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HBOS has reported a 13 per cent rise in half-year profits, despite acknowledging a fall in its share of the UK mortgage market.

Britain's fourth-biggest bank said that its underlying profit before tax in the six months to the end of June climbed to £2.96 billion, up from £2.61 billion a year ago.

Double digit profit growth in each of the bank's divisions except retail saw the group announce the largest rise in its dividend payout to shareholders since it was formed six years ago.

HBOS, created by the merger of the Halifax and the Bank of Scotland, said that its interim dividend would be raised by 23 per cent to 16.1 pence a share.

The Edinburgh-based bank said that the dividend increase illustrated the "confidence" it had in the future of the business.

But despite its apparent optimism HBOS conceded that its share of net mortgage lending more than halved to eight per cent, as previously warned by the home loans provider in June.

HBOS chief executive Andy Hornby admitted that the fall was a result of a new mortgage pricing strategy, which was scrapped in May, being "largely unsuccessful".

"Having taken corrective action to our pricing strategy, the strength of the HBOS franchise has been demonstrated by the speed with which we have returned to our 15 to 20 per cent net lending range in May and June," added Mr Hornby, who said that the bank expected to trade within such a range through the second half of 2007.

Despite underlying profit at HBOS' retail unit falling by a subsequent eight per cent to £1.08 billion over the first half of the year, other sections of the business performed well.

Net operating income for its corporate unit climbed by 42 per cent, while underlying pre-tax profits for HBOS' investment and insurance business were up ten per cent to £316 million.

Meanwhile the third bank this week to report profits ahead of analysts' expectations revealed that it had returned £79 million to customers who claimed they had been overcharged for exceeding their overdraft without authorisation.

HBOS said that it was one of eight UK current account providers who have agreed with the Office of Fair Trading (OFT) to the start of a test case in the high court to "resolve legal uncertainties concerning the level, fairness and lawfulness of unauthorised overdraft charges".

The bank said that due to the early stage of the proceedings and uncertainty about the outcome of the test case it would not be practical to estimate the potential financial effect of the development on its business at the current time.