Shares in Edinburgh-based Halifax Bank of Scotland fell more than 8% today after it posted lower than expected annual profits and warned of continued uncertainty in financial markets this year.

Underlying pre-tax profits came in 3% higher at £5.71 billion for 2007 - but below City forecasts of £5.76 billion.

The Scottish bank captured 22% of new mortgages in the second half of last year but said it would put profitability ahead of market share in future.

HBOS said: "We are planning on the assumptions that market conditions will remain uncertain throughout 2008."

Headline pre-tax profits fell 4% to £5.47 billion, reflecting factors such as costs related to possible refunds of overdraft fees to customers - currently the subject of a test case brought by the Office of Fair Trading.

Hargreaves Lansdown head of equities Richard Hunter said: "Additional writedowns resulting from the credit crunch, and a slowdown in lending all contributed to the malaise.

"In addition, the wider mortgage market environment is looking increasingly tough and, for the moment, there are few signs of a positive catalyst for HBOS."

Despite the lower than expected profits and the financial turmoil which shook markets in the latter half of last year, HBOS also looked to offer reassurance over its funding position.

The company said the supply of wholesale funding to the bank "remained strong", while customer deposits increased 15% to £243.2 billion.

HBOS expects to grow its deposit base further in 2008 in the face of stiff competition from other lenders as banks look to improve their liquidity in more expensive borrowing conditions following the credit crunch.

The bank opened more than two million savings accounts during last year and claims two in every five UK households as a customer.

Its bad debt charges rose 18% to £1.29 billion, although losses were lower in the second half as the bank tightened its lending criteria.

HBOS said: "Savings and bank account sales were strong throughout the year whilst lower sales in unsecured lending reflected our continued cautious approach and reduced appetite for such risk."

But the lender was not unscathed by the financial turbulence and increased its write-downs on asset-backed investments affected by the crunch to £227 million, although it stressed it had little direct exposure to the sub-prime mortgages in the US which triggered the meltdown.

An added blow for the bank was a £135 million hit from last summer's heavy floods, which set back profits at HBOS's general insurance 24% to £232 million.

There was some cheer for the bank's two million private investors following an 18% rise in the 2007 dividend. Each small investor is set to receive £183 on average from a total dividend payout of £1.8 billion.

Chief executive Andy Hornby said: "Our strategy has resulted in good earnings growth for our shareholders despite difficult market conditions."