By Steve Slater and Raji Menon
LONDON (Reuters) - Top Lloyds Banking Group <LLOY.L> investors expect the UK bank to change its chairman well before next June as the part-nationalised lender on Monday kicked off its search for a new boss.
Lloyds also tweaked the terms of a 4 billion pound fundraising so as not to penalise small shareholders if they do not stump up more cash, sending its shares some 6 percent higher.
Lloyds said on Sunday its Chairman Victor Blank will leave in the next year, but three top investors told Reuters they expect a speedier change, and a small lobby group is still urging a vote against his re-election next month.
Blank faced a potential shareholder revolt at next month's AGM after intense criticism of the bank's takeover of HBOS, where bad debts on corporate and home loans have soared and are likely to remain a drag for the next two years.
He said he planned to leave before the bank's annual shareholder meeting in 2010.
"As soon as they have concluded their deliberations on a replacement successor, he will go. He will not be there in a year's time," said a top 10 investor, who asked not to be named.
Two more top 10 investors told Reuters it served no purpose to have a lame duck chairman and Blank is likely to go as soon as a suitable replacement has been found.
"I suspect Blank realises given the way the deal with HBOS has panned out, his position has become untenable," one said.
"It was a big risk and it has clearly gone the wrong way. I think he knew the risks before he did the deal; it was going to be fantastic or it was going to be problematic and it has been very problematic."
Lloyds shares jumped more than 6 percent after the bank tweaked the terms of its fundraising, which will now be structured more similar to a rights issue. The shares were up 5.3 percent at 93.9 pence at 11:25 a.m.
Investors are being offered 0.62 shares at 38.43 pence apiece for each share owned to replace preference shares held by the government, boost its capital and allow it to start paying dividends again.
130 POUNDS FOR JOE PUBLIC
The front-runners to replace Blank include Mervyn Davies, the former Standard Chartered <STAN.L> boss who is now a trade minister; Sandy Leitch, who has been promoted to Lloyds deputy chairman; and Digby Jones, a former trade minister.
David Buik of brokerage BGC Partners offered odds of 7/4 on Leitch, 7/2 on Jones and 3/1 on Davies. He rated Gerry Grimstone, chairman of Standard Life <SL.L>, as 5/1; and Harvey McGrath, chairman of Prudential <PRU.L>, at 8/1. Win Bischoff, the former Citigroup <C.N> chairman, has also been cited as a possible replacement.
Lloyds, which has the largest shareholder base in Britain with 2.8 million private investors, in March said shareholders would be offered shares worth up to 4 billion pounds, with the government buying any shares not taken.
Details unveiled on Monday said any shares not taken up in the offer will be sold in the market and any profit over 38.43 pence per share will be distributed to investors who did not take up their entitlement.
The government will buy shares in relation to its current holding, worth about 1.7 billion pounds, but is not expected to need to buy any extra, keeping its stake at 43 percent.
The average qualifying private shareholder owns about 550 shares, so they will have the option to buy another 340 new shares for about 130 pounds.
The fundraising will save 480 million pounds annually on the preference shares. Together with its participation in a government-backed asset insurance plan, it will lift the bank's Tier 1 capital ratio to about 14.5 percent, one of the highest in the sector.
But Lloyds is likely to post another loss this year and probably next year, according to analysts.
HBOS slumped to a 10 billion pound loss last year, badly hit by rising losses on corporate loans.
"We expect that Lloyds will generate substantial losses in 2009 and 2010 as some key parts of the UK balance sheet continue to deteriorate," said Sandy Chen, analyst at Panmure Gordon.
($1=.6577 Pound)
(editing by Hans Peters)