Andrew Longhurst, the former chief executive who is to become chairman, said the flat housing market meant competition for remortgage business had been particularly vigorous over the past two years, resulting in some offers to customers which were "clearly unsustainable" in the longer term.
"We are already seeing a return to a more healthy situation and while competition will continue to be keen, margins in 1997 are tending to widen." Big discounts and "cash-back" schemes are likely to be phased out by competitors, he suggested.
C&G, which prides itself on providing low-cost, no-strings mortgages, has abandoned its own promise to undercut the big five housing lenders on rates since the beginning of February.
Mr Longhurst said the new commitment only to be "competitive" would have no significant effect on borrowers, although he conceded there was little sign of any real improvement in the housing market: "You need to draw a very clear distinction between house prices going up and actual sales volume activity, actual sales in the market."
The market recorded the second-lowest level of transactions for 20 years towards the end of 1996. "You are not looking at a very buoyant market in terms of transactions, as not many people are putting houses on the market," he said.
But despite the caution about the market, C&G is continuing to prosper. Reporting its first full-year's figures since its pounds 1.8bn acquisition by Lloyds in August 1995, the group revealed a 92 per cent increase in gross advances to pounds 6.74bn, boosted by the addition of Lloyds' existing mortgage book.
Pre-tax profits leapt 36 per cent to pounds 336m in 1996, helped by bad debt provisions slashed from pounds 43.7m to pounds 11.2m as arrears fell and rising house prices cut the level of negative equity. Arrears are said still to be running at below half the industry average of around 1.6 per cent of borrowers.
C&G is now claiming a 15.1 per cent share of the market for net new mortgage lending after net advances soared from pounds 1.62bn to pounds 2.82bn last year. The group said it was taking twice the amount of new business that its "natural" market share would suggest: at the end of the year, its share of total outstanding mortgages in the UK had risen from 6.5 to 6.9 per cent.
Mr Longhurst said they had delivered on the strategy laid out in the transfer document which members were asked to vote on when Lloyds acquired the business.
"In the first year we have been able to double mortgage lending, double our natural market share and we have driven down the cost-asset ratio."
But it has not been entirely painless: the group's cost-income ratio crept up 1 percentage point to 33 per cent in 1996. Mr Longhurst blamed this on last year's interest rate promise, cash "gifts" paid to new borrowers and the decision not to charge them any initial set-up or other fees.
He said Lloyds TSB, which reports its 1996 profits today, remained "alert" to strategic acquisitions, but there was nothing on the stocks at the moment. The group will see around 1,000 branches added this year, taking the total to some 3,000, after it starts selling through TSB, Black Horse Agencies and Lloyds Property Services outlets.