Actions conclude review announced on 15 February 2012
London, 21 June 2012 -- Moody's Investors Service has today downgraded Lloyds TSB Bank plc's
senior debt and deposit ratings by one notch to A2 from A1 and lowered
the standalone credit assessment to baa2 from baa1 within the C-
standalone bank financial strength rating (BFSR) range. The outlook
is stable on the C-/baa2 standalone credit assessment and negative
on the A2 debt and deposit ratings, reflecting Moody's medium-term
view of lower systemic support for large UK banks. The short-term
Prime-1 rating was confirmed.
The drivers for the downgrade and weakened standalone credit profile are
(i) the bank's sensitivity to the increasingly challenging operating
environment in the UK and also in Europe; and (ii) Lloyds'
high (albeit declining) use of wholesale funding, which implies
that it would be vulnerable to changes in investor sentiment towards European
banks.
Several factors mitigate these risks and have limited the extent and scope
of today's actions. These include (i) Lloyds' leading UK-based
customer franchises; (ii) strong capital ratios; and (iii) a
track record of successfully meeting restructuring targets. The
latter includes the integration of HBOS and the wind-down of non-core
assets, as well as the progress in strengthening the bank's
funding and liquidity profile.
The senior debt and deposit ratings incorporate three notches of systemic
support, reflecting Moody's expectation of a very high probability
of systemic (government) support for the bank. However, the
outlook is negative on the A2 debt and deposit ratings, reflecting
Moody's medium-term view of lower systemic support for large
UK banks.
Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143265
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
Today's rating actions conclude Moody's decision to review Lloyds TSB
Bank's ratings for downgrade (please see "Moody's reviews ratings
for European Banks", 15 February 2012 (http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914).
For additional information on bank ratings, please refer to the
webpage containing Moody's related announcements: http://www.moodys.com/bankratings2012.
RATINGS RATIONALE
The downgrade of Lloyds' ratings is principally driven by its sensitivity
to an increasingly challenging operating environment in the UK and also
in Europe. The bulk of the bank's operations are UK-based;
however, the weak macroeconomic outlook in Europe complicates the
challenges within the UK economy. Moreover, Moody's
considers that Lloyds' high (albeit declining) usage of wholesale
funding means the bank is vulnerable to changes in investor sentiment
towards European banks. Further challenges include the European
Commission's mandated sale of UK branches.
Several factors mitigate these risks. These include (i) Lloyds'
leading UK-based customer franchises; (ii) strong capital
ratios; and (iii) a track record of successfully meeting restructuring
targets. The latter includes the integration of HBOS and the wind-down
of non-core assets, as well as the progress in strengthening
the bank's funding and liquidity profile.
Lloyds had wholesale funding of GBP231 billion outstanding at the end
of Q1 2012, of which 40% was short-term. This
has been steadily reducing (wholesale funding was GBP298 billion at the
end of 2010), and Moody's understands that Lloyds' management
plans to reduce it further. In addition, Lloyds has been
increasing its buffer of liquid assets (GBP106 billion primary liquid
assets at the end of Q1 2012 and GBP202 billion total liquidity buffer
at the end of 2011). Nevertheless, the relatively high proportion
of wholesale funding implies that Lloyds is sensitive to investor confidence
(the loan-to-deposit ratio for the whole group has been
improving, but was still 130% at the end of Q1 2012) .
Similarly, the bank continues to make progress in reducing its non-core
assets (down to GBP128 billion at the end of Q1 2012 from GBP194 billion
at the end of 2010), and the bank has a good track record of managing
down these assets. However, Moody's says that until
the assets are wound-down further, the bank remains sensitive
to a worsening operating environment.
The stable outlook on Lloyds' standalone credit assessment reflects
Moody's full incorporation of the funding and asset-quality
risks into the bank's BFSR.
WHAT COULD MOVE THE RATINGS DOWN/UP
The current rating level and outlook incorporate a degree of expected
further deterioration in the bank's operating environment and the
likelihood that changes in investors sentiment could further weaken its
standalone credit profile. However, the ratings may decline
further if (i) operating conditions in the UK worsen beyond Moody's
current expectations; or (ii) funding conditions worsen significantly
for an extended period.
Any reduction in the likelihood of systemic support for large UK banks
could exert downwards pressure on the Lloyds' ratings.
In the context of Lloyds' strong retail-oriented domestic
franchise, over the medium-term, upwards pressure could
develop on its standalone rating if it is able to (i) reduce the impact
of non-core assets on its profitability and return to stable net
income; and (ii) complete the ongoing improvements to its funding
profile, by further reducing its use of wholesale funding.
OTHER GROUP RATINGS
The A2 senior debt rating of the holding company was downgraded to A3,
in line with Moody's views on the structural subordination of holding
companies. The senior debt ratings of Bank of Scotland plc were
downgraded to A2 from A1 and the senior debt ratings of HBOS plc were
downgraded to A3 from A2.
The deposit rating of Lloyds TSB Offshore Ltd was confirmed at A2,
reflecting the highly integrated nature of this subsidiary, which
is small but remains an important gatherer of retail deposits for the
group. However, the standalone rating of the bank was lowered
to C-/ baa2 from C/a3. This reflects Moody's view
that the profitability of Lloyds TSB Offshore remains under pressure and
that asset quality problems have occurred in the bank's small (but
concentrated) loan portfolio. This positions the standalone rating
in line with its parent, Lloyds TSB Bank, in recognition of
the highly integrated role of this subsidiary.
SUBORDINATED AND HYBRID INSTRUMENTS
The group's junior instruments were downgraded by one notch,
in line with the downgrade of the standalone credit assessment,
apart from the instruments discussed below.
However, Moody's took a variety of actions on Lloyds'
"May-Pay" securities. These are the securities
on which Lloyds omitted coupons due to European Commission restrictions
following the receipt of state aid over the period 31 January 2010 to
31 January 2012. Lloyds announced its intention to pay arrears
of interest on cumulative preferred securities on 19 January 2012 and
recommenced payments from 31 January 2012. The ratings of these
instruments have now all been moved, such that they are in line
with the "Must-Pay" securities, which are rated
in line with hybrid notching guidelines.
The ratings of these instruments are listed in the attached excel spreadsheet:
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143267
In addition, Moody's downgraded by two notches to Ba1 from
Baa2 the ratings of six dated subordinated debt issues of Lloyds TSB Bank
that include a substitution or variation clause. These instruments
were initially rated in line with other dated subordinated debt instruments,
but they are now rated one notch lower than other instruments due to the
additional risk for investors resulting from Moody's view that there
is some uncertainty regarding the type of instrument that can be substituted
in a capital event. For more information on Moody's approach
to rating such instruments, please refer to the Special Comment
"Moody's Approach To Rating Bank Securities With Variation
Provisions" published in March 2012. The list of securities
affected is included in the excel spreadsheet referenced above.
ENHANCED CAPITAL NOTES
Moody's has downgraded the enhanced capital notes (ECNs) by one
notch to Ba3 for the ECNs guaranteed by Lloyds TSB Bank and B1 for the
ECNs guaranteed by Lloyds Banking Group. The downgrades reflect
the high loss severity to investors in the event of conversion (these
instruments have an equity conversion feature, which is triggered
if Lloyds TSB Bank's Core Tier 1 ratio drops below 5%).
INSURANCE OPERATIONS
The insurance financial strength ratings (IFSRs) of Scottish Widows plc
(Scottish Widows) and Clerical Medical Investment Group Limited (Clerical
Medical) were downgraded by one notch to A2 from A1, and the subordinated
debt ratings of both insurers were downgraded to Baa2 (hyb) from Baa1
(hyb). The outlook on all these ratings is stable.
The rating action on the insurance operations follows the downgrade of
the senior debt rating and the lowering of the standalone credit assessment
of Lloyds TSB Bank. Although Scottish Widows and Clerical Medical's
IFSRs remain above the Baa2 standalone credit assessment of owner Lloyds
TSB Bank, reflecting the insurers' strong UK life market position,
diversified distribution channels and good capital levels, the downgrade
of the IFSRs reflects Moody's view that their financial strength
is constrained by the ownership by Lloyds TSB Bank. The downgrade
to Baa2 (hyb) from Baa1 (hyb) on the subordinated debt ratings of Scottish
Widows and Clerical Medical follows the downgrade by one notch on the
subordinated debt of the parent bank and reflects Moody's view that
Lloyds Banking Group's capital base is managed centrally. As a
result the Baa2 (hyb) rating on the insurers' subordinated securities
is notched wider than the insurance standard two notches from IFSR.
The stable outlook on the IFSRs and subordinated debt ratings is aligned
with the stable outlook of Lloyds TSB Bank's C- BFSR.
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology, published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: Global
Methodology, published in March 2012. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143265
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
Person approving the credit rating
Releasing office
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated
agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
The below contact information is provided for information purposes only.
Please see the issuer page on www.moodys.com for Moody's
regulatory disclosure of the name of the lead analyst and the office that
has issued the credit rating.
The relevant Releasing Office for each rating is identified under the
Debt/Tranche List section on the Ratings tab of each issuer/entity page
on moodys.com
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Elisabeth Rudman
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Johannes Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Lloyds TSB Bank to A2; outlook negative
