Alliance & Leicester said profit before tax has dropped 42.6 per cent to £399 million as second half losses impacted the bank’s bottom line.

The UK-based bank said write-downs in the second half led to a loss of £165 million for the year.

Earnings per share declined to 59.4p from 96.4p in 2006, while core operating profit dipped from £585 million in 2006 to £417 million in 2007, Alliance & Leicester said.

The bank responded to the market turbulence following the US subprime crisis by tightening its lending criteria, increasing the loan-to-value rate on its mortgages and only lending to less-risky customers.

The bank also introduced new funding facilities which have enabled it to fund all customer loans and advances with customer deposits and wholesale funding with a duration of over six months.

This means the bank does not have to rely on the volatile credit markets to fund its loans over the short term.

Over 2008, Alliance & Leicester said the UK economy and housing market are widely expected to grow at slower rates than in recent years.

The bank said it anticipates lower GDP growth than in 2007, with average house prices remaining broadly stable.

Group finance director, Chris Rhodes, said: “The trading outlook for financial services will be challenging in 2008, and we will maintain the prudent approach to lending which has led to our customer lending asset quality being better than industry averages.”

Alliance & Leicester was significantly affected by the subprime crisis, and shares have dived over 50 per cent over the last year.

Bradford & Bingley, the first UK bank to report 2007 results this season, said its profit before tax fell by 49 per cent on subprime-related write-downs of £226 million, while profits at Barclays dipped one per cent.