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Rating Action:

Moody's upgrades Lloyds Bank Plc's long-term deposit and senior unsecured debt ratings to Aa3

27 Sep 2017

Action concludes review for upgrade and anticipates further issuance of loss-absorbing debt and incorporates directional effects of "ring-fencing" on ratings

London, 27 September 2017 -- Moody's Investors Service, ("Moody's") today upgraded the long-term deposit ratings and long-term senior unsecured debt ratings of Lloyds Bank Plc (Lloyds) by one notch to Aa3 from A1. The bank's standalone baseline credit assessment (BCA) was upgraded to a3 from baa1. The agency also upgraded the ratings on the senior unsecured debt issued by the bank's holding company, Lloyds Banking Group plc (LBG), to A3 from Baa1. The outlook on the bank's and holding company's long-term ratings changed to stable from Rating Under Review. The bank's short-term ratings were affirmed at Prime-1. Lloyds' long-term Counterparty Risk Assessment (CRA) was confirmed at Aa3(cr), the short-term CRA was affirmed at Prime-1(cr).

The rating action concludes Moody's review for upgrade that began on 2 August 2017.

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

RATINGS RATIONALE

The upgrade of the BCA to a3 reflects Lloyds' improved asset risk, stable capital levels and Moody's expectation that Lloyds' profitability will continue to increase as the bank benefits from lower legacy conduct charges and cost reductions, despite the agency's expectations of a more challenging macroeconomic environment ahead. Moody's believes that Lloyds has now booked the bulk of charges related to its mis-selling of Payment Protection Insurance (PPI), and expects that these costs will decline relative to previous years given current levels of provisions and the Financial Conduct Authority's imposition of an August 2019 deadline for customers to claim compensation. Lloyds has taken a cumulative GBP18 billion in PPI-related charges since 2011.

The upgrades of Lloyds' BCA and long-term deposit and senior unsecured ratings also incorporate the likely impact of the implementation of ring-fencing regulation in the UK. This will result in Lloyds becoming the group's ring-fenced banking entity, with the non-ring-fenced bank and insurance business established as sister affiliates, beneath LBG. The effect of these changes on Lloyds' strong credit fundamentals will be small since it will still account for around 97% of the loans and advances of the group, the main differences being a funding base drawn proportionately more from domestic deposits and less from offshore and wholesale funding, and a greater focus on retail and commercial banking without the contribution of financial market activities and insurance.

Moody's rating action on the bank's long-term deposit and senior unsecured ratings also considers the benefit to its senior creditors from the group's planned issuance of additional senior holding company debt to meet its Minimum Requirements for Eligible Liabilities and own Funds (MREL), which have been published by the Bank of England. The rating agency expects Lloyds to issue GBP4-5 billion of long-term senior unsecured holding company debt annually for the next few years, which will provide a larger buffer to absorb losses in resolution. Under Moody's revised Advanced Loss Given Failure (LGF) analysis, the rating agency expects this buffer to be of a sufficient magnitude by 2019 to further reduce the likely loss-given-failure for Lloyds' senior creditors, resulting in three notches of uplift above the bank's adjusted BCA for long-term debt and deposits (previously two notches). The revised LGF analysis was undertaken following updates to Moody's Banks rating methodology, published on 26 September 2017, which can be accessed via the following link: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1065675.

However, Moody's expectation for holding company debt issuance is unlikely to be sufficient within the next few years to lead to a higher rating on LBG's own senior unsecured debt.

Moody's continues to expect a moderate probability of government support for Lloyds' deposits and senior unsecured creditors, but following the recent downgrade of the government of the United Kingdom to Aa2 stable, this no longer leads to further uplift to the ratings (previously one notch). This offsets the benefit of lower loss-given-failure and as such these ratings are upgraded by one notch, in line with the upgrade in the BCA. For subordinated and other junior securities, as well as LBG's senior debt, Moody's continues to believe that the probability of government support is low, resulting in no rating uplift.

The outlooks on Lloyds' and LBG's long-term ratings are stable, reflecting Moody's view that following the upgrade, the ratings now incorporate Moody's expectation of further improvements in fundamentals, the consequences of ring-fencing, and additional loss-absorbency.

WHAT COULD MOVE THE RATINGS UP/DOWN

Given the recent upgrade, a further upgrade of the BCA is unlikely in the near-term. LBG's senior unsecured ratings could be upgraded were Moody's to anticipate a material and sustainable increase in loss absorbency for creditors beyond that which it currently expects.

A downgrade is unlikely in the near-term. However, a downgrade of Lloyds' BCA could be driven by (i) a more acute than expected deterioration in the UK's operating environment, in particular, in terms of economic growth, unemployment and the property market; and/or (ii) a material decline in the bank's capital metrics. A downward movement in Lloyds' BCA would likely result in downgrades to all long-term ratings.

Lloyds's long-term senior unsecured debt and deposit ratings could also be downgraded in response to a failure to make the expected increase in holding company debt, which would increase loss-given-failure for these instruments.

LIST OF AFFECTED RATINGS

Issuer: Lloyds Banking Group plc

..Upgrades:

....Backed Junior Subordinated Regular Bond/Debenture, upgraded to Baa2(hyb) from Baa3(hyb)

....Senior Unsecured Medium-Term Note Program, upgraded to (P)A3 from (P)Baa1

....Subordinate Medium-Term Note Program, upgraded to (P)Baa1 from (P)Baa2

....Senior Unsecured Shelf, upgraded to (P)A3 from (P)Baa1

....Preference Shelf, upgraded to (P)Baa3 from (P)Ba1

....Subordinate Shelf, upgraded to (P)Baa1 from (P)Baa2

....Preferred Stock Non-cumulative, upgraded to Baa3(hyb) from Ba1(hyb)

....Subordinate Regular Bond/Debenture, upgraded to Baa1 from Baa2

....Senior Unsecured Regular Bond/Debenture, upgraded to A3 Stable from Baa1 Rating Under Review

..Confirmations:

....Other Short Term, confirmed at (P)P-2

..Outlook Action:

....Outlook changed to Stable from Rating Under Review

Issuer: Lloyds Bank Plc

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to a3 from baa1

....Baseline Credit Assessment, upgraded to a3 from baa1

....Junior Subordinated Regular Bond/Debenture, upgraded to Baa2(hyb) from Baa3(hyb)

....Senior Unsecured Medium-Term Note Program, upgraded to (P)Aa3 from (P)A1

....Backed Senior Unsecured Medium-Term Note Program, upgraded to (P)Aa3 from (P)A1

....Backed Senior Unsecured Shelf, upgraded to (P)Aa3 from (P)A1

....Subordinate Medium-Term Note Program, upgraded to (P)Baa1 from (P)Baa2

....Backed Subordinate Medium-Term Note Program, upgraded to (P)Baa1 from (P)Baa2

....Backed Subordinate Shelf, upgraded to (P)Baa1 from (P)Baa2

....Preferred Stock, upgraded to Baa3(hyb) from Ba1(hyb)

....Subordinate Regular Bond/Debenture, upgraded to Baa1 from Baa2

....Backed Subordinate Regular Bond/Debenture, upgraded to Baa1 from Baa2

....Senior Unsecured Regular Bond/Debenture, upgraded to Aa3 Stable from A1 Rating Under Review

....Backed Senior Unsecured Regular Bond/Debenture, upgraded to Aa3 Stable from A1 Rating Under Review

....Long-term Bank Deposits, upgraded to Aa3 Stable from A1 Rating Under Review

..Confirmation:

....Long-term Counterparty Risk Assessment, confirmed at Aa3(cr)

..Affirmations:

....Commercial Paper, affirmed P-1

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

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

....Multiple Seniority Medium-Term Note Program (Local Currency) , Affirmed (P)P-1

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

..Outlook Action:

....Outlook changed to Stable from Rating Under Review

Issuer: HBOS plc

..Upgrades:

....Long-term Issuer Rating, upgraded to Aa3 Stable from A1 Rating Under Review

....Senior Unsecured Medium-Term Note Program, upgraded to (P)Aa3 from (P)A1

....Subordinate Regular Bond/Debenture, upgraded to Baa1 from Baa2

....Subordinate Medium-Term Note Program, upgraded to (P)Baa1 from (P)Baa2

....Junior Subordinated Regular Bond/Debenture, upgraded to Baa2(hyb) from Baa3(hyb)

....Junior Subordinate Medium-Term Note Program, upgraded to (P)Baa2 from (P)Baa3

..Confirmation:

....Long-term Counterparty Risk Assessment, confirmed at Aa3(cr)

..Affirmations:

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

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

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

..Outlook Action:

....Outlook changed to Stable from Rating Under Review

Issuer: Bank of Scotland plc

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to a3 from baa1

....Baseline Credit Assessment, upgraded to a3 from baa1

....Long-term Issuer Rating, upgraded to Aa3 Stable from A1 Rating Under Review

....Junior Subordinated Regular Bond/Debenture, upgraded to Baa2(hyb) from Baa3(hyb)

....Backed Senior Unsecured Medium-Term Note Program, upgraded to (P)Aa3 from (P)A1

....Backed Junior Subordinate Medium-Term Note Program, upgraded to (P)Baa2 from (P)Baa3

....Backed Subordinate Medium-Term Note Program, upgraded to (P)Baa1 from (P)Baa2

....Preferred Stock Non-cumulative, upgraded to Baa3(hyb) from Ba1(hyb)

....Subordinate Regular Bond/Debenture, upgraded to Baa1 from Baa2

....Backed Senior Unsecured Regular Bond/Debenture, upgraded to Aa3 Stable from A1 Rating Under Review

....Long-term Bank Deposits, upgraded to Aa3 Stable from A1 Rating Under Review

..Confirmation:

....Long-term Counterparty Risk Assessment, confirmed at Aa3(cr)

..Affirmations:

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

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

..Outlook Action:

....Outlook changed to Stable from Rating Under Review

Issuer: Bank of Scotland Capital Funding L.P.

..Upgrade:

....Backed Preferred Stock Non-cumulative, upgraded to Baa3(hyb) from Ba1(hyb)

No Outlook assigned

Issuer: HBOS Treasury Services Plc

..Upgrades:

....Senior Unsecured Regular Bond/Debenture, upgraded to Aa3 Stable from A1 Rating under Review

....Backed Senior Unsecured Regular Bond/Debenture, upgraded to Aa3 Stable from A1 Rating under Review

..Outlook Action:

....Outlook changed to Stable from Rating Under Review

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

..Upgrade:

....Backed Preferred Stock Non-cumulative, upgraded to Baa3(hyb) from Ba1(hyb)

No Outlook assigned

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

..Upgrade:

....Backed Preferred Stock Non-cumulative, upgraded to Baa3(hyb) from Ba1(hyb)

No Outlook assigned

Issuer: HBOS Capital Funding No. 4 L.P.

..Upgrade:

....Backed Preferred Stock Non-cumulative, upgraded to Baa3(hyb) from Ba1(hyb)

No Outlook assigned

Issuer: Halifax plc

..Upgrades:

....Backed Junior Subordinated Regular Bond/Debenture, upgraded to Baa3(hyb) from Ba1(hyb)

....Backed Subordinate Regular Bond/Debenture, upgraded to Baa1 from Baa2

No Outlook assigned

Issuer: HBOS Group Sterling Finance L.P.

..Upgrade:

....Backed Preferred Stock Non-cumulative, upgraded to Baa3(hyb) from Ba1(hyb)

No Outlook assigned

Issuer: Leeds Permanent Building Society

..Upgrades:

....Backed Junior Subordinated Regular Bond/Debenture, upgraded to Baa3(hyb) from Ba1(hyb)

....Backed Subordinate Regular Bond/Debenture, upgraded to Baa1 from Baa2

No Outlook assigned

Issuer: Cheltenham & Gloucester plc

..Upgrade:

....Junior Subordinated Regular Bond/Debenture, upgraded to Baa2(hyb) from Baa3(hyb)

No Outlook assigned

Issuer: Lloyds Bank plc (Australia)

..Upgrades:

....Senior Unsecured Medium-Term Note Program, upgraded to (P)Aa3 from (P)A1

....Subordinate Medium-Term Note Program, upgraded to (P)Baa1 from (P)Baa2

..Affirmation:

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

..Outlook Action:

....Outlook changed to Stable from Rating Under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. 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.

Michael Eberhardt, CFA
VP - Senior Credit Officer
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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