HBOS, Britain's fourth-largest banking group, delivered a 17 per cent increase in pre-tax profits to more than £2.65 billion in the first half, ahead of the City's expectations, and maintained it was happy with a rise in the its losses for bad and doubtful debts.

Analysts had been expecting HBOS to grow its pre-tax profits by about 13 per cent over the six months to the end of June.

The bank's losses on bad debts in the first half rose to £864 million, from £753 million at the same point last year. Although this is a 14.7 increase on last year, HBOS said the amount represents 0.24 per cent of its average advances to customers and that it was happy with the rate of the rise.

The nation's biggest mortgage lender, which last month welcomed Andy Hornby as its new chief executive, pushed up profits at both its retail and corporate banking divisions, as well as its insurance and investments and treasury and asset management units.

HBOS also posted a healthy performance at its international arm, where interim profits rose by more than a quarter.

It confirmed that it had extended its shares buyback programme to as much as £1 billion and increased the dividend by 15 per cent to 13.5p a share.

"In the first half of 2006, we illustrated the value of prioritising our growth in product areas that provide the most attractive returns. This strategy saw us deliver strong growth in mortgages, investments and in our international operations," HBOS said.

"In contrast we were deliberately cautious in unsecured lending in recognition of affordability pressures and selective in certain price competitive segments of the corporate banking market. In the balance of the year we will continue to prioritise growth in the product segments that provide the most attractive returns."

James Eden, banks analyst at Dresdner Kleinwort, upgraded his target for HBOS's share price to 1150p and again maintained the stock is substantially undervalued.

"Northern Rock and HBOS have been the top two performers among UK domestic banks over the last three months and small wonder given their strong defensive qualities," he said.

Analysts at Keefe, Bruyette and Woods, who have a target price of 1075p on the shares, added: "As expected, overall credit quality continues to worsen modestly, although the mortgage arrears were down in both mainstream and specialist books; unsecured deteriorated more."

Shares in HBOS closed last night at 974.5p, valuing the bank at £37.5 billion. The shares lost 9p to 965.50, a fall of almost 1 per cent.

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Today's half-way results at HBOS come after it disappointed investors towards the end of last month with a flat update on recent trading that sent its shares falling by more than 1 per cent.

With the bank deliberately adopting a cautious approach to lending, some analysts had expressed concerns that it might not be able to capitalise on the mini-boom in the UK's property market.

Today, HBOS said it had increased its share of the mortgage market to 22 per cent.

Underlying pre-tax profits at the retail bank rose by 4 per cent to £1.13 billion and at the corporate banking arm by 14 per cent to £758 million. Profits from insurance and investment sales jumped by 17 per cent to £287 million and in treasury and asset management rose by 46 per cent to £156 million.

International profits increased by 27 per cent to £389 million.

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