Widows bid could bring out runners and riders for Lloyds

Eric Daniels, the American in the saddle at the Black Horse bank, could be forgiven for feeling a little sore.

Lloyds TSB - once the thoroughbred of British banking, but in past years more a candidate for the glue factory - has been quietly rediscovering the footpath leading towards the winners enclosure under his stewardship.

However. the country's fifth-biggest bank may be showing better form across the gallops, its lacklustre retail bank may be easing up along the rails, Lloyds TSB's shares may be now outperforming rivals across the sector, but the City and investors are constantly and frustrating diverted.

Instead of winning the plaudits they should for a steady (if unspectacular) turnaround, Lloyds and its management are plagued by takeover speculation.

A trio of the biggest American banks, a pair of Spanish lenders and a Dutch financial services group have all been touted as potential predators eyeing Lloyds over the past six months.

The City appears to turn a deaf ear as Mr Daniels et al chant the mantra that the bank is not for sale, that business is on the up, that Lloyds does not need a deal.

The fog of bid speculation engulfing the bank is unlikely to dissipate anytime soon, after it emerged that in the past fortnight Mr Daniels has knocked back yet another approach for Lloyds' life and pensions arm, Scottish Widows.

Swiss Re and Axa, the twin pillars of the European insurance establishment, are believed to have been behind the latest £8bn joint attempt to persuade Mr Daniels to cleave the Lloyds TSB group.

The French were interested in Widows' open operations, while Swiss Re wanted to pick up its closed life book.

Theirs was the latest of several unofficial approaches for Widows these past months. Resolution, among others, is believed to have expressed an interest in the business. All covet Widows' large closed with-profits funds, which are among the few remaining in the sector.

The bancassurance model fashioned by Mr Daniels' predecessor, Peter Ellwood, of selling life assurance products through Lloyds' 21,000 branches, is at last showing vital progress, six laboured years after conception.

Borrowing heavily from HBOS by importing a retail ascetic to high-street banking, Lloyds now offers fewer, simpler financial products in branches and over the telephone and internet.

In July, Lloyds unveiled impressive figures for the six months to the end of June. During that time, Widows' £596m of overall sales were 35 per cent higher than in the same time in 2005. At £210m, bancassurance sales were 64 per cent better. The profitability of new business increased to £28.8 per cent.

Assets under management grew by 11 per cent to £97bn, while Widows' embedded value - a key measure of value used by the life and pensions industry - stood at £5.5bn.

Ian Gordon, the banking analyst at Dresdner Kleinwort, said: "Strategically, now would be a strange time for Lloyds to look at selling Widows. It has come through six painful years, and appears to be turning the corner. It now has a product suite fit for purpose and sales are responding."

Mr Ellwood paid an inflated £7bn for Widows at the peak of the stock market in 1999, but his strategic ambitions were mired after the technology bubble burst only a year later.

Under Archie Kane, Scottish Widows is no longer the hospital patient it once was and is contributing solid profits to the group.

A strong pick-up in sales of Scottish Widows-branded savings and investment products, and continued growth in current accounts, is helping to offset slowing consumer lending.

Mr Daniels and latterly Sir Victor Blank, Lloyds new chairman, insist that Widows is integral to the group and one of its key drivers of growth.

Simon Maughan, a senior analyst at Blue Oak Capital, said: "It's taken six years, but the reason for buying Widows has eventually arrived. It would, therefore, be a surprising time to sell."

Not only is Widows a key driver of growth, but shedding the life and pensions business would have the unwelcome side-effect of make the remainder of the group more attractive and vulnerable to potential predators.

One banking sector expert said: "The feeling is that the Widows deal isn't going to happen, but that it's let the genie out of the bottle. We now know there is someone out there who will pay £8bn for Widows. If you are a clever investment banker, you know that even if Lloyds doesn't want to do a deal you can make a move on the whole group secure in the knowledge that you could sell on Widows."

Bank of America, Citigroup and JP Morgan, the Spanish lenders BBVA and Banco Santander, the owner of Abbey, and the Dutch financial services group ABN Amro have all been linked with Lloyds TSB this year.

Despite decent interim results, Lloyds still faces stiff challenges that lend it an appearance of vulnerability to takeover. A strong trading performance was watered down to only tolerable earnings growth by a rise in bad debts, not only in retail but also in business banking.

There are those within the City who still worry that Lloyds is corralled in strategic cul-de-sac. It has neither the high-growth emerging markets operations of Standard Chartered or HSBC, nor the American footprint of rivals such as Royal Bank of Scotland. Unlike Barclays, there is no booming investment banking business.

Lloyds' corporate bank is expanding nicely, but from a low base. The most pessimistic appraisals reckon it can only hope to grow to a fraction of the size of Barclays Capital or RBS's capital markets arm.

Competition for banking business is hotting up on the high street as rivals across the sector once again place greater store by branches.

HSBC is planning to open five "megastores", which it likens to the flagship stores of the computer group Apple. Meanwhile, HBOS and Abbey are planning their biggest branch expansions for decades.

In a sector where bid rumours appear more numerous than cash-machine withdrawals, the takeover speculation surrounding Lloyds is unlikely to disappear.

However, Lloyds is not a badly run company and the business rationale for its takeover by an American giant is not readily obvious.

Lloyds shares - 2p easier at 579p yesterday - stand higher than at any time since the end of 2002, valuing the bank at almost £32.6bn.

Mr Daniels is running a tighter ship, and has imported management that is winning plaudits. Truett Tate and Terri Dial are deepening Lloyds' American accent while orchestrating the burgeoning corporate bank and turnaround of the retail bank.

Mr Daniels has addressed the £2bn shortfall in the group's pension. He has moved to diversify Lloyds' earnings and ease its reliance on retail banking by bolstering its wholesale bank. Widows is doing nicely.

Thus the question is raised: what could the Americans running Citigroup, Bank of America or JP Morgan do differently to reinvigorate Lloyds that the Americans at its helm are not already doing?