* Investors want bank to "recession-proof" business
* Concerned over Lloyds' exposure to fall in credit demand
* Seek fresh push into wealth management
By Sinead Cruise and Simon Jessop
LONDON, April 13 (Reuters) - Lloyds Banking Group shareholders want the bank to consider some creative additionsto its business to protect its generous dividend plans againstan economic slump in Britain.
Investors broadly approve of Lloyds' slimline strategy,anchored by UK mortgages and retail and corporate lending, butfive Lloyds' investors contacted by Reuters think the bank mightbenefit from 'recession-proofing' as Britain's economicprospects darken.
"Lloyds is not bullet-proof ... The restructuring has beenimpressive but it is incomplete. This is not yet a perfect bankas far as shareholders are concerned," Guy de Blonay, fundmanager at Jupiter Asset Management, told Reuters.
With a costly payment protection insurance mis-sellingscandal largely behind it, investors believe Lloyds can affordto make fresh investment into wealth management and its ScottishWidows insurance business, which offer returns less correlatedto interest rates changes or Britain's economic strength.
Calls for a retune of the strategy follow a frustratingstart to 2016 for state-backed Lloyds, which recovered itsstatus as one of Europe's preferred bank stocks last year, aftera bold restructuring effort led by CEO Antonio Horta-Osorio.
Despite outperforming most of Europe's beleaguered bankingsector since 2015, its share price has dropped 13 percent overthe past year, below the government's break-even price of 73.6pence.
This has put the brakes on a plan to return the bank to fullprivate 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 modeland robust balance sheet, with Shore Capital describing the bankas a future "cash machine" for investors chasing income returns.
The bank is forecast to achieve a dividend yield in excessof 5 percent from 2017, according to Thomson Reuters data.
But analysts at Berenberg, who point to the high level of UKhousehold debt, say Lloyds has a cost-to-income target thatrelies on revenue growth they do not expect to materialise whileinterest rates remain at record-low levels.
The depressed stock price suggests some investors shareconcerns that Lloyds might be over-exposed to falling creditdemand and a rise in bad loans if Britain's economy continues toslow.
"Lloyds has some ambitious dividend policy plans but theseare based on relatively favourable economic conditions and asolid property market. My worry is how the business plan willcope in a tougher economic environment," de Blonay said.
SHARE BOOST
A bigger push into higher margin businesses like wealthmanagement and insurance could revive investor appetite andoffset worries about the proposed retail sale and the outcome ofa referendum on Britain's membership of the European Union.
"A wealth business makes sense for a bank. They will haveexcess deposits and therefore it will be good to build a wealthmanagement business," said one of the bank's 15 largestinvestors, pointing to the potential for a greater partnershipwith Aberdeen Asset Management, the fund manager inwhich Lloyds owns a 9.8 percent stake.
Management changes at Lloyds' insurance division, whichoperates the 200-year old Scottish Widows insurance brand, suggest it is listening to shareholder concerns about theresilience and breadth of its strategy.
Antonio Lorenzo, the executive responsible for deliveringabove-target growth in Lloyds' consumer finance division in2015, is now also responsible for the insurance arm.
AXA Investment Managers fund manager Jamie Forbes-Wilson,another Lloyds shareholder, said structural changes in Britain'sbanking market such as charging for current accounts could alsohelp prop up the Lloyds' revenues in the future.
"For providing basic banking services, banks like Lloydsmake very little money," he said. "Why should they give theseservices for free?"
Investors hope to hear more on the bank's plans at itsgeneral shareholder meeting on May 12. These could envisage areturn to the market for small acquisitions for the first timesince a multi-billion pound state rescue during the financialcrisis.
"It's true the eggs are in one basket but there areadvantages to having a very streamlined business model focusedprimarily on one economy," another source close to Lloyds said,cautioning against any rash changes.
"Other banks have found that for every $1 of diversifiedincome earned, a $1 charge for operational risk is incurred,"the source said.($1 = 0.7022 pounds) (Editing by Jane Merriman)
