Shares in Lloyds TSB rose 4.75% yesterday after it posted a 6% rise in pre-tax profits to £3.9bn and boosted its dividend, despite taking a higher-than-expected hit on assets exposed to the US sub-prime mortgage crisis.

The bank unveiled a £280m writedown on assets related to the credit crunch, having previously said it expected to book a £200m loss.

But this looked insignificant next to the writedown of £1.6bn posted by larger rival Barclays earlier in the week and Lloyds shares rose 20.75p to 457.5p, allowing it to replace HBOS, down 2% yesterday, as the UK's fourth-largest bank.

Investors were buoyed by other signs of strength at the bank, which posted revenue growth of 5% at a time when its costs rose 1%.

Lloyds TSB boasted a 13% rise in core earnings and chairman Sir Victor Blank hailed the "strong, sustainable" business model at the company, which has often been criticised by investors for its slow growth.

He said the bank would continue to expand by targeting its relationships with existing customers.

Lloyds TSB's retail bank posted a 12% rise in pre-tax profits to take them to £1.7bn after raking in more than one million new current accounts.

But there was a 12% slump in its wholesale and international banking division to £1.4bn after taking the writedown. Without this knock it would have seen a 5% rise as it reinforced its position in the small and medium-sized corporate space.

In its insurance and investments division, which includes Scottish Widows, pre-tax profit was up 9% to almost £1.1bn despite a hit from increased weather-related claims of £113m for the summer floods.

Lloyds TSB also cheered investors by raising its final dividend for the first time in more than four years. The 5% increase took its full-year payout to 35.9p. The bank indicated it expected to increase both the dividend and its dividend cover, which is currently around 1.4 times, over time.

Chief executive Eric Daniels added that while the company was not immune to the credit crunch and general economic slowdown, it had good momentum for the coming year.

He signalled that the bank may seek a bigger chunk of the mortgage market after seeing its share of the market drop from its typical 9% to 6.2% as it ducked out of fierce price competition.

He said Lloyds had a "very conservative mortgage book", completely eschewing the self-certification and 100%-plus segments of the market.

But he added: "We think ... returns and credit standards are returning to the market place and we think that will stand us in good stead."

The chief executive also sparked a 6.36% rise in the shares of less robust rival Alliance & Leicester by indicating that the company would look at acquisitions to supplement organic growth, especially after recent falls in valuations in the sector.

"Has the turbulence knocked some of the blush off the rose? Probably," said Daniels.

Among the company's successes was an improvement in losses from customers going bust. Its retail bank saw a 1% fall in impairment losses to £1.2bn as fewer customers went insolvent and the company recovered more than expected from those who did. But losses increased by £264m to £572m in its wholesale division as it absorbed losses related to the credit crunch.

Lloyds TSB also said that it was satisfied by government pledges that newly-nationalised Northern Rock would not be able to distort the savings market in particular.

"They have said they have no desire to distort the market place," Daniels said. "We believe them and we will have to see how it goes."