Lloyds TSB, the fifth largest bank in the UK, has announced full-year, pre-tax profits of £4.25bn, up 11% from 2005.

The amount made up by retail banking – that is, the provision of UK current accounts and other public banking services to its customers – was £1.55bn, more than 5% higher than the previous year.

However, set against the increased profit is a jump in the provision for bad debt, up 20% to £1.56bn.

Lloyds warned that 2007 would be a “challenging” year due to high levels of consumer debt, and predicted slower growth in unsecured loans and increased regulatory costs, although UK current accounts were expected to do well.

The bank said that despite the provision for bad debts in 2007, its unsecured loans portfolio was showing signs of “stabilising”.

“Towards the end of 2006 we experienced some signs of stabilisation in the rate of our customers filing for bankruptcy and a slowdown in the rate of growth in Individual Voluntary Arrangements (IVAs),” said a spokesperson.

The bank also announced a 2% reduction in ongoing costs in its retail UK operation, and earlier this month announced a plan to close a processing centre in Peterborough with the loss of 243 jobs.