TSB has seen first-half profits fall by nearly one-quarter after the bank came under pressure from falling margins and an increase in interest paid to savers.

The lender, owned by Spanish giant Sabadell, reported a 24.5% drop in pre-tax profits to £116.6 million for the six months to June 30, amid further signs that the benefit banks been receiving from the rise in interest rates imposed to combat surging inflation has passed.

The base rate has been held at 5.25% since August last year, following a series of rises by the Bank of England from a historic low of 0.25% in December 2021.

TSB, which was taken over by Sabadell in 2015, said the main driver of the decrease in profits was the fall in income, which dipped by 6% to £548.7m. It noted that the fall in income reflected lower mortgage margins in challenging conditions and an increase of £126m paid to depositors over the period. The bank’s net interest margin (NIM) dipped by 22 basis points to 2.62%, compared with 2.84% for the first half of last year.

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However, the bank noted that its NIM was only five basis points lower than in the second half of 2023, which it said highlights a more positive trend in the first half of this year, where both net interest income and NIM were higher in the second quarter than the first.

Pre-tax profits for the first half were 25% or £22.3m higher than in the second half of 2023.

And the bank said that despite inflationary pressures, operating expenses had increased by just 2.2% to £418m. The rise included recognition of the new Bank of England bank levy, excluding which underlying costs were broadly unchanged.

Credit impairment charges fell by 31% to £8.6m, reflecting an updated and more favourable outlook in the first half, the bank said.

Robin Bulloch, chief executive of TSB, said: "Our focus in 2024 is making TSB simpler and easier to bank with and I'm delighted to see more customers choosing TSB.

“We continue to make good progress against our strategy, and I'd like to thank everyone at TSB for their continued efforts to support our customers and communities, helping them feel more money confident."

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Mulling the outlook, TSB said that with inflation falling to more normal levels, there is an expectation that interest rates will follow suit. However, it expressed the view that rates will remain higher than in the years which preceded the recent rises.

TSB was the first of the major UK lenders to update the City in this week's reporting season. It is expected that banks will report lower profits as the benefit from higher mortgage rates begins to subside, despite households continuing to be impacted by elevated borrowing costs.

Lloyds, owner of Bank of Scotland and Halifax, and NatWest Group, which owns Royal Bank of Scotland, will report their half-year results on Thursday and Friday respectively, while Santander will also update investors on Wednesday.

Lloyds is expected to report a pre-tax profit of £3.2 billion for the first six months of the year, about a fifth lower than the £3.9bn half-year profit the bank generated this time last year.

NatWest is expected to report an operating pre-tax profit of £2.6bn for the six months to June, £1bn lower than the £3.6bn recorded this time last year.

The banking group said in April it had seen consumer confidence start to improve, and reported an increase in both savings and current account balances since the end of 2023.