Britain’s banks are in much better shape than you might imagine

Who'd want to be a British bank? If you were to read the first 50 pages of TSB's stock market prospectus, you might think that high street banking was a one way ticket to losses and bail outs.

TSB lists 43 risks to its business - everything from the fragile macroeconomic climate to Scottish independence to the risk that people simply might not buy into its marketing spiel.

But TSB's risk list is merely the prologue to a 332 page document which goes onto boast about the rude health that Britan's banking sector is now in. Perhaps most revealing is the chart showing how profits before tax have grown amongst the UK's six largest banks over the past few years.

As you can see below, the combined retail banking profits of Britain's six largest banks still totaled £5.4bn back in 2009 - the year after the eye of the financial storm. And while profits went onto fall further still in 2011 and 2012 - this was almost entirely down to the massive bill for Payment Protection Insurance mis-selling. If this is put to one side, you can see that banks' underlying profits immediately rebounded after the crisis and touched new highs well above the pre-crash peaks in 2011, 2012, and 2013.

I'm not one of those commentators that believes banks shouldn't be allowed to make a decent profit. But what the crisis exposed was a litany of bad practice and a rotten culture at the core of our nation's banking sector. If this had truly unraveled - and banks were back to building their profits in a fair and transparent manner, there's no way that there could have been a return to bumper profit levels so quickly.

Harder to climb down from a high perch

While many banks claim that they are subject to an unreasonable regulatory burden, and that retail bankng in the UK is barely profitable, the TSB prospectus tells another story.

But the longer that some of the cultural issues go unchanged in our banking sector, the harder it will be for management to set these right. Shareholders expect healthy growth in their investment, and management are incentivised to deliver it. Sustaining a drop in profits in pursuit of a more customer-friendly banking model will get harder to sell to investors every year, if profits continue to grow at the level they are. Even taking into account PPI claims, the big six are already making £8bn in combined pre-tax profits. This year, they are likely to be back above pre-crash levels in absolute terms as well as relative terms.

It's important for TSB to grasp this from the outset. If it gets hooked on income streams that are not transparent, or are not delivering the best outcomes for customers, it will get harder for it to change its position once it is floated, and working hard to charm investors.

For now, it has a clean slate, and a chance to eliminate some of the worst practices that it has simply taken with it from Lloyds.

Like most other banks, TSB is not explicit about some of its bank charges (such as using your card overseas), its overdraft charges are still relatively high, and it offers long 0% balance transfer deals which are predicated on the assumption that a number of people will miss a payment and end up having to pay interest. These are all practices which I believe will be eliminated over the next few years, as the new regulator continues its micro-management of the sector.

It would be as well for TSB to make these changes now and build up from a clean base. If it doesn't, it will end caught in the same cycle as other banks, finding it difficult to do the right thing even if it wants to.