High street bank TSB has revealed that record mortgage lending helped it returned to profit in 2021, but warned over pressure on households and businesses from soaring inflation.

The Spanish-owned lender posted annual pre-tax profits of £157.5 million against losses of £204.6 million in 2020.

It comes after TSB notched up its highest-ever gross mortgage lending at £9.2 billion for the year, up 46% on a year earlier, with results also boosted by the recovering UK economy last year.

But bosses at the group said 2022 will see household and business finances hit hard by inflation and rising interest rates, which could affect mortgage demand.

Financial markets are expecting the Bank of England to increase rates from 0.25% to 1.25% by the end of the year as it looks to cool rampant inflation.

TSB chief financial officer Declan Hourican said the group will “keep a close eye on” the impact on borrowing.

He said: “Both inflation and the Monetary Policy Committee’s response to that which is likely to be interest rate rises – and we’re expecting gradual rises over the course of 2022 – will put pressure on household finances.”

The group revealed a deal with unions on Thursday to raise pay for the majority of its staff by 4%, which it said is higher than the typical yearly pay increase and comes in response to the rising cost of living.

TSB added that it has not changed its Covid sick pay policy for unvaccinated staff, though it said absence levels have surged due to Omicron.

More than 10% of the lender’s 1,800-strong branch workforce was off at the peak of the recent Omicron wave in December, against normal absence levels of less than 5%, but it said this has now returned to normal.

TSB’s full-year results were helped by surging demand for mortgages amid last year’s buoyant housing market thanks to rock-bottom interest rates, the Government’s stamp duty holiday, and changing home-buyer demands due to the pandemic.

A recovering UK economy also helped to drive bank profits higher, with far lower-than-feared unemployment meaning losses for loans turned sour have not been as bad as expected.

TSB’s results showed cash set aside for bad loans plunged to just £100,000, down from £164 million in 2020 at the height of the pandemic.

Total customer lending jumped 12.2% to £37.4 million last year, but it saw a slowdown in deposits growth – up 4.6% to £36 billion – as customers spent some of the savings built up in the early stages of the pandemic.

TSB’s interim chief executive, Robin Bulloch, welcomed a “great set of results”.

“We have seen outstanding income growth in 2021, made improvements in the products and services we offer customers, and become a more efficient and resilient bank,” he said.

Mr Bulloch took over on an interim basis last month after former boss Debbie Crosbie was hired to the top job at Nationwide.

TSB’s results come less than two months after it announced the closure of 70 bank branches across the UK, taking its network down from 290 to 220 by the end of June 2022.

The figures also follow a failed attempt in October by rival Co-operative Bank to buy TSB, which was rejected by owner Banco de Sabadell.