£5.7bn HBOS profit 'helps drive economy'

Hornby, unveiling a full-year dividend up 15 per cent to 41.4p - via a 27.9p final - and a 550m payout in cash, shares and options to the group's 65,000 staff, said: "Profit is not a dirty word. It is the fuel that drives our market economy." The banking giant, formed from the merger of Bank of Scotland and Halifax in 2001, also made a commitment to continue free banking regardless of any ruling of the Office of Fair Trading (OFT) on capping banking charges on overdrafts.

Hornby said: "We are committed to free banking. It serves us and the UK consumer very well.

"It's simplicity encourages switching [of accounts] and so, selfishly, it is in our interest. We like free banking."

HBOS's commitment was in contrast to Lloyds TSB, whose chief executive Eric Daniels would only commit last Friday to providing "excellent value" to customers following any OFT ruling.

It was a strong performance across the board for HBOS, with retail banking profits up 4 per cent, corporate up 17 per cent, insurance and investment up 19 per cent, and treasury and asset management ahead 33 per cent. HBOS's core UK retail arm turned in a profit of 2.36bn (2.28bn), while the cost-income ratio reduced to 38.4 per cent from 39.8 per cent.

HBOS, the country's biggest mortgage lender, saw its gross market share stay stable at 21 per cent, while its share of net lending increased to 17 per cent from 14 per cent.

Hornby said the division had also benefited from a greater propensity by people to save. "Savings, once looking like an endangered species, are now clearly back in fashion," he said. HBOS won half a million new savings customers in 2006.

Corporate banking benefited from what Hornby called "the most benign credit environment for some 30 years", delivering a profit of 1.66bn compared with 1.42bn in 2005.

However, he said HBOS remained alert as "too much money is chasing too few deals in some parts of the market".

Hornby said HBOS's favoured sectors at present for corporate lending tended to be "old economy and the commercial property industry".

Lending growth to customers groupwide rose 10 per cent, while the group bad and doubtful debt charge rose to 1.74bn from 1.59bn in 2005.

Bad debt charges lifted to 13.2 per cent from 11.5 per cent as a percentage of advances, and Hornby added: "We remain cautious about future trends given the continued growth in UK personal insolvencies."

He said this caution was also underpinned by the cumulative impact of rising interest rates, utility prices and consumer debt.

HBOS's shares fell 52p, or 4.6 per cent, to 1,081p yesterday - the biggest FTSE 100 faller - partly on this caution and also the six basis point hit on the bank's margins from its greater appetite for mortgage lending, including the buy-to-let market.

It was the stock's biggest daily fall in over three years, extending a pullback from a record high of 1,176p last week.

Higher corporate margins helped offset the margin pressure, and the group net interest margin - the difference between the interest levied on borrowers and interest paid to savers and a key driver of profits - dipped to 1.78 per cent from 1.80 per cent.

Hornby said he expected to see a "modest decline" in overall margins this year due to competition among lenders. "We're indicating a similar type of trend in 2007," he said.

David Dodds, analyst at SVM Asset Management, said solid results were dampened by the margin outlook and caution on unsecured bad debts, but growth prospects were better than for most of its peers.