Outlook remains negative reflecting Moody's view of lower systemic support trend for UK banks
London, 02 May 2014 -- Moody's Investors Service has today upgraded to A1 from A2 the senior
debt and deposit ratings of Lloyds Bank plc (Lloyds), following
the (1) stabilisation of the group's operating model and the group's
reduced downside risk; (2) significant improvements in Lloyds's
liquidity and funding metrics; (3) achievement of solid capital and
leverage metrics; and (4) improved earnings generation capacity.
"Our upgrade of Lloyds Bank to A1 from A2 follows the group's
significant progress on achieving its targets under its multi-year
restructuring and de-risking plan, whilst asset quality has
improved due to the brighter prospects for the UK operating environment
and a significant reduction in the size of its non-core portfolio,"
says Carlos Suarez Duarte, a Moody's Vice President -
Senior Analyst.
"Furthermore, Lloyds has reduced its reliance on wholesale
funding and enhanced its liquidity buffers, achieved solid capital
and leverage metrics, and improved its ability to generate earnings
from its substantial retail, commercial and bancassurance franchises,"
adds Suarez Duarte.
The upgrade of the bank's debt and deposit ratings follow the raising
of the bank's standalone baseline credit assessment (BCA) to baa1 from
baa2 (both mapping to the a bank financial strength rating (BFSR) of C-,
which has been affirmed). Moody's also affirmed Lloyds's
Prime-1 short-term rating. A full list of affected
entities and ratings is included at the end of this press release.
Lloyds's A1 supported senior debt and deposit ratings are underpinned
by the bank's strengthened standalone credit profile (as expressed
in the baa1 BCA) as well as Moody's assessment of a very high likelihood
of government support to senior depositors and bondholders if needed.
However, in line with Moody's view on systemic (government)
support for all systemically important UK banks, the outlook on
all senior and deposit ratings remains negative reflecting Moody's
view of a trend toward a lower likelihood of systemic support.
The senior debt ratings of the group holding company, Lloyds Banking
Group plc (LBG), have been upgraded to A2 from A3 remaining one
notch below those on Lloyds, reflecting the structural subordination
of the holding company to its operating subsidiary.
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
The financial data in the following sections is sourced from LBG's financial
statements unless otherwise stated.
SUCCESSFUL REDUCTION OF DOWNSIDE RISK PLACES LLOYDS IN A STRONGER OPERATIONAL
POSITION
The raising of Lloyds' standalone baseline credit assessment reflects
the group's successful execution and delivery of its multi-year
restructuring and de-risking plan, including the material
reduction of the credit risks within its legacy portfolios. The
group reported a decline in its impaired loan ratio to 6.3%
in 2013 from 8.6% in 2012. Core impaired loans also
continued to decline reaching GBP11 billion in 2013 from GBP13 billion
in 2012. While asset quality has improved due to a favourable operating
environment in the UK, Lloyds also followed a conservative provisioning
plan to aggressively reduce the size of its non-core portfolio.
This resulted in a reduction in the size of the group's non-core
portfolio by 79% to GBP64 billion in December 2013 from GBP300
billion in January 2009. Although Moody's considers that
some downside risk remains in the group's run-off portfolio,
successive capital-accretive disposals have demonstrated the group's
conservative approach to provisioning.
IMPROVED FUNDING AND LIQUIDITY PROFILE
The upgrade also reflects Lloyds's enhanced approach to balance-sheet
management in line with regulatory requirements. This has led to
(1) a significant reduction in the funding gap, Lloyds's loan
to deposit ratio declined from 148% in 2010 to 113% in 2013;
(2) reduced reliance on wholesale funding (to GBP138 billion in 2013 from
GBP298 billion in 2010), especially short-term wholesale
funding (to GBP44 billion maturing in less than one year as of year-end
2013 from GBP149 billion maturing in less than one year as of year-end
2012); and (3) improved liquidity coverage. According to Moody's
calculations, primary liquid assets at the end of 2013 accounted
for twice the firm's short-term wholesale funding.
Lloyds does not report any estimates of its liquidity coverage ratio;
however, the group says that it expects to meet the minimum requirements
well ahead of the implementation dates.
HIGHER CAPITAL AND LEVERAGE RATIOS
Moody's expects that the group's improved ability to generate earnings
will increasingly strengthen its capital levels as the deleveraging process
comes to an end. Following reduced deductions relating to its defined
benefit pension schemes and the exchange of GBP5 billion of its outstanding
Enhanced Capital Notes (ECNs) for Additional Tier 1 instruments,
the group's Basel III fully loaded common equity Tier 1 ratio as
of April 2014 was approximately 10.3% according to Moody's
calculations.
Even under conservative assumptions regarding on-going conduct
related costs, Moody's expects that Lloyds will be able to
materially further enhance its capital base over the 2014-16.
Lloyds announced that it expects to apply to the Prudential Regulation
Authority in H2 2014 to restart dividend payments, which would facilitate
further reductions in the government stake providing additional diversification
to its shareholder base.
LEADING RETAIL AND COMMERCIAL BANKING FRANCHISE PROVIDES MATERIAL "SHOCK
ABSORBERS", BUT ONGOING CONDUCT REMEDIATION COSTS LIMIT FURTHER
POSITIVE PRESSURE ON THE RATINGS IN THE SHORT TERM
The group's leading commercial and retail banking franchise continues
to generate significant revenues, providing good-quality
"shock absorbers" for further credit impairments and conduct related costs.
LBG also continues to benefit from the revenue diversification provided
by its bancassurance subsidiaries, Scottish Widows and Clerical
Medical, which paid GBP2.2 billion in dividends to the group
in 2013. However, Moody's expects a lower insurance
dividend contribution to the group going forward, given that Scottish
Widows transferred a significant amount of excess capital to LBG in 2013.
Today's action reflects Moody's view of the positive contribution
the bank's revenue generation capacity will provide against additional
conduct remediation costs. In 2013, the group reported approximately
GBP3 billion of additional provisions related to mis-selling PPI.
Moody's believes that Lloyds will remain exposed to potential further
PPI provisions and other potential liabilities and charges.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Moody's view of trend towards a lower
likelihood of systemic support for large UK banks being provided in the
event of need, following the expected implementation of a number
of regulatory initiatives. These include the proposal for ring-fencing
in the UK and further steps towards implementation of an effective recovery
and resolution regime in the EU including bail in of senior creditors.
What Could Change the Rating - Up
Upward pressure on the bank's BCA could develop if Lloyds is able to (1)
continue reducing the impact of conduct remediation on its profitability
and return to stable net income; (2) complete the ongoing deleveraging
of its run-off portfolio, further limiting downside risk
and (3) achieve further material increases in its capital and leverage
ratios.
What Could Change the Rating - Down
Downward pressure on Lloyds' BCA could develop from (1) a material deterioration
in the UK's operating environment, including a significant deterioration
in the housing market; (2) a material reversal in the trend relating
to the use of wholesale funding; and (3) sizeable, unexpected
conduct remediation charges.
Downward pressure on the senior debt and deposit ratings could develop
from material regulatory progress in the UK and Europe regarding the implementation
of burden-sharing with senior bondholders in the resolution of
large financial institutions.
List of affected ratings --
Issuer: Bank of Scotland plc
....Adjusted Baseline Credit Assessment,
Changed to baa1 from baa2
....Baseline Credit Assessment, Changed
to baa2 from baa3
....Bank Financial Strength Rating,
Upgraded to C- STA from D+ STA
....Long-term Deposit Rating,
Upgraded to A1 NEG from A2 NEG
....Issuer Rating, Upgraded to A1 NEG
from A2 NEG
....Short-Term Deposit Ratings,
Affirmed P-1
....Junior Subordinated Regular Bond/Debenture,
Upgraded to Baa3 (hyb) STA from Ba1 (hyb) STA
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)A1 from (P)A2
....Junior Subordinated Medium-Term
Note Program, Upgraded to (P)Baa3 from (P)Ba1
....Subordinate Medium-Term Note Program,
Upgraded to (P)Baa2 from (P)Baa3
....Pref. Stock Preferred Stock,
Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Subordinate Regular Bond/Debenture,
Upgraded to Baa2 STA from Baa3 STA
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A1 NEG from A2 NEG
....Outlook, Negative(m)
Issuer: Lloyds Bank Plc
....Adjusted Baseline Credit Assessment,
Changed to baa1 from baa2
....Baseline Credit Assessment, Changed
to baa1 from baa2
....Bank Financial Strength Rating,
Affirmed C- STA
....Junior Subordinated Regular Bond/Debenture,
Upgraded to Baa3 (hyb) STA from Ba1 (hyb) STA
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)A1 from (P)A2
....Junior Subordinated Medium-Term
Note Program, Upgraded to (P)Baa3 from (P)Ba1
....Subordinate Medium-Term Note Program,
Upgraded to (P)Baa2 from (P)Baa3
....Backed Senior Unsecured Shelf, Upgraded
to (P)A1 from (P)A2
....Pref. Stock Preferred Stock,
Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Subordinate Regular Bond/Debenture,
Upgraded to Baa3 STA from Ba1 STA
....Subordinate Regular Bond/Debenture,
Upgraded to Baa2 STA from Baa3 STA
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A1 NEG from A2 NEG
....Long-Term Deposit Rating,
Upgraded to A1 NEG from A2 NEG
....Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)Aa1
....Commercial Paper, Affirmed P-1
....Short-Term Deposit Ratings,
Affirmed P-1
....Short-Term Medium-Term Note
Program, Affirmed (P)P-1
....Senior Unsecured Commercial Paper,
Affirmed P-1
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed Aa1 STA
....Backed Senior Unsecured Regular Bond/Debenture,
Upgraded to A1 NEG from A2 NEG
....Backed Senior Unsecured Medium-Term
Note Program, Upgraded to (P)A1 from (P)A2
....Backed Subordinate Medium-Term
Note Program, Upgraded to (P)Baa2 from (P)Baa3
....Backed Subordinate Regular Bond/Debenture,
Upgraded to Baa2 STA from Baa3 STA
Outlook, Negative(m)
Issuer: Bank of Scotland Capital Funding L.P.
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Outlook, Stable
Issuer: Bank of Scotland plc, Australia Branch
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)A1 from (P)A2
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)P-1
....Outlook, Negative
Issuer: Cheltenham & Gloucester plc
....Backed Junior Subordinated Regular Bond/Debenture,
Upgraded to Baa3 (hyb) STA from Ba1 (hyb) STA
....Outlook, Stable
Issuer: Halifax plc
....Backed Junior Subordinated Regular Bond/Debenture,
Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Backed Subordinate Regular Bond/Debenture,
Upgraded to Baa2 STA from Baa3 STA
....Outlook, Stable
Issuer: HBOS Capital Funding No. 1 L.P.
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Outlook, Stable
Issuer: HBOS Capital Funding No. 2 L.P.
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Outlook, Stable
Issuer: HBOS CAPITAL FUNDING NO. 3 L.P.
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Outlook, Stable
Issuer: HBOS Capital Funding No. 4 L.P.
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Outlook, Remains Stable
Issuer: HBOS Group Euro Finance (Jersey)
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Outlook, Remains Stable
Issuer: HBOS Group Sterling Finance L.P.
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Outlook, Stable
Issuer: HBOS plc
....Long-term Issuer Rating,
Upgraded to A2 NEG from A3 NEG
....Short-Term Issuer Rating,
Upgraded to P-1 from P-2
....Junior Subordinated Regular Bond/Debenture,
Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)A2 from (P)A3
....Junior Subordinate Medium-Term
Note Program, Upgraded to (P)Ba1 from (P)Ba2
....Short-term Medium-Term Note
Program, Upgraded to (P)P-1 from (P)P-2
....Subordinate Medium-Term Note Program,
Upgraded to (P)Baa3 from (P)Ba1
....Subordinate Regular Bond/Debenture,
Upgraded to Baa3 STA from Ba1 STA
....Outlook, Negative(m)
Issuer: HBOS Treasury Services Plc
....Backed Senior Unsecured Regular Bond/Debenture,
Upgraded to A1 NEG from A2 NEG
....Outlook, Negative
Issuer: HBOS Treasury Services plc, Sydney Branch
....Backed Senior Unsecured Medium-Term
Note Program, Upgraded to (P)A1 from (P)A2
....Outlook, Negative
Issuer: LBG Capital No 1 plc
....Backed Subordinate Conv./Exch.
Bond/Debenture, Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Outlook, Stable
Issuer: LBG Capital No 2 plc
....Backed Subordinate Conv./Exch.
Bond/Debenture, Upgraded to Baa3 (hyb) STA from Ba1 (hyb) STA
....Outlook, Stable
Issuer: Leeds Permanent Building Society
....Backed Junior Subordinated Regular Bond/Debenture,
Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Backed Subordinate Regular Bond/Debenture,
Upgraded to Baa2 STA from Baa3 STA
....Outlook, Stable
Issuer: Lloyds Bank plc (Australia)
....Subordinate Medium-Term Note Program,
Upgraded to (P)Baa2 from (P)Baa3
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)A1 from (P)A2
....Short-Term Medium-Term Note
Program, Affirmed (P)P-1
....Outlook, Negative(m)
Issuer: Lloyds Banking Group plc
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)A2 from (P)A3
....Subordinate Medium-Term Note Program,
Upgraded to (P)Baa3 from (P)Ba1
....Pref. Stock Preferred Stock,
Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba2 (hyb) STA from Ba3 (hyb) STA
....Backed Subordinate Regular Bond/Debenture,
Upgraded to Baa2 STA from Baa3 STA
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A2 NEG from A3 NEG
....Outlook, Negative(m)
Issuer: Lloyds TSB Bank plc Hong Kong Branch
....Senior Unsecured Commercial Paper,
Affirmed P-1
Issuer: Lloyds TSB Capital 2 L.P.
....Backed Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba1 (hyb) STA from Ba2 (hyb) STA
....Outlook, Stable
Issuer: Scotland International Finance No. 2 B.V.
....Backed Subordinate Medium-Term
Note Program, Upgraded to (P)Baa2 from (P)Baa3
....Outlook, Stable
The principal methodology used in these ratings was Global Banks published
in May 2013. Please see the Credit Policy 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 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 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 rating action, and
whose ratings may change as a result of this 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.
Carlos Suarez Duarte
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
SUBSCRIBERS: 44 20 7772 5454
Johannes Felix 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 upgrades Lloyds Bank's issuer and deposit ratings to A1; outlook negative
