FOCUS Lloyds TSB investors stay calm on German bank deal speculation

LONDON, Jun 23, 2008 (Thomson Financial via COMTEX) -- LYG | Quote | Chart | News | PowerRating -- Speculation that Lloyds TSB Group Plc. has made an approach for Dresdner Bank failed to make an impression on the group's share price Monday, suggesting that domestic worries remain a larger concern for investors.

Lloyds TSB Group has made a tentative approach to buy Germany's Dresdner Bank, owned by the insurance giant Allianz SE., according to reports in the Sunday Times and Der Spiegel. A deal may involve Lloyds swapping its Scottish Widows life-assurance business for Dresdner's retail operations, valued at about 6 billion pounds.

However the news failed to make an impression on the market Monday, in spite of the scale of such a deal, with shares remaining stable, down 1.53 percent at 322-1/2 pence by 1:46 p.m., tracking UK banking peers.

The lack of market reaction suggests that the United Kingdom macro outlook remains a more important driver for investors, particularly the bank's monoline exposure, Sandy Chen at Panmure Gordon & Co told Thomson Financial News.

Any possible deal between Lloyds and Dresdner is not likely for several months, suggested another analyst, with investors instead focused on more short-term concerns, added Chen.

In a note Monday, Panmure revised its forecasts and price targets for Lloyds to reflect the deteriorating UK outlook. The broker sees Lloyds likely to cut its cash dividend by around 30 percent. More positively, the dividend is likely to be in cash, and not shares, and Lloyds is still likely "to create value over the next few years - something we do not expect for most of its peers," said the note.

The UK's fifth-biggest bank is also eyeing Deutsche Postbank according to the Sunday Telegraph, in a report last weekend. Germany's largest retail bank, which is earmarked for disposal, is majority-owned by Deutsche Post World Net AG. The newspaper added said that the bank's chairman, Victor Blank, and its CEO, Eric Daniels, are looking at a series of merger and takeover opportunities in continental Europe.

This represents a significant change in strategy for the bank, which sold off its overseas operations to focus on domestic growth.

Lloyds has emerged relatively unscathed from the global credit crisis, as a result, it faces pressure from investors to continue its strong growth.

At a recent speech at the BBA Annual Banking conference, CEO Daniels, spoke for the first time of the importance of cross border consolidation, which will continue "at a measured pace".

However some analysts remain sceptical that an acquisition in the German market will take place, due to the lack of synergies between Lloyds TSB and the German market, and its lack of experience in cross-border consolidation compared to European peers such as BBVA, Banco Santander.

In addition, the German banking market is largely unconsolidated, and would require Lloyds to make more than one acquisition to make it worth its while, said Magnus Mathewson at Hitchens Harrison, talking to Thomson Financial News. More than one acquisition, however, would be challenging from a regulatory perspective.

Nonetheless, an acquisition during the current climate may be shrewd, as rival banks worldwide suffer in the light of impairment charges on mortgage-backed securities.

Mike Trippitt at Oriel Securities said that the Lloyds management has typically been cautious, and is unlikely to make "a silly deal". It will examine thoroughly any potential acquisition in terms of creating long-term value, he said, adding that "there is recognition that the management won't be gung ho".

For now, investors remain focused on the negativity of the balance sheet and the gloomy consumer outlook. However Lloyds is a "relative winner" in the UK market, said Trippitt, well poised to take market share in difficult market conditions. lorraine.turner@thomsonreuters.com lht/ejp

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