July 17, 2017 / 11:14 AM / 2 years ago

Fitch Rates Lloyds Bank Corporate Markets plc and Lloyds Bank International Ltd 'A(EXP)'

(The following statement was released by the rating agency) LONDON, July 17 (Fitch) Fitch Ratings has assigned Lloyds Bank Corporate Markets plc (LBCM) and Lloyds Bank International Ltd (LBIL) expected Long-Term Issuer Default Ratings (IDR) of 'A(EXP)'. The Outlooks are Stable. A full list of rating actions is at end of this commentary. LBCM is wholly-owned by Lloyds Banking Group plc (LBG, A+/Stable/a) and will head the group's non-ring-fenced bank sub-group. This is in line with Prudential Regulation Authority requirements to implement ring-fencing rules by 1 January 2019. Under ring-fencing rules, banks with core deposits (mainly from individuals and SMEs) in excess of GBP25 billion are required to separate their core retail banking from investment or wholesale banking businesses. LBG's approach to ring-fencing is to maximise the size of its ring-fenced bank and maintain a small non-ring-fenced bank. This is driven by its largely commercial banking-focussed business model with moderate capital markets and trading activities. Fitch expects to assign final ratings on the successful implementation of LBG's planned restructuring, under which non-ring-fenced activities will be transferred into LBCM, and Jersey-based LBIL which will become a wholly-owned subsidiary of LBCM. KEY RATING DRIVERS IDRS, DERIVATIVE COUNTERPARTY RATING AND SUPPORT RATING LBCM's and LBIL's expected IDRs are equalised with LBG's 'a' Viability Rating (VR), reflecting our view of an extremely high probability of support for LBCM and LBIL by LBG, should it be required. This view also drives the expected Support Rating of '1(EXP)'. The IDRs are equalised with LBG's VR as opposed to LBG's IDR to reflect insufficient certainty that LBCM's and LBIL's senior creditors would benefit from LBG's qualifying junior debt buffer in a resolution of the group. This is primarily because we believe that in a resolution of the group the resolution authority's main objective would be the protection of senior creditors of LBG's ring-fenced bank. We believe that LBG would have a strong ability and propensity to support LBCM and LBIL, based on our expectation that support would be manageable for LBG given LBCM's and LBIL's small relative size (around 4% of end-2016 LBG Group loans) and the high reputational risk for LBG from allowing either entity to default. Fitch believes that LBCM will be a key and integral part of the group, and LBIL will be strategically important within the group. We expect that LBG would be the primary source of support for LBCM, and the ultimate source of support for LBIL, in the event that LBCM is unable to support LBIL on its own. Fitch does not assign VRs to LBCM or LBIL, due to our view that neither entity would have a meaningful standalone franchise without the ownership by LBG. An expected Derivative Counterparty Rating (DCR) has been assigned to LBCM due to its significant derivatives activity. The DCR is at the same level as the Long-Term IDR because derivative counterparties have no definitive preferential status over other senior obligations in a resolution scenario RATING SENSITIVITIES IDRS, DERIVATIVE COUNTERPARTY RATING AND SUPPORT RATING The IDRs and DCR of LBCM and LBIL's IDRs are equalised with LBG's VR and are therefore sensitive to changes in our assumptions around the propensity or ability of LBG to provide timely support. This could result from a change to LBG's VR, or to the strategic importance of these subsidiaries within the group. A material increase in the size of either entity could weaken LBG's ability to provide support and could result in a widening of notching between their IDRs and LBG's VR. A downgrade of LBG's VR would indicate a weakening of LBG's ability to support its subsidiaries and result in a downgrade of LBCM's and LBIL's IDRs. The prohibition or restriction by LBG's regulator to upstream dividends from the ring-fenced bank to support non-ring fenced entities could also result in a downgrade of both entities' IDRs. The rating actions are as follows: Lloyds Bank Corporate Markets plc Long-Term IDR assigned at 'A(EXP)'; Outlook Stable Short-Term IDR assigned at 'F1(EXP)' Support Rating assigned at '1(EXP)' Derivative Counterparty Rating assigned at 'A(dcr)(EXP)' Lloyds Bank International Ltd Long-Term IDR assigned at 'A(EXP)'; Outlook Stable Short-Term IDR assigned at 'F1(EXP)' Support Rating assigned at '1(EXP)' Contact: Primary Analyst Krista Davies Director +44 203 530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Marc Ellsmore Associate Director +44 203 530 1438 Committee Chairperson Patrick Rioual Senior Director +49 69 768076 123 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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