Jeremy Warner's Outlook: A few signs of progress, but Lloyds TSB's strategic bind still looks as bad as ever

A testing minority for Sir Richard's Virgin; Britain must fall in line on group tax relief

Someone once unkindly described Lloyds TSB as the British Leyland of the banking sector. Any business that generates more than £3bn a year in pre-tax profits is plainly not quite that, but what is certainly true is that this is a bank which strategically seems to have lost its way and despite the very best efforts of Eric Daniels, the chief executive, to find a way forward, still seems to be stumbling around like a blind man in the forest.

The trading update released yesterday was relatively encouraging. The group has found a further £800m of surplus capital to extract from Scottish Widows, strengthening the bank's capital ratios and underpinning the heroic 7 per cent dividend yield Lloyds TSB is forced to sustain on its shares to prevent the price from collapsing.

Costs remain under control and there are useful revenue gains, especially in business and corporate banking. Yet unsecured lending is slowing, and there is another whacking great provision for endowment mis-selling. Most worrying of all, there's still no clear route map at a time when the outlook for consumer lending looks wobbly and the competitive landscape for banking ever more threatening.

The bank is run efficiently enough, and Mr Daniels is beginning to deliver on his promise on revenue and earnings growth. But again, it's hard to see where strategically the bank is going.

HSBC has positioned itself as a genuinely global player for the 21st century, HBOS's multi-brand approach in which it attacks the soft underbelly of the big legacy banks is paying rich dividends, Royal Bank of Scotland more controversially is testing its mettle in the US, and Barclays has got... well, Barclays has got Bob Diamond. It's hard to point to anything that similarly distinguishes Lloyds TSB.

This is a curiosity, for look back at the late 1990s, and Lloyds TSB was the pin up boy of the banking sector, with the best cost to income ratio by a country mile and a market capitalisation which was once almost as big as that of Citigroup.

All this was the achievement of the redoubtable Sir Brian Pitman, a cost-cutter par excellence who realised that by moving from one takeover to the next and crunching the quiescent banking customer along the way he could make the bottom line sing. Not for Sir Brian the vicissitudes of overseas banking, or the culturally alien and highly-paid ways of City investment banking.

He just stuck to his knitting, which meant one cost-cutting retail banking takeover after the other. The trouble is that it became addictive. Every couple of years, the bank would need a fresh infusion of life-enhancing red corpuscles, and eventually there were none left to give. The bank had cut all the costs it could, it was already too big for the regulators to allow more takeovers, and rivals had begun to learn its low-cost tricks.

Sir Brian left before the real rot set in. It was left to his successor, the luckless Peter Ellwood, to engineer a disastrous top of the market takeover of the life assurer Scottish Widows, and, in one last desperate effort to repeat the Pitman alchemy, to be blocked from bidding for Abbey National.

Sir Brian was a banking genius of his time, but he left Lloyds, once one of the biggest banks in the world in terms of market value, peculiarly ill-prepared for what has come since. Lloyds has been left standing by others. What's left is a hollowed-out husk of a bank which even the global pretenders of the US and Europe seem unwilling to bid for.

A testing minority for Sir Richard's Virgin

Nothing is ever simple in the affairs of Sir Richard Branson, and so it has proved again with NTL's takeover bid for Virgin Mobile. This has been mishandled from the start in a manner which may end up badly disadvantaging minority shareholders.

Sir Richard spent nine months talking to NTL before independent directors were informed, and he then leaked it to the Sunday press as a fait accompli. Hold on, said the independent directors: shouldn't minority shareholders be consulted first?

Too late. Sir Richard had said the 323p a share terms were acceptable to him. Admittedly, the turn of events was not entirely his fault. Sir Richard felt compelled to brief after a journalist got hold of a garbled version of the story. Given the choice, the takeover terms would have been hammered out in private with independent directors negotiating on behalf of the minority.

Yet it has been clear all along that the NTL takeover would be worth considerable more to Sir Richard personally than it is to the minority. The takeover makes Sir Richard the largest shareholder by far in a much bigger enterprise, with 100 per cent ownership of UK cable.

Strategically, this is quite a coup for Sir Richard. From a bit player in telecommunications who merely piggy-backs off someone else's network, Sir Richard and his Virgin brand are catapulted into the big league of fast-growing pay TV and broadband markets with access to, and ownership rights over, a telecommunications infrastructure which has had billions of pounds of investment. He also gets an annual royalty for use of the Virgin name.

These are key and important benefits over and above what the minority receives, so much so that Sir Richard is now apparently prepared to accept a smaller price for his 72 per cent stake than is offered to the minority. Whether he's still prepared to accept as little as 300p a share, said to be a price he found acceptable in the early stages of the negotiation, is open to question, but if he is and the difference was reallocated to the minority, then they could end up with a price of 380p a share.

Sir Richard was very much downplaying these numbers yesterday, though he does indeed seem prepared to accept a differential if that's what it costs to win the minority over. As controlling shareholder, Sir Richard could bulldoze the deal through at any price he liked, yet to ignore the minority to that degree may not be entirely wise if he wants to do business with the stock market again.

Rightly or wrongly, Sir Richard has sometimes been accused of riding roughshod over the interests of his minority partners, which is why few such partners deal with him more than once: invariably he seems to get all the upside. He cannot afford to be seen doing the same thing at Virgin Mobile.

Yet with NTL apparently unwilling to pay a penny more, it's hard to see an obvious way through. The irony is that even six months ago, the Virgin minority would have bitten NTL's hand off to take 323p a share. Post Telefonica's takeover of O2, UK mobile is again seen as a scarce asset which should command a correspondingly high premium. How times change.

Britain must fall in line on group tax relief

Today's judgment on whether British laws concerning group tax relief contravene the rules of the single market has been variously billed as the most seismic, eagerly awaited and potentially costly tax ruling ever made by the European Court of Justice. Yet even assuming the court goes along with the Advocate General's view, it is unlikely to have the profound consequences suggested. There are several ways of dealing with the threatened tax leakage which are already successfully applied elsewhere.

The important thing is that Britain and other miscreants are forced to fall in line. Their intransigence is indicative of quite how far Europe still has to go before it achieves a free and open internal market to compare with the United States. National interest still reigns supreme. As long as it does, Europe's ambition of becoming the most competitive economic region in the world will remain but a pipe dream.

j.warner@independent.co.uk