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Lloyds Banking Group today revealed HBOS recorded a pre-tax loss of £10.8 billion for 2008 – but the bank maintained the purchase was still a good deal.

Lloyds TSB – which bought HBOS in September last year as the mortgage lender struggled for survival in the credit crisis to form Lloyds Banking – saw pre-tax profits reduced by 80 per cent to £807 million.

The government now owns 43 per cent of the combined group after injecting £17 billion into the business.

Sir Victor Blank, Lloyds Banking chairman, said: "We know the short-term outlook for the enlarged group is challenging.

"Whenever economic conditions do begin to normalise, however, we believe we will be in a very strong position to reap the benefits."

Eric Daniels, Lloyds Banking chief executive, said: "This has been an extraordinary year, by any measure, and as many commentators have observed, we are in the most severe global downturn since the 1930s."

He added the acquisition of HBOS was "probably the most far reaching event in our 243 year history".

Mr Daniels defended the purchase of the loss making HBOS – claiming the firm got £17.9 billion worth of assets for £7.7 billion, even taking into account the losses HBOS announced for 2008.

"All in, we have acquired a franchise that brings extensive distribution, a large customer base, good people and excellent brands," he said.

"We are buying the business in the down part of the economic cycle, at a significant discount to book value, which increases the likelihood of value creation, and we paid in shares rather than cash which in some part insulated the Lloyds TSB shareholders from market risk."

Mr Daniels added the Lloyds TSB business had "performed satisfactorily".

"I would have liked to have delivered an even stronger performance for our shareholders, but in the context of the environment and when many organisations will be reporting losses, I do feel this is a reasonable out-turn."

Lloyds also confirmed it was in "well advanced" negotiations with the Treasury over taking part in the Asset Protection Scheme to insure the bank against losses on its toxic holdings.

Royal Bank of Scotland – which yesterday announced a £24.1 billion loss – said it would put £325 billion worth of assets into the government scheme.

After recording gains yesterday, the Lloyds Banking share price was down ten per cent at 8:50 GMT to 67.50p. A year ago the Lloyds TSB share price was 488.50p.