British bank Lloyds TSB's first-half profit dropped 70 percent from a year ago as it took a 585 million pound ($1.2 billion) hit from its exposure to risky assets and said a slower economy will hurt growth.
Lloyds shares fell 4.7 percent to 306 pence, the weakest performer in the FTSE-100 share index, which analysts said was due to a rise in bad debts and ongoing concerns about its capital position.
Britain's fifth biggest bank said its underlying businesses had performed well, however, giving it a platform to keep an eye on acquisition opportunities.
"You've seen prices adjust virtually across the board in the last year and we would be remiss if we didn't look and see what was going on in the wider environment beyond our core businesses," said Lloyds Chief Executive Eric Daniels.
"But we're in no hurry. We'll look, but we'll be very, very prudent."
Lloyds recently considered a big acquisition in Germany, sources have said, and has been cited as a possible counter bidder for domestic rival Alliance & Leicester, which has agreed to be taken over by Spain's Santander.
Daniels said he is braced for a UK economic slowdown but it was "well positioned for a lower growth environment".
He said the bank's base case is for UK economic growth of 1.6-1.8 percent this year and 1.3 percent next year, with a chance of a recession.
House prices are likely to fall 10-15 percent this year and another 5 percent next year, he said.
Lloyds, the first UK bank to report half-year results, said statutory profit in the six months to the end of June was 599 million pounds, down from 1.99 billion a year ago due to the writedown and also adverse insurance volatility.
The average forecast from nine analysts polled by Lloyds was for profit of 773 million.
Its first-half underlying profit, stripping out volatility, writedowns and a U.S. legal charge, rose 11 percent to 2.16 billion.
The bank took a 280 million pound writedown in 2007, less than rivals who have risked more on complex financial products that have turned sour.
It took a 387 million pound hit for the first quarter.
The bank said its capital position was robust enough to support its organic growth plans.
Its core Tier 1 capital ratio was 6.2 percent at the end of June.
Lloyds said it would lift its half-year dividend by 2 percent, which Daniels said "is a very positive signal" given that several rivals have asked shareholders for cash or paid their interim dividend in shares.
Many analysts expect the bank to cut its dividend in the future, but Daniels said it aimed to have a "progressive" dividend policy and to raise its dividend cover.
"There are no iron clad guarantees but you have some pretty strong indicators of how the board thinks," he said.
UK retail banking profits rose 15 percent for the half-year to 911 million pounds, as Lloyds said it grabbed market share in a number of areas from which rivals had retreated.
It had a 24 percent share of net new mortgage lending, sharply higher than in past years and well above its traditional market share of 9 percent.