DBRS: PPI Hits Lloyds’ Results; but Core Franchise Resilient

Summary:
• 4Q13 statutory loss after tax of GBP 1.1 billion and full year 2013 statutory loss after tax of GBP 0.8 billion (2012 statutory loss after tax of GBP 1.4 billion), as legacy issues continue to hit results, including GBP 3.1 billion PPI charge in 2013
• On a Group underlying basis Profit before Tax (PBT) of GBP 6.2 billion (up 140%) and increases in Net Interest Income (NII) and lending showed the strength of core businesses; capital and funding remain on a solid footing
• DBRS rates Lloyds Bank plc Senior Unsecured Long-Term Debt at AA (low) with a Negative trend

From DBRS Ratings Limited’s (DBRS) perspective, the 4Q13 and full year 2013 results of Lloyds Bank plc (Lloyds or the Bank) show the core franchise is resilient, even though legacy issues and restructuring continue to have a significant impact on overall profitability. On an underlying basis the Bank reported Profit before Tax (PBT) of GBP 6.2 billion (up 140% year-on-year). Revenues and NII were up in the core banking businesses, there was loan growth of 3% in the core loan books, and the Group net interest margin (NIM) was slightly up at 2.12%. Impairment charges were down 47% on 2012 to GBP 3 billion in 2013, signalling the return to a more normalised asset profile at the Bank.

Nevertheless, legacy and restructuring charges are still negatively affecting the Bank’s results. The major item was a GBP 3.1 billion charge related to Payment Protection Insurance (PPI) in 2013 (including GBP 1.8 billion in 4Q13), and although the Bank indicates the pace of new claims has slowed, DBRS considers there is still a possibility of further charges in 2014. Restructuring charges from the Simplification programme and charges related to the EU-mandated sale of branches (TSB Bank) were GBP 1.5 billion in 2013 and the Bank expects charges to end in 2014. The Bank has made good progress in reducing costs (reaching a reported cost-income ratio of 51.2% in 2013) and continues to target further reductions in costs. Positively, the Bank has continued to reduce the Non-Core portfolio, which totalled GBP 64 billion at the end of 2013 (down from GBP 98 billion at the end of 2012). Lloyds announced that most of the retail Non-Core portfolios (including UK specialist mortgages and Dutch mortgages) will no longer be classified as Non-Core, The Bank will now report the remaining Non-Core assets as a run-off portfolio of GBP 33 billion.

Lloyds has continued to strengthen the balance sheet and posted solid capital ratios at the end of 2013. The pro forma fully loaded CRD4 Common Equity Tier 1 ratio was 10.3% and pro forma Basel 3 leverage ratio (January 2014 rules) was 4.5%. DBRS considers that Lloyds is in a good position to manage any increase as final requirements evolve. Funding remains solid with a 100% loan-to-deposit ratio in the core bank and 113% in the overall group.

DBRS notes that Lloyds’ ratings are underpinned by the strength of the Bank’s customer franchise in the UK. Progress by the Bank in resolving the protracted legacy issues and reporting stable net income could lead to a Stable trend for the ratings.

DBRS rates Lloyds Bank plc Senior Unsecured Long-Term Debt at AA (low) with a Negative trend.

Notes:
All figures are in British Pound (GBP) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]