View from City Road: Lloyds reviews list of targets

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The Independent Online
ONE OF the market's favourite pastimes is spotting Lloyds Bank's next target after its bold but failed attempt to buy Midland. Standard Chartered was in the spotlight yesterday but there is no shortage of candidates.

A purchase would solve Lloyds' operating profits problem, which has worsened in the recession. It has cut costs but income is falling faster. It must either cut them further, expand its balance sheet or make an acquisition that will boost revenues.

Not just any acquisition will do. Lloyds' chief executive, Brian Pitman, will be looking at two main criteria (which Midland met) when reviewing the field: Lloyds must have scope to make cost savings and it must have an untapped customer base to which it can sell its Black Horse life insurance and pension products.

Royal Bank of Scotland might fit the criteria but could be more trouble than it was worth. First, Scottish nationalist feeling and attendant bad publicity could be stirred up if an English clearer tried to take over a Scottish one. Second, Banco Santander of Spain owns 10 per cent and is a potential white knight. Scottish Equitable Life owns a further 5 per cent, making a potential hurdle of 15 per cent to be overcome.

TSB, another focus of speculation, is out because it already successfully sells life and pension products to its branch customers.

Standard Chartered, however, is an attractive prospect and should be high in the running. Investors who met Standard's managing director, Malcolm Williamson, at a Goldman Sachs dinner on Tuesday were impressed. Lloyds already owns 4.6 per cent from its previous bid, and Standard's businesses in the fast-growing Asian economies could be a goldmine. Investors fear, however, another mishap like the Bombay stock exchange scandal.

Buying the rest of Lloyds Abbey Life, another possibility, would not gain Lloyds a fresh customer base, because they already share the field. And with a likely cost of at least pounds 1bn the benefits are not obvious.

Last but not least, a building society would need to be demutualised, but may prove one of the best options. Lloyds may have plans to buy a big one up its sleeve.

Between its bid for Midland being referred to the Monopolies Commission and the end of last year, Lloyds shares outperformed the rest of the market by nearly 20 per cent. But recent takeover speculation has meant some of those gains have been lost. Until its plans become clearer, investors should remain wary.

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