Lloyds TSB today posted a pre-tax profit of £3.9 billion for 2007, up 6 per cent on the previous year, after escaping the worst of the US sub-prime mortgage meltdown.

Reporting its figures for the year to December 31, the British bank took a £280 million hit from the global liquidity crisis, mainly from the falling value of its investments in collateralised debt obligations (CDOs) containing asset-backed securities.

But it did not need to increase its wholesale funding during the year and said that it was not expecting a significant impact on the cost of its long-term funding in 2008. It continues to borrow short-term capital at 2007 rates.

The results compare with a £1.6 billion credit market writedown at Barclays — which, unlike Lloyds TSB, owns a large investment banking business — and £150 million increase in 2008 funding costs at Alliance & Leicester.

Helen Weir, Lloyds TSB's finance director, said that margins at the bank would widen this year because wholesale funding costs would remain stable. "Our AAA rating and prudent stance has stood us in good stead," she said.

The company increased its dividend by 5 per cent to 24.7p per share, saying that it remained confident about the earnings outlook in 2008 despite turbulent markets and slowing economic growth.

Lloyds TSB, which is Britain's biggest provider of current accounts, cards and personal loans, reported a 1 per cent decrease in impairment losses in retail banking to £1.2 billion. It attracted more than one million new current accounts last year, an increase of 17 per cent on 2006, but spent £76 million in 2007 on settling claims for the refund of overdraft charges.

Eric Daniels, the bank's chief executive, said that Lloyds TSB was the biggest winner of new current accounts in the market last year and expected savings business to also continue to grow. "Customers are becoming more concerned about savings for a rainy day, saving for retirement," he said.

Outstanding mortage balances increased by 7 per cent to £102.7 billion and net new lending was £6.7 billion, giving Lloyds TSB a 6.2 per cent share of net new lending.

Existing Lloyds TSB customers account for 25 per cent of the bank's mortgage business, which Mr Daniels said was advantageous because they presented a better-understood risk. "We've stayed away from the racy end of the market," he said. "We have no self-certified at all." The chief executive said that he expected UK house prices to remain flat in 2008.

The bank's insurance and investment business, which includes Scottish Widows, reported a 9 per cent rise in pre-tax profit to just over £1 billion.

Profit at the wholesale and international banking business fell by 12 per cent to £1.4 billion, mainly due to the £280 million credit market hit. The bank has a remaining £130 million exposure to CDOs and £155m million exposure to monoline insurers. It also wrote down its investments in structured investment vehicles by £22 million, leaving a £78 million exposure.

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