* Shares fall on disappointment over impairment update
* Profitable Q3, on track for good 2010 performance
* Search for new CEO continuing "apace"
* British retail branch sale unlikely in 2010
(Releads, adds further comment from fund manager, analysts)
By Sudip Kar-Gupta
LONDON, Nov 2 (Reuters) - Concerns over losses from problem loans and tougher competition overshadowed an upbeat trading statement from Lloyds Banking Group, the part-nationalised British lender.
Europe's fourth-biggest bank by market value said on Tuesday that impairments from loans turning sour were declining at the rate it expected, disappointing some investors who had hoped the fall would be faster.
The bank said it was set for a "good financial performance" in 2010 as the bad debts fall and margins continue to improve. It was still suffering losses on bad loans at its international operations, which include Ireland from where it is in the process of withdrawing.
Banks around the world have posted mixed-third quarter results, with large profits at JP Morgan and Goldman Sachs contrasting with losses at Deutsche Bank and Bank of America.
Jane Coffey, who heads British equities at Royal London Asset Management, said: "Overall, there isn't anything really bad in the (Lloyds) statement but the impairments are not going down as much as some had hoped for."
Lloyds was down 3.3 percent at 67.34 pence by 1125 GMT, underperforming a 0.3 percent fall in the European bank index and making it the second worst-performing stock on Britain's blue-chip FTSE 100 index.
Coffey said she had sold her holding in Lloyds around three months ago. "There is no additional positive surprise in the statement but there are ongoing problems from bad debts and they will face more competition in the future in retail banking," she said.
New entrants looking to break into the UK retail bank sector include Metro Bank, Aldermore and NBNK Investments, while Virgin Money and Tesco Bank are also looking to expand.
ON TRACK WITH HUNT FOR CEO
Lloyds, Britain's biggest retail bank, kicked off third-quarter updates from its domestic rivals with Royal Bank of Scotland, Barclays and HSBC due later this month.
Lloyds did not disclose specific profit figures for the third quarter, but outgoing Chief Executive Eric Daniels said the bank remained profitable, following on from its half-year pretax profit of 1.6 billion pounds.
Daniels is due to step down next year and he said the hunt for his successor was continuing "apace".
Lloyds is 41 percent state-owned after a bailout by the government which engineered a rescue takeover of troubled rival HBOS.
As a result of the bailout, regulators have ordered Lloyds to dispose of billions of pounds worth of assets. Lloyds aims to shrink its 1 trillion pound balance sheet by a third by winding down or selling unwanted businesses, which includes a plan to sell 600 branches in Britain.
Daniels said the closely watched 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.
According to Thomson Reuters Starmine, Lloyds is expected to report a 2010 pretax profit of around 2.8 billion pounds, compared with a 2009 loss of 6.3 billion.
Lloyds said its capital ratios were strong and slightly higher than those reported at the half-year stage, when Lloyds said Tier 1 core capital was 9.0 percent.
The British taxpayer acquired its stake in Lloyds at a price of around 63 pence and the government hopes to sell the stake at some point.
However, an inquiry into banks by Britain's new government is expected to take a year and analysts do not expect any sale of the state's stakes in Lloyds or Royal Bank of Scotland until that inquiry has been completed. (Additional reporting by Steve Slater; Editing by David Cowell and Erica Billingham)