Lloyds TSB, the UK bank that has been temporarily nationalised by the UK government amid the credit crunch, “continues” to trade well and was on track to deliver a “good trading performance” for this year, it said in an interim statement.

The bank is to buy rival UK bank HBOS, which also issued an interim statement, saying its profitability had been hit.

“Whilst continuing to remain cautious on the UK economic outlook, the group is well positioned to withstand the expected economic challenges over the next few years. Our business model is robust and, by focusing on our core strengths and selective growth opportunities, we expect to deliver a good trading performance in 2008,” Lloyds TSB said on figures for the first nine months of this year.

Lloyds said its retail banking arm recorded growth in product sales supporting “slightly higher revenue growth” in the third quarter than in the first half of the year.  Revenue growth has exceeded cost growth in the first nine months of the year.

In insurance and investments, Lloyds TSB said it has continued to achieve a good level of sales growth in the bancassurance channel, reflecting a strong performance in the sale of stand-alone protection products and open-ended investment companies through the group's wealth management business.

Lloyds TSB said its overall asset quality “remains satisfactory”, despite higher impairment losses on loans and advances, largely reflecting the impact of lower house prices on the mortgage impairment charge and higher company impairments.

Mortgage credit quality remains robust with arrears levels at 30 September 2008 up 14 per cent over the last twelve months, compared to an industry average increase of 34 per cent in the twelve months to 30 June 2008.

In its statement, HBOS said that compared to 2007, in the nine months to the end of September 2008, profitability has been hit by factors including higher impairments, the sale of BankWest and short term fluctuations in investment returns. 

However, despite higher funding costs, net interest income from its banking businesses has increased and its insurance and investment business has made a “good contribution”.

As at 30 September 2008, HBOS’ Tier 1 ratio was 8.1 per cent and its Core Tier 1 ratio 6.0 per cent. 

“The proposed acquisition of the HBOS Group by Lloyds TSB is proceeding according to plan,” it said, pointing out that a Lloyds TSB meeting to approve the acquisition of HBOS will be held on 19 November. HBOS expects to hold a General Meeting to approve the acquisition by Lloyds TSB, and the placing of equity and preference shares, in December 2008.