Britain's biggest home lender HBOS raised its hit from the value of risky assets and bad loans to over £5bn pounds on Monday and its takeover partner Lloyds TSB warned of a sharp fall in profits.

The banks said the takeover of HBOS by Lloyds TSB remained on track, however, and Lloyds said it expects to resume dividend payments next year after repaying preference shares taken by the UK government.

Lloyds also raised its expected cost savings from the deal to £1.5bn a year from £1bn.

By 8am GMT Lloyds shares were up 4.7% at 207p, valuing its offer at 125p per HBOS share. HBOS shares jumped 9% to 108p, also helped by a weekend report of a potential counterbid.

Both banks said market conditions remain tough.

HBOS said writedowns and losses on bad debts for the first nine months of this year had risen to £5.2bn, up £2.7bn in the third quarter.

The owner of the Halifax said losses on structured credit related assets was £1.8bn at the end of September, up from £1.1bn at the end of June.

Bad debt losses in its retail bank rose to £1.2bn pounds and more than trebled in its corporate banking arm to £1.7bn by the end of September.

Lloyds said its profit for the first nine months of the year also fell sharply as a result of financial market turmoil and rising bad debts.

The bank said it expected to write off a further £300m in the second half of this year as a result of an increase in bad loans to businesses, and predicted a further £120m impairment charge as a result of falling house prices.

The bank published a circular to shareholders confirming its offer of 0.605 Lloyds shares for every HBOS share.

Lloyds stepped in to buy HBOS in a government-brokered deal, after HBOS was hit by a deepening global financial crisis and concerns about its exposure to the weakening UK housing market.

Both banks were forced to recapitalise under the government's rescue plan, taking a combined £17bn from the sale of preference shares to the UK government and from the issue of equity guaranteed by the state.

There have been concerns that investors will not receive a dividend for several years until preference shares sold to the government had been repaid.

Lloyds Chairman Victor Blank said in his letter to shareholders the bank intends to repay the preference shares "during 2009 so that the block on the payment of cash ordinary dividends will be removed."