LLOYDS BANKING GROUP PLC
Fitch Ratings has affirmed
Fitch has also affirmed the LT IDRs of LBG's ring-fenced bank subsidiaries,
Rating Withdrawals
Fitch has withdrawn the Support Ratings (SRs) of '5' and Support Rating Floors (SRFs) of 'No Floor' of LBG, LB and BOS, as well as the SRs of '1' of HBOS, LBCM and LBCMW, as they are no longer relevant to Fitch's coverage following the publication of the updated Bank Rating Criteria in
Key Rating Drivers
Viability Ratings (VR) - LBG, LB, BOS
Fitch has affirmed LBG's, LB's and BOS's VRs at 'a'. Fitch assesses LBG on a consolidated basis as it is managed as a group and is highly integrated. LBG acts as the holding company for the group, and its VR is equalised with that of the main operating subsidiaries, reflecting LBG's role in the group and moderate holding company double leverage, which is comfortably below 120%.
The 'a' VR reflects LBG's strong business profile in the
Key Rating Driver 1
LBG's loan quality has remained resilient to the pandemic, and we expect its Stage 3 loans ratio (end-3Q21: 1.9% as per Fitch calculations) to deteriorate only mildly, and remain on average just above 2%, as government-support measures wind down. We have therefore revised our assessment of LBG's asset quality to 'a' from 'a-'.
Fitch expects higher non-performance ratios in more vulnerable portfolios such as unsecured consumer finance and SME lending than in LBG's low-risk mortgage book, which accounted for 68% of loans at end-3Q21. LBG's conservative underwriting, particularly in mortgage lending, underpins the bank's robust asset quality.
Key Rating Driver 2
LBG has consistently achieved strong profitability metrics, and we expect its four-year average operating profit/risk-weighted assets (RWA; 9M21: 4%) to remain above 2.5% over the rating horizon. As a result, we have upgraded the earnings and profitability score to 'a+' from 'a'. Fitch expects LBG's profitability to continue to benefit from strong revenue generation, rising interest rates and only modest loan impairment charges in 2022-2023, given the improved economic outlook and increasing customer activity. The group's strategy to improve income diversification and cost efficiency should also support earnings resilience.
Key Rating Driver 3
Capitalisation is strong and should be supported by the bank's strong profitability and RWA optimisation, despite some regulatory RWA inflation in 2022. We expect the common equity Tier 1 (CET1) ratio (16.1% at end-3Q21; net of software benefit and IFRS transitional relief) to gradually fall towards, but remain above, management's target of about 13.5% (about 200bp above regulatory minimum capital requirements) through higher shareholder distributions.
Key Rating Driver 4
LBG's funding and liquidity profile is strong, supported by a large deposit base, due to a leading retail franchise and good access to wholesale-funding markets. Deposit inflows since the onset of the pandemic have improved the loans/deposits ratio to below 95% at end-3Q21, but a proportion of these inflows may prove transitory.
Key Rating Driver 5
LB's and BOS's Long-Term IDRs of 'A+' are notched up once from the respective banks' VRs to reflect additional protection to external senior creditors afforded by the internal minimum requirements for own funds and eligible liabilities (MREL) debt buffers. We also incorporate this benefit into the IDRs of HBOS, LBCM and LBCMW. No VRs have been assigned to HBOS, LBCM and LBCMW as Fitch believes that these entities cannot be assessed meaningfully on a standalone basis. Their IDRs reflect a very high probability of shareholder support from LBG, if needed.
LBG's LT IDR of 'A' is aligned with the group's VR, due to our expectation that the group's consolidated qualifying junior debt (QJD) buffer will not be rebuilt and, consequently, will remain sustainably below 10% of RWAs (end-1H21: 8.8%) over the rating horizon.
The Short-Term IDRs of 'F1' for all entities are the lower of two options mapping to the respective Long-Term IDRs, because our assessment of the group's funding and liquidity profile, which we score at 'a', does not warrant higher Short-Term IDRs.
Key Rating Driver 6
GOVERNMENT SUPPORT RATINGS (GSRs)
The GSRs assigned to LBG, LB and BOS reflect Fitch's view that senior creditors cannot rely on extraordinary support from the
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
LBG's ratings are primarily sensitive to changes in the group's VR, which has material headroom at the current level, given LBG's strong business profile and performance metrics. Therefore, a negative rating action is unlikely over the rating horizon. However, the VR could be downgraded in case of an unexpected severe setback to the economic outlook.
We could also downgrade the VR as a result of sharp deterioration in the four-year average Stage 3 loans ratio to above 3% without a clear path to reduction, in combination with a significant weakening in operating profit below 1.5% of RWAs, and if we expect the CET1 ratio to remain materially below the bank's current target of about 13.5%.
LBG's VR and IDR could also be downgraded if the holding company's double leverage increases above 120%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of LBG's VR would most likely result from an upgrade of the capitalisation and leverage score. We could upgrade the capitalisation and leverage score if the CET1 ratio remains at or above the bank's current target, and if this is supported by a continued record of strong profitability and healthy asset quality and absent of a more aggressive risk appetite.
LBG's LT IDR could be upgraded to one notch above the VR if the group's consolidated qualifying QJD buffer is rebuilt and likely to be maintained over 10% of RWA, which we currently do not expect over the rating horizon.
An upgrade of the GSRs of LBG, LB and BOS would be contingent on a positive change in the sovereign's propensity to support domestic banks, which Fitch deems highly unlikely in light of the resolution framework in place.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
DEBT RATINGS, DERIVATIVE COUNTERPARTY RATINGS (DCR)
The long-term senior unsecured debt ratings and DCRs of LBG and of its subsidiaries, where available, are in line with the respective LT IDRs.
The Tier 2 debt issued by LBG, LB, BOS and HBOS is rated two notches below their respective VRs (LBG's VR in the case of HBOS). This is the baseline notching under our criteria, reflecting high loss severity for this type of debt.
The ratings of legacy upper Tier 2 subordinated debt issued by LBG, LB, HBOS and BOS are notched down three times, twice for loss severity and once for incremental non-performance risk.
The Additional Tier 1 (AT1) and legacy Tier 1 and preferred stock issued by LBG, LB and BOS are rated four notches below the respective anchor VRs, two each for loss severity and incremental non-performance risk. Our assessment is based on the group operating with a CET1 ratio comfortably above its maximum distributable amount (MDA) thresholds, and our expectation that this will continue.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The long-term senior unsecured debt ratings and DCRs would be downgraded if the LT IDRs of the respective entities are downgraded.
The Tier 2 debt, AT1, legacy Tier 1 debt and preferred stock ratings would be downgraded if the respective VRs are downgraded.
The ratings of the AT1 and other discretionary Tier 1 instruments are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in LBG's VR. The instruments' ratings could be downgraded if the headroom to the MDA-thresholds drop below 100bp.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The long-term senior unsecured debt ratings and DCRs would be upgraded if the LT IDRs of the respective entities are upgraded.
The Tier 2 debt, AT1, legacy Tier 1 debt and preferred stock ratings would be upgraded if the respective VRs are upgraded.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
SHAREHOLDER SUPPORT RATINGS (SSRs)
The SSRs of HBOS, LBCM and LBCMW are aligned with LBG's LT IDR and reflect a very high probability of shareholder support, in case of need, given the issuers' strategic roles in the group, their high level of ownership by LBG and high reputational risks for LBG in the event of their default.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The subsidiaries' LT IDRs that benefit from an uplift due to resolution funds could be downgraded if we no longer expect the group's resolution planning and requirements to afford the subsidiaries' senior creditors protection in a group failure.
The SSRs and IDRs of HBOS, LBCM and LBCMW are also sensitive to a reduction in LBG's ability or propensity to support the entities.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The subsidiaries' SSRs and IDRs would be upgraded if LBG's IDRs are upgraded.
VR ADJUSTMENTS
The operating environment score of 'aa-' is at the lower end of the range because it is constrained by the
The capitalisation and leverage score of 'a' has been assigned below the 'aa' category implied score, due to the following adjustment reason: historical and future metrics (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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