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Fitch Affirms Lloyds Banking Group's IDRs and VR
July 24, 2014 / 4:22 PM / in 3 years

Fitch Affirms Lloyds Banking Group's IDRs and VR

(The following statement was released by the rating agency) LONDON, July 24 (Fitch) Fitch Ratings has affirmed Lloyds Banking Group (LBG) and Lloyds Bank Plc's (LB) Long-term and Short-term Issuer Default Ratings (IDRs) at 'A' and 'F1' respectively and the Viability Ratings (VR) at 'a-'. The Outlooks on the Long-term IDRs are Negative. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS - IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS LBG and LB's IDRs and senior debt ratings are driven by the expectation that support would be provided to this group by the UK authorities in case of need, and are at their Support Rating Floors (SRFs). The Support Ratings (SR) and SRFs reflect Fitch's view that, as systemically important banks in the UK, support for the group from the UK authorities (AA+/Stable), in case of need, is still extremely likely. RATING SENSITIVITIES - IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS LBG's and LB's SRs and SRFs, and hence their Long-term IDRs and Long-term senior debt ratings, are sensitive to Fitch's assumptions about the on-going availability of extraordinary sovereign support to these banks. Changes in assumptions could be driven by a reduction either in the sovereign's ability (for example, triggered by a downgrade of the UK's sovereign rating) or propensity to provide such support. In either case, this would result in a downward revision of the banks' SRFs. The Negative Outlooks assigned to LBG's and its subsidiaries' IDRs indicate that Fitch has identified a weakening propensity to provide support by the authorities. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for systemically important banks in the UK (and more broadly in the EU), as demonstrated by a series of legislative, regulatory and policy initiatives. We expect the EU's Bank Recovery and Resolution Directive (BRRD) to be implemented into national legislation later in 2014 or in 1H15. In Fitch's view, these regulatory developments will increase the likelihood of senior debt losses in banks if they fail solvability assessments. Fitch expects to downgrade the SRs of these institutions to '5' and revise the SRFs to 'No Floor'. The timing at this stage is likely to be some point in late 2014 or in 1H15. Following this rating action, Fitch expects to downgrade LBG's and LB's IDRs to their common VRs. While LBG and its subsidiaries' Short-term IDRs and Short-term debt ratings would be at the 'F1'/'F2'cross-over point if the IDRs were downgraded to the current VR of 'a-', Fitch considers it likely that the liquidity profiles of the group would warrant the higher of the two rating options available. As such, LBG and LB's Short-term IDRs and debt ratings may not be downgraded once support is removed as the key rating driver for the IDRs. KEY RATING DRIVERS - VRs LBG's and LB's VRs reflect LBG's strong retail and corporate banking franchises in the UK, along with reducing tail risk, improving capitalisation and healthy liquidity. Fitch expects LBG to consolidate on its strong retail position and leverage this to continue to develop its SME franchise. LBG's Fitch Core Capital (FCC) to weighted risks ratio is on an upward trajectory following a return to profit generation in 1Q14, supported by low funding costs, improved cost efficiencies and reducing impairment charges. Fitch believes that internal capital generation will be positive from 2014. Fitch expects the group will operate with a fully-loaded Basel III common equity Tier 1 ratio of about 11%. The VRs take into account some remaining credit tail risk, which is evidenced by a higher than peers', albeit reducing, impaired loans ratio. Capitalisation is vulnerable to asset valuation because unreserved impaired loans account for a high, albeit reducing, 55% of FCC at end-March 2014. For LBG, the VR also reflects relatively low holding company double leverage. RATING SENSITIVITIES - VRs Upward movement for the VR over the medium term could occur as credit fundamentals improve and tail risk reduces. For an upgrade, we would expect a reduction in impaired loans, constant healthy profitability and further strengthening of capitalisation. A downgrade would likely be driven by external factors such as a particularly sharp deterioration in the UK economy and property market that resulted in a material weakening of the group's asset quality, or increasing legacy charges penalising earnings and capital. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of subordinated debt and hybrid securities are notched down from the subsidiaries' or from their parents' VRs reflecting a combination of Fitch's assessment of their incremental non-performance risk relative to their VRs (up to three notches) and assumptions around loss severity (one or two notches). These features vary considerably by instrument. The ratings are primarily sensitive to changes in the VRs of the banks or their parents. Please refer to 'Assessing and Rating Bank Subordinated and Hybrid Securities' at www.fitchratings.com for more detail on criteria. The Alternative Tier 1 (AT1) and non-innovative instruments issued by LBG, LB and HBOS take account of the deep subordination of these instruments and fully discretionary coupon omission. They are rated five notches below LBG's and its subsidiaries' common VR, representing two for loss severity and a further three notches for incremental non-performance risk due to the easily activated deferral characteristics of these instruments. LBG, LB, HBOS and Bank of Scotland (BOS) have also issued legacy Tier 1 instruments which are rated four notches below the common VR, representing two notches for the relatively high loss severity and another two notches to reflect incremental non-performance risk. The notching on these instruments acknowledges that deferral may be more constrained than in the case of the AT1 and other Tier 1 instruments. The Upper Tier 2 instruments issued by LBG, LB, HBOS and BOS are rated three notches below the common VR, representing one notch for the relative loss severity due to the instrument's subordination and a further two notches to take account of the incremental non-performance risk on these instruments. The Lower Tier 2 debt issued by LB and HBOS is notched once from the VR to reflect the subordination and incremental loss severity. The Enhanced Capital Notes (ECN) issued by LBG as lower Tier 2 host instruments are rated two notches below the VR. These instruments have a 5% conversion trigger. Fitch considers that the conversion feature could result in recoveries that are weaker than for legacy Tier 2 instruments and are therefore notched twice for loss severity from the group's VR. KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARIES AND AFFILIATED COMPANIES LBG, LB, HBOS and BOS are managed as a group. The subsidiaries and the ultimate parent are highly integrated, in management, balance sheet fungibility and systems, meaning subsidiaries and parent's credit profiles are highly correlated. We have therefore assigned a common VR to HBOS and BOS at the same level as their immediate parent's, LB, and of their ultimate parent, LBG. This also reflects the large relative size of these entities in the group context. The VRs of HBOS and BOS are sensitive to the same factors that affect the VR of the group. They are also sensitive to changes in group structure. Given the close integration, the subsidiaries' IDRs are aligned with LBG's and are sensitive to the same factors that might drive a change in LBG's IDRs. Hence the Long-term IDRs are on Negative Outlooks. The full list of rating actions is as follows: Lloyds Banking Group (LBG) Long-term IDR: affirmed at 'A'; Negative Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a-' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior unsecured EMTN Long-term: affirmed at 'A' Senior unsecured EMTN Short-term: affirmed at 'F1' Senior unsecured notes: affirmed at 'A' All other lower Tier 2 subordinated Enhanced Capital Notes: affirmed at 'BBB' Upper Tier 2 subordinated Enhanced Capital Notes (XS0471770817, XS473103348, XS0471767276, XS0473106283): affirmed at 'BBB-' All other Upper Tier 2 subordinated bonds: affirmed at 'BBB-' Subordinated non-innovative Tier 1 discretionary debt: affirmed at 'BB' Subordinated Alternative Tier 1 instruments: affirmed at 'BB' Lloyds Bank (LB) Long-term IDR: affirmed at 'A'; Negative Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a-' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior unsecured Long-term debt: affirmed at 'A' Commercial paper and senior unsecured Short-term debt: affirmed at 'F1' Market linked securities: affirmed at 'Aemr' Lower Tier 2: affirmed at 'BBB+'' Upper Tier 2 subordinated debt: affirmed at 'BBB-' Innovative Tier 1 subordinated non-discretionary debt (US539473AE82, XS0474660676): affirmed at 'BB+' Non-innovative Tier 1 debt (XS 0156372343): affirmed at 'BB+' Other Innovative Tier 1 subordinated discretionary debt: affirmed at 'BB' HBOS Long-term IDR: affirmed at 'A'; Negative Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a-' Support Rating: affirmed at '1' Senior unsecured debt: affirmed at 'A' Innovative Tier 1 subordinated discretionary debt: affirmed at 'BB' Innovative Tier 1 subordinated non-discretionary debt: affirmed at 'BB+' Upper Tier 2 subordinated debt: affirmed at 'BBB-' Lower Tier 2 debt: affirmed at 'BBB+' Bank of Scotland (BOS) Long-term IDR: affirmed at 'A'; Negative Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a-' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior unsecured debt: affirmed at 'A' Commercial paper and senior unsecured Short-term debt: affirmed at 'F1' Lower Tier 2: affirmed at 'BBB+' Upper Tier 2: affirmed at 'BBB-' Preference stock: affirmed at 'BB+' Contact: Primary Analyst Denzil de Bie Director +44 20 3530 1592 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Vanessa Flores Associate Director +44 20 3530 1515 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 4429 91 74 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, "Assessing and Rating Bank Subordinated and Rating Criteria", dated 31 January 2014, "Rating FI Subsidiaries and Holding Companies" dated 10 August 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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