* Bischoff will step down by May 2014
* Says performance of group "well on track"
* Anthony Watson to lead search for replacement
* BoE deputy governor Tucker linked with post
By Matt Scuffham
LONDON, May 13 (Reuters) - Lloyds Banking Group Plc Chairman Win Bischoff is to retire in the next year, handing the reins to a successor who must steer it through a potentially risky multi-billion pound government share sale.
Bischoff, 72, has overseen a restructuring and return to profitability at Lloyds, rescued by the government through a 20 billion pound ($31 billion) bailout during the 2008 financial crisis which left Britain with a 39 percent stake.
His replacement will need a mix of stock market nous and political sensitivity, given the high-profile nature of the looming privatisation and British Finance Minister George Osbourne's need to maximise returns to help fix the nation's deficit.
Industry and political sources have said the government is keen to start selling off shares in the bank ahead of the 2015 general election and the new chairman will be tasked with handling the potentially delicate political process.
Shares in Lloyds have been edging closer to the 61 pence level which the government regards as its break-even and last week hit a two-year high of 59.1p, raising hopes Britain could soon start selling its shares, which have a stock market value of some 17 billion pounds.
That prospect means the bank's new chairman will need to quickly establish strong relationships with Osbourne and with UK Financial Investments (UKFI), which manages the government's stake.
The new chairman will also take charge at a time when Lloyds is planning to float 630 branches after the collapse of a planned sale to the Co-operative, in a divestment ordered by the European Commission as a price of accepting the state bailout.
Bank of England deputy governor Paul Tucker, who had been favourite to succeed Mervyn King as governor of the central bank but lost out to Canadian Mark Carney, has been linked with the role in some British newspapers.
However, a source familiar with the matter played down the reports and said no individual had been ruled in or out. The bank is likely to examine the credentials of both internal and external candidates in a process expected to take months.
The Treasury and UKFI are expected to have a say in the process. Lloyds, the Treasury and the Bank of England declined to comment.
The bank said on Monday that Anthony Watson, its senior independent director, would lead the search.
Lloyds said Bischoff would retire no later than next year's annual shareholders' meeting in May 2014. The exact date will be subject to the appointment of his successor.
Bischoff said Lloyds had made significant progress towards its goal of becoming a strong UK-focused retail and commercial bank. "Whilst clearly some challenges remain, the performance of the group is well on track. Indeed, in many areas, it is ahead of plan," he said in a statement.
Bischoff spent his career at Schroders before its investment banking arm was acquired by Citigroup in 2000. He became chairman of Citi until stepping down in 2009 and joined Lloyds shortly afterwards.
At Lloyds, he oversaw the appointment of Portuguese banker Antonio Horta-Osorio as chief executive in 2009, following the departure of Eric Daniels.
Shares in Lloyds were down 2.4 percent to 57.5 pence at 1100 GMT, underperforming the European Banking sector which was down 1.9 percent.
Bischoff will chair the bank's 2013 annual shareholders' meeting on Thursday in Edinburgh, Scotland.