"Due to its predominately prime-residential mortgage-based book, TSB's loan-book track record is excellent, which has resulted in very low non-performing assets and charge-offs over the past five years," Standard & Poor's credit analyst Shaun Evans said. "However, the bank has limited business diversity, its funding is concentrated, and its risk-management capabilities are still developing."

Earnings have been resilient, benefiting from the higher-than-peers interest margin and good cost efficiency. The bank's low-cost retail funding base underpins its robust net interest margin. The net interest margin for the six months to Sept. 30, 2007 was 2.98%, which compares well with domestic peers, considering TSB's low-risk asset profile. TSB's cost-to-income ratio is very good, and continued to steadily improve over recent years.

Liquidity levels are high and above the peer average. The bank has consistently held more than 30% of its assets in cash and marketable securities, which provides ample liquidity under normal operating conditions and offsets concerns to an extent associated with the short-dated nature of its liability profile. The retail funding capabilities are augmented by TSB's two committed wholesale bank lines from AA rated banks, which provide a moderate level of additional funding support.

The stable outlook on TSB is based on our expectation that the bank will continue to focus on key financial-strength drivers that have contributed to positive ratings momentum in recent times, Evans says.