Halifax Bank of Scotland (HBOS) has warned investors that its profit margins would tighten this year, but said it would meet forecasts.

In a trading statement issued to the stock markets yesterday, HBOS, which owns Bank of Scotland Ireland, said profitability had been hit by rising interest rates that had affected the cost of the money it had to source to advance loans. The bank has also been cautious on its retail lending prospects this year.

The bank's chief executive, Mr James Crosby, said the crucial factor was that its profits were not being reduced as a result of competitive pressures.

"That \ strain is pretty well what accounts for us giving the market slightly different guidance than we gave earlier," he told analysts.

In the Republic, Bank of Scotland has announced plans to expand into retail banking by offering services through the internet and over the phone. It is currently focusing on providing services to the business sector.

HBOS said it was "very comfortable" with analysts' consensus forecasts for full-year 2004 pre-tax profit of £4.51 billion (€6.75 billion), up 20 per cent from £3.77 billion in 2003.

Its net interest margin, which measures lending profitability, will fall by about 0.12 of a percentage point this year, HBOS said. Some analysts have been concerned that HBOS is sacrificing profitability for asset growth and say bank margins will be further squeezed.

Margin pressure will ease next year as interest rates flatten and the gap between funding costs and the Bank of England base lending rate closes, according to HBOS. - (Additional reporting, Reuters)