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Rating Action:

Moody's upgrades Lloyds Bank's issuer and deposit ratings to A1; outlook negative

02 May 2014

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
No Related Data.
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