Halifax owner HBOS today said profits more than halved in the first six months of the year after it took a £1.1 billion hit on investments hammered by the credit crunch.

The bank said first-half underlying profits fell from £2.96 billion to £1.45 billion and warned the crisis in the financial markets will continue for at least another year. Pre-tax profits crashed 72% to £848 million.

It came just a day after rival Lloyds TSB revealed a 70% slump in profits. Alliance & Leicester reports tomorrow. HBOS, which this month completed a troubled £4 billion rights issue to shore up its balance sheet, was also forced to write down £1.1 billion on investments linked to the toxic US subprime mortgage market.

However, the shares surged 22½p or more than 8% to 293"p as the profits fall was not as bad as many in the City had feared. The shares have tumbled 75% since early last year.

Chief executive Andy Hornby said: "In an incredibly tough market, particularly if you look at the US and the impact on mortgage lending, these are really resilient numbers."

He warned that the outlook was "clearly challenging" because of rising energy prices and the collapse in mortgage lending since the onset of the credit crunch last autumn.

He said "a worsening in the economic environment" would result in higher impairment charges. Bad debts leapt by 36% to £1.31 billion in the first half as customers struggled with loan repayments while arrears among its two million or so mortgage holders increased from 35,600 in December to 39,300.

Bruno Paulson, banking analyst at Bernstein, said: "HBOS is a property bank in a property crunch, and is thus in the firing line if ongoing residential and commercial property price falls combine with a recession."

Hornby warned there was no sign of mortgage funding easing in the coming months as the global money markets remain in turmoil. As a result, the mortgage freeze looks set to continue with house prices falling as much as 20% by the end of 2009.

"We think the market is going to remain very tough," he said. "It would be wrong to expect any significant change in the next 12 months."

But he insisted the bank was now "well-positioned to operate in the more challenging economic environment" following its £4 billion rights issue.

He said the bank's capital ratios will be shown to be "the strongest in the sector" by the end of the reporting season.

The fundraising was seen as a mighty flop in the City after just 8.29% of shareholders took up their rights, leaving the underwriters with more than £3.6 billion of unsold shares. The shares dived in the build-up to the rights issue and spent much of the time under the 275p offer price.

The bank said it would consider selling assets if the right price was offered, but would not comment on whether that meant its Australian operation Bank-West was for sale.