BRITAIN's largest retail financial services group, Lloyds TSB, yesterday reported a 52 per cent surge in 1996 profits, but analysts said the figure was somewhat flattering and included lower than expected bad debt provisions.

Pretax profits in the first full year following the merger between Lloyds Bank and TSB rose to £2.505 billion sterling, and the bank, which has been the star performer in a booming British banking sector, said "the best is yet to come". "We had a good year in 1996 but the combination of Lloyds, TSB and Cheltenham & Gloucester is not fully into its swing," Lloyds TSB chairman, Sir Brian Pitman, told reporters at a news conference. Sir Brian expects cost savings of £400 million every year from the merger and from the purchase of the 38 per cent minority interest in Lloyds Abbey Life completed last year.

The 1996 profit figure followed £1.650 billion the previous year. Lloyds TSB raised its dividend by 20 per cent to 13.2p per share from 11p, while earnings per share soared by 63 per cent to 31.2p from 21.3p.

But banking analysts said the headline data flattered the bank's underlying performance somewhat and expressed some concern for future income growth. "There's nothing really wrong with the results," said Mr John Leonard, banking analyst at Salomon Brothers. "But they are not as glorious as they look on the surface.

Analysts pointed out that the large drop in bad debt provisions - 44 per cent down to £327 million - was a surprise, even though some improvement was expected given that the bank has increased higher quality assets such as mortgages.

Specific provisions for bad and doubtful debts were down to £357 million from £459 million in 1995 while profit from its problem country debt portfolio, mainly in Latin America, jumped to £127 million from £50 million.

Lloyds said it made a restructuring provision of £75 million following its purchase of insurer Lloyds Abbey Life and said it was raising its provision against possible redress from the mis selling of pensions by £29 million to £200 million, a move welcomed as prudent by analysts.

Lloyds TSB said that, after excluding restructuring provisions, economic profit for 1996 was 69 per cent higher at £1.055 million pounds compared with £623 million in 1995.

Sir Brian said the bank is likely to spend surplus capital on growth.