banking market.

Speaking as TSB saw profits tumble on the back of increased fees payable to former owner Lloyds, Paul Pester said: “The £775 million put aside by RBS is a once in a generation opportunity to really break the shackles the big five banks have had on small business banking for so long: imagine the impact one of the largest grants could have in the hands of TSB – Britain’s challenger bank that has already shown its credentials in bringing more competition to the retail banking market in the UK.”

After admitting that it would not be able to meet a deadline to sell off its Williams & Glyn business, RBS and the UK Government proposed that a series of grants would be paid to challengers to negate the need for the divestment.

An independently administered £425m Capability & Innovation Fund will award 15 grants of between £5m and £120m to challenger banks; while £350m will be used to help up to 120,000 small and medium-sized enterprises to move their accounts from Williams & Glyn to challenger banks, with payment made in the form of dowries.

It is believed that the payments will begin to be made this year.

Mr Pester said TSB had already “put its money where its mouth is”, investing millions of pounds to build new services.

Its parent, Sabadell, has announced up to £100m of funding, with an initial tranche of £30m, to invest in small businesses across the UK.

Mr Pester said the bank had put together the pieces to bring more competition to the small business banking market in 2018.

“There are 5.7 million hard-working small businesses in the UK that are the lifeblood of the UK economy,” he said. “Creating more competition is the catalyst needed to unlock the real potential of these small businesses and help local communities thrive. At TSB we’ll be doing everything we can to lead the charge on this in 2018.”

The bank’s statutory pre-tax profits fell by 10.6 per cent to £162.7m as operating costs climbed 16.7 per cent to £821.3m – driven by a £122m increase in fees paid to former owner Lloyds.

Lloyds spun-off the bank in a 2013 flotation and it was subsequently acquired by Spain’s Banco Sabadell in 2015. However TSB has continued to use Lloyds’ information technology (IT) infrastructure, with costs running into hundreds of millions of pounds each year.

The bank said that these fees would continue to increase through 2018 as it worked on rolling out the final phase of its own banking platform. That platform was first revealed in November and is expected to be rolled out this quarter.

Profits this year are also set to be impacted by the reduction in value of its Whistletree closed mortgage portfolio.

Whistletree was established in 2015 when TSB acquired £3.3 billion of mortgage assets from NRAM. It subsequently picked up the loan and mortgage assets of Airdrie Savings Bank, when it collapsed in April last year.

Customer deposits at TSB reached £30.5bn, up 3.9 per cent. Total customer lending at the bank was £30.9bn, up 4.9 per cent.

TSB also announced the appointment of former Standard Chartered finance chief Richard Meddings as chairman. Mr Meddings, a non-executive director at Deutsche Bank, succeeds Will Samuel who steps down after four years.