Bosses at Skipton Building Society – under fire for a hike in its standard variable mortgage rate hitting 64,000 borrowers – have defended the controversial decision as ‘prudent’ despite announcing a rise in annual profits.

Group chief executive David Cutter expects the economic recovery to be ‘anaemic and slow’ and said Skipton would continue to take whatever steps necessary to ensure its prosperity.

The SVR increase from 3.5 per cent to 4.95 per cent from March 1 and 90 redundancies came against a ‘material reduction’ in the society’s net interest margin, which slumped by £33 million to £53 million after the Bank of England base rate was slashed to an all-time low of 0.5 per cent .

Extreme economic challenges meant its core savings and lending business was loss-making as it struggled to maintain savings rates, while the base rate remained so low and was also hit by competition from banks unable to rely on wholesale markets for funding turning to savers’ deposits.

The Skipton relied on the financial cushion provided by its subsidiaries. This enabled it to increase group pre-tax profits from £41 million to £63.5 million in the face of pressure from low interest rates and competition.

Skipton bought its smaller rival Scarborough Building Society last March which helped it grow assets and savings deposits, while the group also boosted its core tier one capital – a key sign of financial strength – to 9.4 per cent from nine per cent Savings balances rose 29 per cent to £2.3 billion, while mortgage assets increased £1.3 billion to £10.7 billion.

Profits were boosted by record results at its estate agency arm Connells, which saw profits rise £10.4 million to £54.1 million.

It received a £40 million one-off gain from the sale of the Callcredit credit reference agency in December.

Mr Cutter said: “We have taken prudent action to widen the margin in the long-term best interests of the society.

“In addition, uncertainties remain regarding the economy, the Government’s finances, the impact of an historic quantitative easing programme, and the distortions in the UK savings market – we therefore remain vigilant.

“That is why we announced steps, after the end of the financial year, which will enable the society to combat the challenges it faces.”

The Skipton is to merge with the Buckinghamshire-based Chesham Building Society.

The move will create an organisation with assets of £15 billion and 92 branches.

Subject to the agreement of members and the Financial Services Authority, the merger should go ahead by June.