Lloyds Bank's senior unsecured debt ratings were affirmed at A1, outlook stable
London, July 19, 2022 -- Moody's Investors Service ("Moody's") today downgraded by one notch Lloyds Banking Group plc's (Lloyds Banking Group) senior unsecured debt ratings to A3 from A2, maintaining the stable outlook, and downgraded its other short term rating to (P)P-2 from (P)P-1. Concurrently, Moody's affirmed Lloyds Bank plc's (Lloyds Bank) senior unsecured debt ratings at A1 with a stable outlook.
Moody's also downgraded by one notch Lloyds Banking Group's subordinated debt ratings to Baa1 from A3 and its backed junior subordinated debt ratings to Baa2(hyb) from Baa1(hyb) and downgraded by one notch Lloyds Bank's subordinated debt ratings to Baa1 from A3 and its junior subordinated debt ratings to Baa2(hyb) from Baa1(hyb).
The rating action had no effect on all other ratings and assessments of Lloyds Banking Group and Lloyds Bank. Lloyds Bank Corporate Markets plc was not part of today's rating action.
For a list of all affected ratings, please refer to the end of this press release.
RATINGS RATIONALE
-- LOWER SUPPORT FROM THE ADVANCED LOSS GIVEN FAILURE (LGF) ANALYSIS. NO REVIEW OF THE BASELINE CREDIT ASSESSMENT
Moody's action only focused on the results from its Advanced Loss Given Failure (LGF) analysis. The agency's LGF assessment takes into account the volume and subordination provided by outstanding senior unsecured debt instruments and more junior liability classes, as well as the banking group's medium-term funding plan, balanced against its expected balance sheet evolution.
Moody's did not review Lloyds Bank's a3 BCA, which remained unchanged.
-- DOWNGRADE OF LLOYDS BANKING GROUP'S SENIOR UNSECURED DEBT RATINGS, AND OF LLOYDS BANKING GROUP'S AND LLOYDS BANK'S SUBORDINATED DEBT RATINGS
Today's one-notch downgrade of Lloyds Banking Group's senior unsecured debt ratings to A3 from A2 was prompted by the expected reduction in the volume of this loss-absorbing debt class, relative to the future size of the bank's balance sheet. This development results in a higher loss severity for senior debt under Moody's Advanced Loss Given Failure (LGF) analysis. Moody's LGF analysis now indicates a moderate loss-given-failure for senior unsecured debt, resulting in no uplift from the bank's a3 Adjusted BCA, while the previous LGF analysis resulted in a low loss-given-failure and one notch of uplift.
Further, today's one-notch downgrade of Lloyds Banking Group's subordinated debt ratings and of Lloyds Bank's subordinated and junior subordinated debt was prompted by the expected reduction in the volume of loss-absorbing debt classes junior to them, relative to the size of the bank's balance sheet. This development results in a higher loss severity for subordinated debt under Moody's Advanced Loss Given Failure (LGF) analysis. Moody's LGF analysis now indicates a high loss-given-failure for both subordinated and junior subordinated debt, resulting in one negative notch from the bank's a3 Adjusted BCA, while the previous LGF analysis resulted in a moderate loss-given-failure and no notch of uplift.
Moody's continues to assume no government support for all instruments issued by Lloyds Banking Group, the holding company of the group and for the junior instruments of Lloyds Bank, the major operating company of the group.
-- AFFIRMATION OF LLOYDS BANK'S SENIOR UNSECURED DEBT RATINGS
The affirmation of Lloyds Bank's senior unsecured debt ratings at A1 reflects lower support from Moody's Advanced Loss Given Failure (LGF) analysis neutralized by higher levels of government support.
Today's affirmation of Lloyds Bank's senior unsecured debt was prompted the expected reduction in the volume of loss-absorbing debt classes junior to them, relative to the expected evolution of the bank's balance sheet. This development results in a higher loss severity for senior unsecured debt under Moody's Advanced Loss Given Failure (LGF) analysis. Moody's LGF analysis now indicates a low loss-given-failure for the bank's senior unsecured debt, resulting in one notch uplift from the bank's a3 Adjusted BCA, while the previous LGF analysis indicated a very low loss-given-failure resulting in two notches of uplift. However, being considered as a systemically relevant institution, the resulting moderate government support assumption now results in one notch of further rating uplift (from zero notches).
-- RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view that the combined solvency and liquidity metrics will on a forward-looking basis remain in line with our current assessment, as the group's asset quality and profitability stabilizes, following the pandemic-induced deterioration in 2020, taking into account tail winds from rising interest rates and headwinds from current macroeconomic pressures.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Lloyds Banking Group
Lloyds Banking Group's long-term ratings could be upgraded following an upgrade of its notional BCA supported by higher capital levels, increased profitability, or lower problem loans. Lloyds Banking Group's senior unsecured debt ratings could also be upgraded following a significant increase in the stock of subordinated debt issued by Lloyds Banking Group or externally by Lloyds Bank.
Lloyds Banking Group's ratings could be downgraded following a downgrade of the notional BCA driven by higher problem loans, or a material deterioration in the group's capital and asset risk metrics. The ratings of Lloyds Banking Group could also be downgraded following a reduction in its stock of externally issued unsecured debt.
Lloyds Bank
Lloyds Bank's BCA could be upgraded if the bank's profitability and liquidity buffers improve. An upgrade of the BCA could lead to an upgrade of all long-term ratings of Lloyds Bank, with the exclusion of its senior unsecured debt, as government support would decrease to zero notches from one notch. Lloyds Bank's junior debt rating could also be upgraded following a significant increase in the stock of subordinated debt issued by Lloyds Banking Group or externally by Lloyds Bank.
Lloyds Bank's BCA could be downgraded following (1) a deterioration of the UK operating environment beyond our current expectations, or (2) a material decline in the group's capital metrics. A one notch downgrade of the bank's BCA would lead to a downgrade of all its ratings.
LIST OF AFFECTED RATINGS
Issuer: Lloyds Banking Group plc
..Downgrades:
....Senior Unsecured Regular Bond/Debenture, downgraded to A3 from A2, outlook remains Stable
....Senior Unsecured Medium-Term Note Program, downgraded to (P)A3 from (P)A2
....Subordinate Regular Bond/Debenture, downgraded to Baa1 from A3
....Subordinate Medium-Term Note Program, downgraded to (P)Baa1 from (P)A3
....Backed Junior Subordinated Regular Bond/Debenture, downgraded to Baa2(hyb) from Baa1(hyb)
....Other Short Term, downgraded to (P)P-2 from (P)P-1
..Outlook Action:
....Outlook remains Stable
Issuer: Lloyds Bank plc
..Affirmations:
....Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable
....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable
....Senior Unsecured Shelf, affirmed (P)A1
....Senior Unsecured Medium-Term Note Program, affirmed (P)A1
....Other Short Term, affirmed (P)P-1
..Downgrades:
....Subordinate Regular Bond/Debenture, downgraded to Baa1 from A3
....Subordinate Medium-Term Note Program, downgraded to (P)Baa1 from (P)A3
....Junior Subordinated Regular Bond/Debenture, downgraded to Baa2(hyb) from Baa1(hyb)
..Outlook Action:
....Outlook remains Stable
Issuer: Cheltenham & Gloucester plc
..Downgrade:
....Backed Junior Subordinated Regular Bond/Debenture, downgraded to Baa2(hyb) from Baa1(hyb) (assumed by Lloyds Bank plc)
..No Outlook assigned
Issuer: HBOS plc
..Affirmations:
....Long-term Issuer Rating, affirmed A1, outlook remains Stable
....Short-term Issuer Rating, affirmed P-1
..Downgrades:
....Subordinate Regular Bond/Debenture, downgraded to Baa1 from A3
....Junior Subordinated Regular Bond/Debenture, downgraded to Baa2(hyb) from Baa1(hyb)
..Outlook Action:
....Outlook remains Stable
Issuer: Bank of Scotland plc
..Affirmations:
....Long-term Issuer Rating, affirmed A1, outlook remains Stable
....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable
..Downgrades:
....Junior Subordinated Regular Bond/Debenture, downgraded to Baa2(hyb) from Baa1(hyb)
..Outlook Action:
....Outlook remains Stable
Issuer: HBOS Treasury Services Ltd
..Affirmations:
....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable (assumed by Bank of Scotland plc)
..Outlook Action:
....Outlook remains Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.
The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Alessandro Roccati
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
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United Kingdom
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Laurie Mayers
Associate Managing Director
Financial Institutions Group
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Client Service: 44 20 7772 5454
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