Investors weigh strategy tweaks at Lloyds to protect dividend plans

* Investors want bank to "recession-proof" business

* Concerned over Lloyds' exposure to fall in credit demand

* Seek (Other OTC: SKLTF - news) fresh push into wealth management

By Sinead Cruise and Simon Jessop

LONDON, April 13 (Reuters) - Lloyds Banking Group (Other OTC: LLOBF - news) shareholders want the bank to consider some creative additions to its business to protect its generous dividend plans against an economic slump in Britain.

Investors broadly approve of Lloyds' slimline strategy, anchored by UK mortgages and retail and corporate lending, but five Lloyds' investors contacted by Reuters think the bank might benefit from 'recession-proofing' as Britain's economic prospects darken.

"Lloyds is not bullet-proof ... The restructuring has been impressive but it is incomplete. This is not yet a perfect bank as far as shareholders are concerned," Guy de Blonay, fund manager at Jupiter Asset Management, told Reuters.

With (Other OTC: WWTH - news) a costly payment protection insurance mis-selling scandal largely behind it, investors believe Lloyds can afford to make fresh investment into wealth management and its Scottish Widows insurance business, which offer returns less correlated to interest rates changes or Britain's economic strength.

Calls for a retune of the strategy follow a frustrating start to 2016 for state-backed Lloyds, which recovered its status as one of Europe's preferred bank stocks last year, after a bold restructuring effort led by CEO Antonio Horta-Osorio.

Despite outperforming most of Europe's beleaguered banking sector since 2015, its share price has dropped 13 percent over the past year, below the government's break-even price of 73.6 pence.

This has put the brakes on a plan to return the bank to full private ownership via an offer of at least 2 billion pounds ($2.85 billion) of shares to the public.

Some analysts have praised the bank's focused business model and robust balance sheet, with Shore Capital describing the bank as a future "cash machine" for investors chasing income returns.

The bank is forecast to achieve a dividend yield in excess of 5 percent from 2017, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

But analysts at Berenberg, who point to the high level of UK household debt, say Lloyds has a cost-to-income target that relies on revenue growth they do not expect to materialise while interest rates remain at record-low levels.

The depressed stock price suggests some investors share concerns that Lloyds might be over-exposed to falling credit demand and a rise in bad loans if Britain's economy continues to slow.

"Lloyds has some ambitious dividend policy plans but these are based on relatively favourable economic conditions and a solid property market. My worry is how the business plan will cope in a tougher economic environment," de Blonay said.

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A bigger push into higher margin businesses like wealth management and insurance could revive investor appetite and offset worries about the proposed retail sale and the outcome of a referendum on Britain's membership of the European Union.

"A wealth business makes sense for a bank. They will have excess deposits and therefore it will be good to build a wealth management business," said one of the bank's 15 largest investors, pointing to the potential for a greater partnership with Aberdeen Asset Management (Other OTC: ABDNF - news) , the fund manager in which Lloyds owns a 9.8 percent stake.

Management changes at Lloyds' insurance division, which operates the 200-year old Scottish Widows insurance brand, suggest it is listening to shareholder concerns about the resilience and breadth of its strategy.

Antonio Lorenzo, the executive responsible for delivering above-target growth in Lloyds' consumer finance division in 2015, is now also responsible for the insurance arm.

AXA Investment Managers fund manager Jamie Forbes-Wilson (Oslo: WILS.OL - news) , another Lloyds shareholder, said structural changes in Britain's banking market such as charging for current accounts could also help prop up the Lloyds' revenues in the future.

"For providing basic banking services, banks like Lloyds make very little money," he said. "Why should they give these services for free?"

Investors hope to hear more on the bank's plans at its general shareholder meeting on May 12. These could envisage a return to the market for small acquisitions for the first time since a multi-billion pound state rescue during the financial crisis.

"It (Other OTC: ITGL - news) 's true the eggs are in one basket but there are advantages to having a very streamlined business model focused primarily on one economy," another source close to Lloyds said, cautioning against any rash changes.

"Other banks have found that for every $1 of diversified income earned, a $1 charge for operational risk is incurred," the source said. ($1 = 0.7022 pounds) (Editing by Jane Merriman)