Alliance & Leicester has reported a 6% increase in annual profit with expectations of slower growth and tightening profit margins.

The bank said in a statement that it expected “continued market growth in each of our core markets, albeit at generally slower rates of growth than experienced in recent years”.

The former building society has been cautious on mortgage lending during Britain’s recent house-price boom, avoiding lending large multiples of income and refusing to join the booming, profitable buy-to-let market.

Analysts are concerned that Alliance & Leicester will struggle to boost revenue amid increased mortgage competition, slowing consumer borrowing and tightening profit margins.

The bank’s net interest margin, a key measure of lending profitability, fell to 1.52% from 1.79% a year earlier, though the decline was slightly less than the bank predicted in December.

Alliance & Leicester said the margin squeeze would continue this year but at a slower rate. Credit quality was strong across the group, it added.

Revenue rose 2.2% to £926m, but the underlying increase was 2.7%, achieving the bank’s target of accelerated growth, it said. Gross mortgage lending increased 7% to £8.7 billion, though growth slowed in the second half from the first half, which contributed £5.5 billion.

CEO Richard Pym added that the bank was well placed to give shareholders good returns in that environment.

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