The Thing Is: Lloyds TSB

Eric must use the whip to rescue banking's also-ran

The denials came thick and fast. No, Scottish Widows wasn't for sale. "Eric is reviewing the firm as you would expect a new chief to do," said a senior Lloyds TSB source. "No more, no less."

Within two months of becoming chief executive, Eric Daniels has put the cat among the pigeons at the troubled high- street bank. The plain-speaking 51-year-old American, who had his office redesignated to get round the no-smoking policy at Lloyds' new headquarters, has made it clear nothing is safe as he tries to turn the supertanker around.

The bank's New Zealand operation is being auctioned, with a list of bidders stretching from ANZ Bank to HSBC vying to pay up to A$4bn (£1.65bn) for it; the Brazilian bank, which Lloyds has nurtured through thick and thin for 30 years, is also said to be on the stocks; and now there is all this talk about Scottish Widows, the life company bought for £7bn in the late 1990s.

It was Mr Daniels himself who fired these rumours. Talking to an American newspaper, he said: "Scottish Widows ... if you can make a good return on capital then it's a good business. If we can't build competitive advantage, we need to scratch our heads and have a rethink."

The fact is that Scottish Widows is not making a good return on capital, and when Mr Daniels gets up before the City on Friday to announce the bank's half-year figures, this will be patently obvious. Not only will poor sales of investment products drain profitability, but the operation is expected to have to make a provision of some £250m to cover the costs of compensating customers who were mis-sold endowment policies. The provision will allow Philip Hampton, Lloyds' finance director, to persuade the bank's board to sanction the dividend cut he has long thought is needed.

Ironically, a lot of this provision has nothing to do with the Scottish Widows business bought by Lloyds. It relates to the old Lloyds Abbey Life operation, which the bank folded into Scottish Widows along with the fund manager Hill Samuel, part of the old TSB.

"There is a certain amount of impairment to the brand which has occurred since Lloyds bought Scottish Widows," commented one rival. "It's not quite the premium provider it was."

Ammunition for those who think Lloyds was wrong to buy Scottish Widows is likely to come the following week when Lloyds' high-street rival Barclays reveals its results. It struck an alliance with Legal & General under which the bank became the main distributor of the insurance company's savings products. This has delivered good profits for Barclays without the hassles of actually owning the investment products "factory".

Mr Daniels knows now is not the time to sell Scottish Widows. And, anyway, the life business is only one of a whole series of issues troubling Lloyds.

In the past few years the bank has slipped from being Britain's pre-eminent financial institution to an also-ran. The recovery in fortunes at Barclays, the takeover of NatWest by Royal Bank of Scotland, and the successful merger of Halifax and Bank of Scotland, have all put Lloyds in the shade.

Also there was a feeling that Peter Ellwood, who took over from the legendary Sir Brian Pitman as chief executive in 1995, was unable to keep up the momentum of the Pitman era. Three quarters of the "famous 40" top managers, who Sir Brian depended on to keep costs tight and ride the revenues, have now left, and the quixotic bid for Abbey National in 2001 damaged the bank's credibility. In addition, Mr Ellwood set his sights on merging with a big European bank, something he singularly failed to deliver.

An indication of the City's feelings about Mr Ellwood has come in the form of the 60 per cent increase in Lloyds' share price since Mr Daniels took over. Part of this may be down to a general re-rating of bank shares, but a lot has been in anticipation that the unquiet American will start knocking Lloyds back into shape.

While running the bank's retail operations, a job he held for only a year, he transformed the corporate philosophy by starting a price war. He recently surveyed customer satisfaction and found that 1.4 million of Lloyds' 17 million customers were unhappy with what they got. In the past, Lloyds might have seen this as a "not bad" result; Mr Daniels described it as "a cause for great concern".

There are a lot of people who compare Mr Daniels to Matt Barrett, Barclays Irish-Canadian boss. Both smoke heavily and talk plainly. But Mr Barrett also delivered a real turnaround at Barclays, and Mr Daniels is going to have to do the same at Lloyds if it is to regain its position as a force to be reckoned with.