Banking group Abbey National braced the City for "substantially" lower profits today after bad debt provisions spiralled in a key division.

Abbey's corporate-based Wholesale Bank arm said credit markets remained challenging and that cover for high-risk loans would be higher.

As a result, the company said pre-tax profits this year would be down on both current market expectations and last year's result.

It also warned shareholders that Abbey's rate of dividend growth would reflect current trading conditions and be lower than a year earlier.

In February, the Wholesale Bank division was to blame for a two per cent fall in group pre-tax profits last year, with Abbey's exposure to collapsed energy firm Enron among the reasons for £256 million worth of write-offs.

Abbey said a new management team was now repositioning the division but this had resulted in a "more conservatory and anticipatory approach" to its provisions for bad debts.

Chief executive Ian Harley said action had been taken to tackle the problems in the Wholesale Bank division while the remainder of the group's businesses had performed in line with expectations.

He said: "This is a transitional period for the group."