Shares in UK bank HBOS have fallen 11% after it said the credit crisis had hit profits in its retail division.
HBOS was formed by the merger of Halifax and Bank of Scotland
Pre-tax profits at HBOS, which was formed by the merger of Halifax and Bank of Scotland, were £5.47bn, down 4% from £5.7bn in 2006.
The increase in the cost of borrowing funds for mortgages on the wholesale market contributed to a fall in the profits of its retail business by 13%.
The bank said it would take a more "cautious" approach to lending in 2008.
HBOS shares ended Wednesday trading down 76 pence to 657p.
"The squeeze on its margin in retail banking was very pronounced," the BBC's business editor Robert Peston said.
HBOS said competition in the mortgage market hit profits in the first half of the year. They were then knocked by a rise in the cost of borrowing funds on the wholesale market after the credit crisis.
Profit in the retail division fell to £2.05bn from £2.36bn last year.
HBOS said it was taking a more cautious approach to lending which had led to a fall in the amount of unsecured lending.
Customers' outstanding balances on credit cards fell 3%, higher than the market average.
This caution will also affect its approach to mortgage lending in 2008. "We will continue to favour profitable mortgage lending over market share," HBOS said.
In the UK, the bank forecasts householders will save more in 2008.
It expects "strong growth" in savers' deposits, despite stiff competition from other banks and building societies for those funds.
"We are well placed to take opportunities presented by these difficult markets and deliver good growth in shareholder value over the next few years," said chief executive Andy Hornby.
The bank said it had performed well for shareholders during 2007 despite the tough market conditions.
It has increased its shareholder dividend by 18% to 48.9p.
Underlying pre-tax profits rose to £5.7bn from £5.5bn in 2006.
HBOS added it had reduced the value of its investments by £227m, reflecting uncertainty in financial markets.
In the course of 2007, the bank repaid £122m to customers who had complained of being overcharged for running up unauthorised overdrafts.
The refund is the largest revealed so far for last year, topping the £116m paid by Barclays and the £76m refunded by Lloyds TSB.
The issue of bank overdraft charges provoked a huge wave of legal actions in the county courts last year.
It has been the subject of a recent High Court test case involving seven banks, including HBOS, along with the Nationwide building society and the Office of Fair Trading (OFT).
All sides are now waiting for the judge to decide if the OFT has the power to use consumer contract regulations to investigate the level of bank charges.
But HBOS warned that if the banks lose the case, it could have profound consequences for the way they charge customers.
"Regulatory intervention is an ongoing feature of UK retail banking and changes could affect the profitability of our business," the bank warned.
"The ongoing investigations into bank charges and payment protection insurance may both lead to changes in pricing structures in those markets."