Bad debts to take shine off HBOS record ?4bn profit

Britain's largest mortgage lender, HBOS, will this week report record profits of nearly £4 billion, but set alarm bells ringing with a huge increase in bad-debt provisions to take account of doubtful loans.

Chief executive James Crosby has already said that the company is tightening lending criteria as interest rates head north, with economists predicting they could hit a peak of 6 per cent in 2005.

But profits for 2003 should come in at around £3.8bn, up 20 per cent on the previous 12 months - and by far the highest figure recorded by HBOS since its inception in 2001, when the Halifax merged with Bank of Scotland.

Analysts at US investment bank and broking house Lehman Brothers have forecast that bad-loan provisions could breach £1bn, a jump of more than 25 per cent.

Much of the rise is a consequence of an increase in the size of the HBOS loan book, and brokers emphasise that the company's balance sheet remains strong, with provisions still a very small proportion of all loans.

But some debt counsellors are expressing concerns that consumers, and some small businesses, are in danger of defaulting on interest repayments as the Bank of England raises rates in order to bring borrowing under control.

HBOS last week launched a savers' account yielding 6 per cent in a bid to persuade people to set more money aside. Other lenders may be forced to follow with similar products.

However, HBOS has also been aggressively building up its business loan book, and some provisions are believed to be linked to recent corporate collapses, at home and abroad. HBOS accounts for about one in four of all UK mortgages.

Two years ago, Crosby irritated investors when HBOS launched a £1.3bn cash call to fuel growth. Many analysts called the move unnecessary.