Pension deal is latest stage in attempt to turn LloydsTSB into thoroughbred

The once thoroughbred Black Horse bank has looked rather more like Steptoe's nag, Hercules, in recent years. But under its American chief executive Eric Daniels, Lloyds TSB is at last showing better form across the gallops, and its struggling retail bank is easing up slowly along the rails.

Yesterday's steady, if unexciting, update on trading in the first half of its year provided the latest evidence that Lloyds is making up ground on the rest of the field.

Mr Daniels has finally addressed the problem of the £2bn shortfall in the group's pension fund, reaching an agreement with unions to clear the deficit over the next decade. Payments into the fund of £150m a year are expected, with extra voluntary contributions should any be required. Profits were not expected to suffer as a result.

The bancassurance model fashioned by Mr Daniels' predecessor, Peter Ellwood, of selling life assurance products through Lloyds' 2,100 branches is also at last showing vital progress, six laboured years after conception.

Borrowing heavily from HBOS by importing a retail ascetic to high street banking, Lloyds' now offers fewer, simpler financial products in branches and over the telephone and Net. Sales are "well ahead" of where they were over the same period last year.

Mr Daniels declared: "We expect the result of building better businesses will be sustained economic growth. The group remains on track to deliver a satisfactory performance for the first half."

A strong pick-up in sales of Scottish Widows-branded savings and investment products, and continued growth in current accounts, is helping to offset slowing consumer lending.

But Lloyds' strong trading performance was watered down to tolerable earnings growth by a rise in bad debts, not just in retail but also business banking. These grew in the first six months of this year, but not by as much as in the second half of 2005.

Steeper mortgage payments and higher energy bills are leaving more Britons struggling to meet repayments on unsecured loans and credit-card debt. Greater stability is predicted for the second half of the year as the bank's lower lending levels and tighter policies come through, but the environment for consumer lending is likely to get worse before its gets better.

Simon Maughan, a senior analyst at Blue Oak Capital, said: "Lloyds is trying to focus investors on its trading performance, which is strong, and to downplay its rising bad debts, which are having meaningful dilution on its growth rate.

"While they are flagging that there will be some stability in consumer bad debt over the remainder of the year, corporate bad debt is still a worry."

Last year, Lloyds grew retail revenues markedly slower than its rivals. Performance was clawed back by screwing down costs. Still deeper cost-cutting is slated to deliver a further £30m of savings this year.

Lloyds' shares, which in the past month have performed better than those of any European bank, eased 3.5p to 523.5p, valuing the bank at a touch more than £29.3bn.

Mr Daniels has moved to diversify Lloyds' earnings and ease its heavy reliance on retail banking - with its market-leading 10 million current accounts, 11 per cent of the credit card and 9 per cent of mortgage markets - by bolstering wholesale banking and reinvigorating Scottish Widows.

Three years into the job, Mr Daniels continues to wrestle with a legacy of underinvestment and lack of innovation inherited from his predecessors, Sir Brian Pitman and Peter Ellwood.

Throughout the 1990s Sir Brian, focused to the exclusion of almost all else on return on equity and return to shareholders, forged a UK-centric bank (for that was where returns were most lucrative at that time) while others in the sector invested heavily on foreign soil.

Swollen returns cemented his glorious reputation within the City, while sowing the seeds of his bank's later troubles.

One senior banking expert said: "Pitman was so highly regarded at the time, he walked to analysts' meetings across water. We would bring in crippled children for him to heal and bottles of Evian for him to turn into claret."

Later, with Mr Ellwood at the helm after Sir Brian's departure in 2001, it became apparent that what had once appeared to be efficiency had in fact been a chronic starvation of resource.

"Lloyds gave the impression of being a lean, mean machine. It was lean, but that was because there had been no investment whatsoever," the expert said.

"Ellwood inherited a souped-up Ford Capri. At one time, it had been a good car. But suddenly it was being overtaken by faster cars, with bigger engines."

While hindsight may dent Sir Brian's reputation, Mr Ellwood's stewardship has often been characterised as a "disaster".

He forked out an inflated £9bn for Scottish Widows, a life and pensions business, at the stock market's peak in 1999, and then expended a lot of energy trying to clean up the mess after the technology bubble burst.

Mr Ellwood oversaw the integration of Lloyds and the TSB banks, installing a preponderance of TSB managers in senior positions and, arguably, stripped the merged group of solid retail banking experience.

"Daniels' first job was to put that retail experience back into the branches, and there are some benefits of that being shown today," Mr Maughan said.

He has also imported a management that is winning plaudits. Terri Dial and Truett Tate, are deepening Lloyds' American accent while leading the turnaround of its retail bank and the burgeoning of its corporate banking division. Helen Weir's appointment as finance director has also been well received.

Under Archie Kane, Scottish Widows is no longer the hospital patient it was and is finally contributing solid profits to the group.

Mr Daniels is running a tighter ship and has gone some way towards addressing some long-standing concerns that have dogged his bank.

Lloyds' 6.5 per cent yield still comfortably outstrips the interest payable in even the most generous current account on the high street.

However, some within the City still fret that Lloyds is corralled in a strategic cul-de-sac. It has neither the high-growth emerging markets interests of HSBC or Standard Chartered, nor the American footprint of rivals such as RBS. Unlike Barclays, there is no lucrative investment banking business.

Lloyds' corporate bank, the source of excitement within the City, is expanding from a low base and the most pessimistic reckon it will grow only to a fraction of the size of Barclays Capital or RBS's capital markets operation.

In a sector where bid rumours appear as numerous as cash-point withdrawals, Lloyds has been long touted as ripe for a foreign takeover. None of the potential buyers is thought to have substance (for the time being at least) although, it is said, Lloyds has approached ABN and Germany's Deutsche Bank about a possible tie-up in the past.

Bid speculation aside, investors may do worse than to enjoy a flutter on the Black Horse's tentative return to form, safe in the knowledge the shares pay more than any bank account.