James Crosby, the chief executive, said that the time was right to deal with the deficit because of the bank’s strong financial position.

He said: “It’s a debt like any other and for a financially strong business like ours accelerating the elimination of that deficit is simply doing the prudent thing.”

HBOS, which hopes to be the first of the British banks to eliminate its deficit, said that it planned to start with a “substantial initial contribution” followed by increased annual contributions. The bank contributed £194 million to the pension fund last year, up from £50 million in 2001.

Mr Crosby also said that the bank planned to buy back up to £750 million of shares next year and added that 2005 earnings would probably beat market expectations of 84.4p a share. HBOS said that it had bought back shares worth £910 million out of a target for this year of £1 billion.

“It is the result very much of our strategy of delivering good but measured growth across all banking divisions and stronger growth in our insurance and investment businesses,” he said, adding that the bank could still make acquisitions but would consult investors.

HBOS said that its credit quality performance and provisioning for bad debts for the year were expected to be in line with expectations. Cost growth excluding planned investments would be below 3 per cent.

The bank also signalled that it might increase its focus abroad after adopting a new structure for international operations, which now account for between 12 and 13 per cent of the group’s total profits. There had been speculation HBOS was considering buying St George, the Australian bank.

Richard Staite, analyst at SG Securities, said: “The market likes the strong capital position and the fact this allows them to continue making buybacks into 2006. That also seems to indicate they’re not hoarding any capital to make acquisitions.”

HBOS followed rivals Barclays and Alliance & Leicester in reassuring on bank prospects in the UK.

Richard Hunter, the head of UK equities at Hargreaves Lansdown Stockbrokers, said: “Over the last year the shares have performed in line with the FTSE and have therefore outperformed the sector by a decent margin — the combination of earnings growth and prudent cost management continues to impress.”

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