Lloyds Banking Group may sell parts of its business to reduce its reliance on Britain's government-backed asset protection scheme, shareholders familiar with the group's thinking said on Thursday.

Lloyds, which is 43-percent owned by the British taxpayer, agreed earlier this year to include 260 billion pounds ($421.4 billion) worth of risky assets in the scheme, to shield it from losses should the recession worsen.

But a better outlook for the British economy and for bad debts has raised the question of whether Lloyds should reduce its reliance on the government, avoiding 15.6 billion pounds of fees to take part in the scheme.

Lloyds has been through the process of raising money from the market, so it would be sensible for them to look at selling some non-core assets before they come to the market again, one of the bank's top 10 shareholders told Reuters on condition of anonymity because the issue was sensitive.

Their asset management (Scottish Widows Investment Partnership) isn't huge, so it probably would make sense to sell it perhaps because it is not likely to reach critical mass.

Lloyds Chief Executive Eric Daniels described Scottish Widows as an integral part of the group, when the bank reported its first half results on Aug. 5.

But industry sources have previously said that Lloyds, which raised 4 billion pounds from shareholders earlier this year, was also gauging appetite for a bumper rights issue of up to 20 billion pounds. [ID:nLC689883]

An IPO of at least part of the business, is not beyond the realms of reality. But I think it is unlikely, given what they've said in the past or unless they change their mind, Kevin Ryan, equities analyst at ING, said.

STRATEGIC REVIEW

Lloyds appointed Deutsche Bank to conduct a strategic review of its insurance and fund management operations, a person familiar with the matter told Reuters in March.

In addition to Scottish Widows, the list of possible divestments includes life insurer Clerical Medical and the bank's 60-percent stake in wealth manager St James Place. I think there is more likelihood of them selling Clerical Medical to Clive Cowdery and keeping their asset management business, another top 15 investor said. They are certainly spending a lot of time trying to work out how they could possibly minimise the government's stake.

Resolution, an acquisition vehicle founded by insurance entrepreneur Clive Cowdery, clinched the first of a series of acquisitions it hopes to make with the 1.86 billion pound takeover of insurer Friends Provident on Aug. 11.

It is tipped as a leading candidate to buy Clerical Medical.

Lloyds, SWIP and UK Financial Investments, which manages the government's stake in Lloyds, declined to comment.Deutsche Bank declined to comment.

($1=.6170 Pound)

 (Additional reporting by Lorraine Turner, Editing by Lin Noueihed)