HBOS, the UK's fourth-largest banking group, notched up a 19 per cent increase in annual pre-tax profits to £5.7 billion, but still saw bad and doubtful debt provisions surge to more than £1.7 billion.

The rise in unsecured bad debts, although slowing during the second half, was enough to make HBOS say it was "cautious about future trends, given the continued growth in UK personal insolvencies".

HBOS shares lost as much as 4.5 per cent, down 51p at £10.82, as the bank's cautionary comments combined with predictions of lower growth and a wider market experiencings its second day of falls.

Analysts at Keefe, Bruyette & Woods said: "Overall, management appears cautious on outlook ... We believe the in-line [pre-tax] results, cautionary outlook statements and questions over earnings quality may see some profit-taking today."

BACKGROUND

• HBOS drops £1.5bn on mortgage mistake

• Halifax shock as UK new mortgage business plunges

• HBOS hikes SVR, hits borrowers

• Shares in HBOS drop nearly 5% on cautious outlook

• HBOS cautious as bad debts hit £1.7bn

HBOS must be more measured

The bank insists that it moved promptly to reverse its lending practices when it saw that new lending was falling

Related Internet Links

• HBOS company information

• HBOS share price chart

• HBOS forecast

Related Links

• Comment: Growth pressure

Changes in bankruptcy laws have prompted a rash of individual voluntary agreements (IVAs) among UK consumers - an alternative to insolvency that is bad news for banks seeking their loans repaid in full. But the bank boasted that it had cut the level of provisions on secured loans as a percentage of total money lent and said its traditionally conservative lending policy had paid off.

HBOS's peers in the banking sector have all reported an increase in sour loans but all except Lloyds TSB have so far suggested that the increase is moderating and should tail off this year. HSBC will be carefully watched when it reports next week.

Although HBOS said it was optimistic about the UK economy, it added: "We continue to be cautious, however, about unsecured lending, given the cumulative impact of rising interest rates."

The bad debts and tentative growth outlook at HBOS, which has overtaken Lloyds TSB as a bank and continues to dominate the mortgage market, were the only two dark marks on an otherwise strong set of results.

Andy Hornby, the chief executive who has cultivated HBOS's conservative lending streak, unveiled an increase in underlying pre-tax profits at all five of the bank's main lending areas: retail, corporate, insurance and investments, international and treasury.

In the retail, or high-street, bank profits rose 4 per cent to almost £2.4 billion, with HBOS lending less money to customers but holding its share of mortgages firm at 21 per cent.

This came as Nationwide reported that house prices rose by 0.7 per cent month-on-month in February, taking annual house price inflation back up to 10.2 per cent and suggesting the market was poised for a fresh bull run.

In the corporate bank at HBOS, where it plays an active role backing private equity and is close to the retail entrepreneur Sir Philip Green, underlying pre-tax profits jumped 17 per cent to nearly £1.7 billion.

Insurance and investments posted a 19 per cent underlying pre-tax profits increase to £581 million, boosted by lower household claims.

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