June 5 (Bloomberg) -- Lloyds Banking Group Plc Chairman Victor Blank said his executives carried out “thorough” due diligence before buying HBOS Plc in January, an acquisition that forced the lender to seek government aid.

Asked by a shareholder how he could “miss an elephant in the room,” Daniels, 57, told investors at the bank’s annual meeting in Glasgow that “we were very aware when we were doing the due diligence that this was a higher-risk portfolio.” The bank took “precautions” and paid less than HBOS’s asset value.

Lloyds agreed to buy HBOS for about 7.7 billion pounds ($12.4 billion) in September in a government-brokered deal to prevent the collapse of Britain’s biggest mortgage lender. Lloyds, now 43 percent owned by the government, has forecast a loss this year as HBOS’s bad debts rise. Lloyds shares have slumped 77 percent in the past 12 months.

Blank, 66, said “our due diligence was thorough.” Advisers were asked to review the bank’s due diligence because of concern about it. “They expressed the view that all of the due diligence that we could have done was done properly,” Blank said. Referring to the acquisition, he said, “does it look worse today than we would have hoped? The answer to that in one sense is yes” because the economy was deteriorating.

The bank fell 1.3 percent to 66.2 pence in London trading, for a market value of 14.5 billion pounds.

‘Not Fair’

Chief Executive Officer Eric Daniels told a House of Commons committee in February that the bank would have done more due diligence on the takeover if the law had allowed it.

“If we had unlimited access, which isn’t permitted by law, we probably would have put in somewhere between three to five times” more research, Daniels told parliamentarians.

The reporting of those comments had been “not fair and accurate,” Blank said today.

“The board are sorry about the decline in our share price and the financial difficulty the temporary suspension of our dividend has caused shareholders,” he said.

Blank and Daniels faced a series of hostile questions from shareholders angered by the bank’s share price decline and the HBOS losses.

“You are disappearing down a vortex created by yourself,” shareholder Tony Peterson told Blank. “I would have done little worse when investing in one of Bernard Madoff’s ponzi schemes than investing in this bank.”

Blank Reelected

Shareholders reelected Blank with 93.95 percent of the vote, compared with 97.4 percent at the last vote in 2006. U.K. Financial Investments Ltd., which manages the government’s stake, had said it would support the Lloyds board and all the resolutions at today’s meeting. Blank has said he will step down next year.

“The board should be shipped out,” shareholder Brian Dawson, 70, said in an interview. “They hadn’t exercised due diligence. They should have recognized the problems of HBOS.”

“I’m not impressed by the current board,” said Kenneth Gray, a retired 72 year-old, in an interview. “They should be getting rid of the directors that were in charge at the time of the takeover. The whole thing is going rapidly downhill.”

In March, Lloyds said it would put 260 billion pounds of risky loans into the government’s asset protection scheme, and received a 17 billion-pound capital injection from the U.K. The bank has eliminated 2,600 jobs since April as it seeks to save more than 1.5 billion pounds.

Bad Loans Soar

Corporate bad loans at Lloyds may increase 50 percent to 15 billion pounds, Finance Director Tim Tookey said on May 7. The bank pointed to HBOS property loans as “sensitive” to recession.

Some shareholders at the meeting are backing Lloyds Action Now Ltd., a company created to take legal action against directors of Lloyds and HBOS and their advisers involved in the acquisition.

“Lloyds TSB shareholders are rightly furious at the way their company has been mismanaged by the board and the failure of professional advisers to discover the true state of the HBOS accounts at a time when its exposure to mortgage debt was a matter of public knowledge,” Lloyds Action Now said in a statement yesterday.

The bank would “vigorously defend any claim based on the allegations,” it said in an e-mailed statement today. “We believe the acquisition was very much in the interest of shareholders and will deliver significant benefits to shareholders in the medium- to longer-term.”

Shareholders also backed the bank’s plans for a 4-billion pound share sale, with new stock offered at 38.43 pence a share. The sale is underwritten by the government. The full result will be announced on June 8, the bank said today.

To contact the reporter on this story: Jon Menon in Glasgow at jmenon1@bloomberg.net; Kevin Crowley in London at kcrowley1@bloomberg.net

Last Updated: June 5, 2009 11:41 EDT