HBOS, Britain’s biggest mortgage lender, is planning to rein in lending this year because of the threat posed by higher interest rates.

The bank, which has nearly a quarter share of the entire UK mortgage market, said that it intended to tighten up its lending criteria on mortgages, credit cards and in the corporate market.

James Crosby, chief executive, said that the move was “a function of the interest rate cycle”, adding that the bank had already begun to tighten up on lending in light of the Bank of England’s recent decisions to put up rates.

Mr Crosby said that the bank was not reacting to concerns over the sharp rise in overall consumer borrowing. He said that he did not believe that the level of consumer indebtedness represented a threat to its business and pointed out that the economic environment still remained benign. He added that the bank’s ratio of bad debts to overall lending was stable.

HBOS’s decision to tighten up its lending criteria came as it announced record profits of nearly £3.8 billion for last year, an increase of 29 per cent. But shares in the UK’s fourth biggest bank fell by more than 3 per cent amid concerns about profitability and exposure to personal loans.

The bank has been the biggest beneficiary of soaring consumer borrowing and the housing boom. Profits at its retail division grew by 19 per cent to nearly £1.7 billion. Net mortgage lending for the year was £25.5 billion compared with £23.1 billion last time.

However, lending through Intelligent Finance, the bank’s internet and direct banking division, more than halved to £3.1 billion from £6.6 billion last time. Mr Crosby said that lending had slowed as IF moved closer to its target to break even.

HBOS said that it expanded its deposit base by attracting 1.2 million new current account customers. Credit balances at the bank now stand at £13.8 billion compared with £8.9 billion last year. Mr Crosby claimed that the bank had been taking market share in current accounts from the big four high street clearers, particularly Lloyds TSB, which has recently started offering an interest-bearing current account to new customers only. HBOS added one million new credit card accounts, which now gives it a 16 per cent share of the credit card market.

Profits at the insurance and investment division rose by more than 50 per cent to £887 million. At esure, the motor insurance division, profits increased 69 per cent and premium income jumped from £320 million to £360 million.

Profits from business and corporate banking also rose by nearly a quarter, reaching £1.23 billion compared with £988 million last time.

Analysts at Dresdner Kleinwort Wasserstein, who have the stock on a “buy”, said that the shares had fallen because :“the margin looks to be a bit squeezed and costs are higher than expected”.

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