News Column

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

May 4, 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.


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Source: EMBIN (Emerging Markets Business Information News)


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