Bad debt fears are still hovering over Lloyds

The bank, which rescued Halifax Bank of Scotland (HBOS) at the peak of the financial crisis, said it was set for a "good financial performance" in 2010 as the bad debts fall and margins continue to improve.

It is still suffering losses on bad loans at its wealth and international operations, which include Ireland from where it is withdrawing from. Lloyds' shares fell 3.2 per cent to 67.39p. New entrants looking to break into the UK retail bank sector include Metro Bank, Aldermore and NBNK Investments, while Yorkshire Bank-owner National Australia Bank, Virgin Money and Tesco Bank are also looking to expand.

The bank said its costs continued to fall in the quarter, and it is on track to achieve run-rate savings of 1.3bn by the end of the year and 2bn by the end of next year.

It has axed more than 22,000 jobs since the start of last year, and last month announced another 700 Yorkshire job losses as part of a global wave of 4,500 job cuts.

Lloyds did not disclose specific profit figures for the third quarter, but outgoing chief executive Eric Daniels said the bank remained profitable, following its half-year pre-tax profits of 1.6bn. Mr Daniels is due to step down next year and after steering Lloyds through the disastrous Government-backed HBOS merger, and said the hunt for his successor is continuing "apace".

Lloyds is 41 per cent state-owned after a Government bailout and regulators have ordered it to dispose of billions of pounds worth of assets as a condition of taking state aid. Lloyds aims to shrink its 1 trillion balance sheet by a third by winding down or selling unwanted businesses, which includes a plan to sell 600 branches in Britain.

Mr Daniels said the retail branch sale was unlikely to occur in 2010.

"If I were to give you the best view, we have 58 days left for this year. That would probably speak for itself," he said.

Analysts expect the bank to report 2010 pre-tax profits of around 2.8bn, compared with 2009 losses of 6.3bn.