We have a duty to consider serious offers for the business should any occur which clearly represent superior returns to our shareholders

A&L executive chairman John Windeler

Investors welcomed the figures, marking A&L shares 12p higher at 843p in mid-afternoon trade on Friday.

Alliance & Leicester said the dip in profits reflects increased investment over the course of the year, including a �13m revamp of the company's small business banking division.

Total revenues grew by 5.1% during the final three months of the year compared with the same period one year earlier, up from 3.5% in during the July to September period.

"It's a pleasant surprise that there are no negatives. We liked the acceleration in revenue growth in the last two quarters," said James Alexander at Commerzbank.

Competition

Alliance & Leicester, which is competing aggressively with the "Big Four" UK banks in the market for small business banking services, added that the number of new small business accounts opened last year grew by 27% compared with the year before.

The bank also reported strong growth in mortgage lending activity, with gross lending rising to a record �6.1bn, representing 3.8% of the UK market.

But the dip in A&L's profits provides further evidence that the banking sector had a tough time of it last year.

Last week, high street giant Lloyds TSB also unveiled lower profits, blaming a sharp decline in global stock markets.

Takeover speculation

Alliance & Leicester is seen as a likely takeover target as the UK banking sector continues to consolidate.

The bank launched an abortive attempt to merge with Bank of Ireland two years ago.

A&L executive chairman John Windeler said that while the company believes investors would derive greater benefit under the present management's strategy, "We have a duty to consider serious offers for the business should any occur which clearly represent superior returns to our shareholders."