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Rating Action:

Moody's affirms the senior and subordinated debt ratings of Lloyds Banking Group and Lloyds Bank

29 Jan 2019

London, 29 January 2019 -- Moody's Investors Service today affirmed the A3 senior unsecured debt rating of Lloyds Banking Group plc (LBG), with a stable outlook. The rating agency also affirmed Lloyd Bank plc's (Lloyds Bank) Aa3 long-term deposit and senior unsecured debt ratings with a stable outlook and its a3 BCA. The ratings of all subordinated debt issued by LBG and Lloyds Bank, including the high-trigger Additional Tier 1 (AT1) instruments, were also affirmed.

Furthermore, Moody's upgraded the long-term Counterparty Risk Assessment (CR assessment) and Counterparty Risk Rating (CRR) of Lloyds Bank to Aa2(cr) and Aa2 respectively, from Aa3(cr) and Aa3. Finally, Moody's assigned a notional baseline credit assessment (BCA) of a3 to LBG.

A full list of affected ratings can be found at the bottom of this press release.

RATINGS RATIONALE

-- LBG: ASSIGNMENT OF NOTIONAL BCA AND AFFIRMATION OF ALL RATINGS

Moody's said it assigned a notional BCA of a3 to LBG, taking into account the group's low asset risk, stable core earnings, and strong current levels of capital, which are, however, more susceptible to deterioration in a stress than that of most of its peers due to exposures to unsecured consumer loans and buy-to-let mortgages, as well as the rating agency's expectation that problem loan impairments will increase. LBG's insurance subsidiary Scottish Widows Limited (Scottish Widows, IFRS A2 stable) provides earnings diversification to the group.

The affirmation of the senior unsecured debt rating of LBG reflects the group's stable standalone creditworthiness, as well as Moody's unchanged view of moderate loss-given-failure, due to the volume and subordination of debt issued by LBG itself and externally by its directly owned banking subsidiaries; this results in a A3 senior unsecured debt rating for LBG, in line with the group's a3 notional BCA.

The affirmation of the rating on the dated subordinated debt issued by LBG reflects its high loss-given-failure, according to Moody's, leading to a Baa1 rating, one notch below the group's a3 notional BCA. Particular coupon features continue to drive additional negative notching for preference share instruments.

-- LLOYDS BANK: AFFIRMATION OF BCA, DEPOSIT, SENIOR UNSECURED, AND SUBORDINATED DEBT RATINGS

Moody's said it affirmed Lloyds Bank's a3 BCA, based on the bank's low asset risk and stable core earnings. Asset risk reduced following the transfer of capital markets activities, non-EEA business and lending to financial institutions to Lloyds Bank Corporate Markets plc (LBCM, long-term deposit and issuer ratings A1 stable, BCA baa3, adjusted BCA baa1), offsetting the impact on its financial profile of the rating agency's expectation of lower profitability following the transfer of Scottish Widows to LBG, and weak leverage.

As a result of the implementation of ring-fencing, the structure of the Lloyds Banking Group became more complex. LBG (1) created a new entity, LBCM, directly owned by LBG, which now manages the group's wholesale banking and trading operations that were previously under Lloyds Bank; (2) transferred the off-shore subsidiary Lloyds Bank International Limited (LBIL, long-term deposit and issuer ratings Baa1 stable, BCA baa2, adjusted BCA baa1) to LBCM from Lloyds Bank, and (3) transferred the ownership of Scottish Widows to LBG from Lloyds Bank.

Previously, when Lloyds Bank was the only material subsidiary of LBG, Moody's assumed that all unsecured liabilities issued by LBG, including those not downstreamed to Lloyds Bank, would absorb the losses of the operating company. This is in line with the assumptions that the rating agency makes for other large UK banking groups that were subject to ring-fencing.

Under the new group structure post ring-fencing, excess loss-absorbing capital issued by the holding company can now be used to support Lloyds Bank, but also LBCM, LBIL, and Scottish Widows. Accordingly, and given the group's expectations for intra-group funding and capital distribution, Moody's believes that the unsecured liabilities issued by the holding company will not be wholly downstreamed to Lloyds Bank and can therefore no longer be assumed to fully absorb the losses at failure of this operating company. As a result, the loss-given-failure for junior depositors and senior bondholders of Lloyds Bank will be very low, rather than extremely low previously. This leads to a two-notch uplift for Lloyds Bank's long-term deposit and senior unsecured debt ratings, from three previously, relative to the bank's adjusted BCA of a3.

The benefit of government support now offsets higher loss-given-failure, leading the agency to affirm the deposit and senior unsecured debt ratings.

-- LLOYDS BANK: UPGRADE OF LONG-TERM CR ASSESSMENT AND CRR

Moody's upgraded the long-term Counterparty Risk Assessment (CR assessment) and Counterparty Risk Rating (CRR) of Lloyds Bank to Aa2(cr) and Aa2 respectively, from Aa3(cr) and Aa3. The long-term CR assessment and CRR, for which the rating agency continues to assume a moderate probability of government support, now benefit from a one-notch uplift from government support, consistently with Lloyds Bank's long-term deposit and senior unsecured debt rating.

OUTLOOK

The outlook on Lloyds Bank and LBG is stable. The outlook reflects Moody's view that the bank and the group will be resilient to an expected moderate deterioration in the UK operating environment.

FACTORS THAT COULD LEAD TO AN UPGRADE

The BCAs of LBG and Lloyds Bank could be upgraded following a material reduction in conduct risk, higher capital buffers, and an improvement in profitability. An upgrade of the BCA would lead to an upgrade of all long-term ratings of Lloyds Bank and LBG.

Furthermore, LBG's senior unsecured rating could be upgraded following a material increase in the stock of subordinated debt issued by the holding company or externally by the bank.

FACTORS THAT COULD LEAD TO A DOWNGRADE

The BCAs of LBG and Lloyds Bank could be downgraded following a more-acute-than-expected deterioration in the UK's operating environment or a material decline in the bank's capital metrics. Moody's base case assumption remains that a withdrawal agreement between the UK and the European Union (EU) will be approved with a transition period. A downgrade of the BCA would result in the downgrade of all long-term ratings.

Furthermore, the senior debt ratings of Lloyds Bank and LBG could be downgraded following a reduction in their externally issued unsecured debt.

LIST OF AFFECTED RATING

Issuer: Lloyds Banking Group plc

..Assignments:

....Baseline Credit Assessment, assigned a3

....Adjusted Baseline Credit Assessment, assigned a3

..Affirmations:

....Senior Unsecured Regular Bond/Debenture, affirmed A3 Stable

....Senior Unsecured Shelf, affirmed (P)A3

....Senior Unsecured Medium-Term Note Program, affirmed (P)A3

....Subordinate Regular Bond/Debenture, affirmed Baa1

....Subordinate Shelf, affirmed (P)Baa1

....Subordinate Medium-Term Note Program, affirmed (P)Baa1

....Backed Junior Subordinated Regular Bond/Debenture, affirmed Baa2(hyb)

....Preference Shelf, affirmed (P)Baa3

....Preferred Stock Non-cumulative, affirmed Baa3(hyb)

....Other Short Term, affirmed (P)P-2

..Outlook Action:

....Outlook remains Stable

Issuer: Lloyds Bank plc

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to Aa2 from Aa3

....Long-term Counterparty Risk Assessment, upgraded to Aa2(cr) from Aa3(cr)

..Affirmations:

....Short-term Counterparty Risk Ratings, affirmed P-1

....Long-term Bank Deposits, affirmed Aa3 Stable

....Short-term Bank Deposits, affirmed P-1

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Baseline Credit Assessment, affirmed a3

....Adjusted Baseline Credit Assessment, affirmed a3

....Senior Unsecured Regular Bond/Debenture, affirmed Aa3 Stable

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Aa3 Stable

....Backed Senior Unsecured Shelf, affirmed (P)Aa3

....Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3

....Subordinate Regular Bond/Debenture, affirmed Baa1

....Backed Subordinate Regular Bond/Debenture, affirmed Baa1

....Backed Subordinate Shelf, affirmed (P)Baa1

....Subordinate Medium-Term Note Program, affirmed (P)Baa1

....Backed Subordinate Medium-Term Note Program, affirmed (P)Baa1

....Junior Subordinated Regular Bond/Debenture, affirmed Baa2(hyb)

....Preferred Stock, affirmed Baa3(hyb)

....Commercial Paper, affirmed P-1

....Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

Issuer: Cheltenham & Gloucester plc

..Affirmation:

....Junior Subordinated Regular Bond/Debenture, affirmed Baa2(hyb)

..No Outlook assigned

Issuer: HBOS plc

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to Aa2 from Aa3

....Long-term Counterparty Risk Assessment, upgraded to Aa2(cr) from Aa3(cr)

..Affirmations:

....Short-term Counterparty Risk Ratings, affirmed P-1

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Long-term Issuer Rating, affirmed Aa3 Stable

....Short-term Issuer Rating, affirmed P-1

....Subordinate Regular Bond/Debenture, affirmed Baa1

....Junior Subordinated Regular Bond/Debenture, affirmed Baa2(hyb)

..Outlook Action:

....Outlook remains Stable

Issuer: Bank of Scotland plc

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to Aa2 from Aa3

....Long-term Counterparty Risk Assessment, upgraded to Aa2(cr) from Aa3(cr)

..Affirmations:

....Short-term Counterparty Risk Ratings, affirmed P-1

....Long-term Bank Deposits, affirmed Aa3 Stable

....Short-term Bank Deposits, affirmed P-1

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Long-term Issuer Rating, affirmed Aa3 Stable

....Baseline Credit Assessment, affirmed a3

....Adjusted Baseline Credit Assessment, affirmed a3

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Aa3 Stable

....Subordinate Regular Bond/Debenture, affirmed Baa1

....Junior Subordinated Regular Bond/Debenture, affirmed Baa2(hyb)

....Preferred Stock Non-cumulative, affirmed Baa3(hyb)

..Outlook Action:

....Outlook remains Stable

Issuer: Bank of Scotland Capital Funding L.P.

..Affirmation:

....Backed Preferred Stock Non-cumulative, affirmed Baa3(hyb)

..No Outlook assigned

Issuer: HBOS Treasury Services Plc

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Aa3 Stable

..Outlook Action:

....Outlook remains Stable

Issuer: HBOS Capital Funding No. 1 L.P.

..Affirmation:

....Backed Preferred Stock Non-cumulative, affirmed Baa3(hyb)

..No Outlook assigned

Issuer: HBOS Capital Funding No. 2 L.P.

..Affirmation:

....Backed Preferred Stock Non-cumulative, affirmed Baa3(hyb)

..No Outlook assigned

Issuer: Halifax Limited

..Affirmations:

....Backed Subordinate Regular Bond/Debenture, affirmed Baa1

....Backed Junior Subordinated Regular Bond/Debenture, affirmed Baa3(hyb)

..No Outlook assigned

Issuer: HBOS Group Sterling Finance L.P.

..Affirmation:

....Backed Preferred Stock Non-cumulative, affirmed Baa3(hyb)

..No Outlook assigned

Issuer: Leeds Permanent Building Society

..Affirmation:

....Backed Junior Subordinated Regular Bond/Debenture, affirmed Baa3(hyb)

..No Outlook assigned

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edoardo Calandro
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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