DBRS Confirms Lloyds Banking Group at A; Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Lloyds Banking Group plc (Lloyds or the Group) including the ‘A’ Issuer and Long-Term debt ratings. The ratings of Lloyds Bank plc are also confirmed at A (high) for the Senior debt and deposit rating and R-1 (middle) for the Short-term rating. The Trend on all ratings is Stable. The Intrinsic Assessment (IA) for Lloyds Bank plc is A (high), whilst the support assessment remains SA-3, indicating DBRS’ view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the Bank’s final ratings are positioned in line with the IA.

The confirmation of the ratings reflects the Group’s powerful retail and commercial banking franchise in the UK, the strong capital position, solid funding and liquidity profile, and normalised risk profile following the successful reduction in non-core/run-off assets. DBRS also notes the significant progress that Lloyds has continued to make over the past year in restructuring the Group, highlighted by the completion of the EU-mandated divestment of branches following the sale of its remaining 40.01% stake in TSB Bank Group plc (TSB) to Banco de Sabadell in June 2015. The Group’s profitability, however, continues to be weighed down by legacy issues, most notably in the form of conduct provisions, such as for Payment Protection Insurance (PPI). DBRS expects the impact of these legacy items to decline considerably over the medium-term, and notes that positive rating pressure would arise from Lloyds demonstrating a longer track record in generating strong, stable net earnings, in addition to delivering continued success in executing its strategy. Negative rating pressure could result from a failure to maintain an acceptable level of consistent profitability or if the Group were to significantly increase its risk profile.

DBRS views Lloyds’s risk profile as generally conservative, benefitting from continued progress in deleveraging non-core/run-off assets, and improved credit quality. In 9M15, Lloyds reported a further improvement in asset quality with the Non-Performing loan ratio declining to 2.1% at end-September 2015 (compared to 6.3% at end-2013) and the impairment charge falling to 0.1% of average advances (0.6% in 2013). The Group’s reduction in its run-off portfolio to GBP 14.4 billion at end-June 2015 (from GBP 33 billion at end-2013) has also contributed to strengthening its risk profile and capital ratios. Lloyds has also made considerable improvements to its funding profile, with further growth in customer deposits and non-core/run-off asset deleveraging helping to reduce the Group’s loan to deposit to 109% at end-September 2015.

DBRS views Lloyds as having strong capitalisation. With total capital, on a transitional basis, of GBP 49.9 billion at end-September 2015, equivalent to 22.2% of RWAs, Lloyds is well positioned for regulatory requirements on loss absorbing capacity. At end-September 2015, Lloyds also reported a strong fully-loaded CRDIV Common Equity Tier 1 (CET1) ratio of 13.7%, an increase of 90 basis points (bps) from end-2014, and a fully-loaded Basel 3 leverage ratio of 5.0%, leaving the Group well-placed relative to peers.

DBRS notes Lloyds has moved closer towards closing the gap between statutory and underlying profits over the past 21 months, reflecting a reduction in legacy issues, including the sale of TSB and run-off assets, such as the Irish commercial loan portfolio in July 2015. On an underlying basis, Lloyds reported a profit before tax (PBT) of GBP 6.4 billion in 9M15, up 6% year-on-year (YoY), supported by an increase in the Banking Net Interest Margin (NIM), excluding TSB, to 2.63% in 9M15, up 24% bps YoY, and reduced impairment charges. Statutory PBT was, however, GBP 2.2 billion in 9M15 (up 33% YoY), driven in part by a further GBP 1.9 billion charge for Payment Protection Insurance (PPI – total provisions of GBP 13.9 billion over 2011 – 9M15, of which GBP 2.1 billion remains unutilised).

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Roger Lister
Initial Rating Date: January 19, 2009
Most Recent Rating Update: September 29, 2015

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