HBOS is now the UK's largest mortgage lender

The country's biggest mortgage lender said pre-tax profit for the year to December rose to �4.5bn ($8.83bn).

The bank has an "increasingly cautious approach" to mortgages and unsecured loans but bad debts still rose slightly, unsettling some analysts.

HBOS, a merger between the Halifax and the Bank of Scotland, is the latest UK bank to report a rise in 2004 earnings.

HSBC saw its pre-tax profits increase 37% to �9.6bn.

Royal Bank of Scotland made �6.9bn, while Barclays posted profits of �4.6bn.

Positive outlook

HBOS remained upbeat on the outlook for 2005.

"Whilst consumer spending has slowed, the prospects for employment remain bright and the trends in business investment appear healthy," it said.

The housing market has seen a "healthy shift in sentiment", HBOS added.

"Housing transactions have come back from last year's peak but prices remain underpinned by strong employment and interest rates that are at or close to a peak."

HBOS said future costs savings would be sought but would not be achieved at the expense of investment either in customer service or future growth.

"The prospects of certain parts of our business call for a significant investment in people and infrastructure," the company said.

Bad debts

HBOS shares have outperformed rivals since December after it announced details of a share buyback of up to �750m and said 2004 profit would beat forecasts.

Obviously, the market is a bit worried about further interest rate rises Stuart Fraser, Brewin Dolphin Check HBOS share price

However, its shares were down 1.0% at 836.5 pence by the close on Wednesday as analysts focused on the increase in bad debts in its retail banking division and slowing growth in loans.

Non-performing loans accounted for 2.16% of its overall retail loans in 2004, up from 1.81% a year earlier, the bank said.

"It's really going forward which the market frets about," said Stuart Fraser of Brewin Dolphin.

"Obviously the market is a bit worried about further interest rate rises and the housing market and also credit cards."