from A2 the senior debt and deposit ratings of
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
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
the size of its non-core portfolio," says
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
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
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
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.
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
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
billion in 2012. While asset quality has improved due to a favourable
operating environment in the
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
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
2010), especially short-term wholesale funding (to
in less than one year as of year-end 2013 from
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
outstanding Enhanced Capital Notes (ECNs) for Additional Tier 1
instruments, the group's Basel III fully loaded common equity Tier 1
ratio as of
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
restart dividend payments, which would facilitate further reductions in
the government stake providing additional diversification to its
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
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
Moody's believes that Lloyds will remain exposed to potential further
PPI provisions and other potential liabilities and charges.
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