PRESS RELEASE: DBRS Comments on Lloyds Banking Group plc's 1Q11 IMS; Senior at A (high), Trend Stable
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MAY 6, 2011 10:05 AM
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DBRS Comments on Lloyds Banking Group plc's 1Q11 IMS; Senior at A (high), Trend Stable
DBRS Inc. (DBRS) has today commented that the ratings for Lloyds Banking Group plc (Lloyds or the Group), including its Issuer and Long-Term Debt rating of A (high) and the ratings of Lloyds TSB Bank plc, including its Senior Debt & Deposits rating of AA (low), are unaffected by the Group's 1Q11 Interim Management Statement (IMS). The trend for all ratings is Stable.
Despite a statutory loss, which reflected the impact of a one-time non-operating item, Lloyds' results indicate continued progress towards achieving the Group's strategic initiatives, which include strengthening and right sizing the balance sheet and further transforming the funding profile. For the quarter, Lloyds reported a statutory pre-tax loss of GBP 3.5 billion, which included a GBP 3.2 billion provision charge for potential costs of customer contact and redress related to Payment Protection Insurance (PPI) complaints. On 20 April 2011, the High Court ruled that U.K. banks, including Lloyds, had failed in their appeal against positions taken by the FSA and FOS on PPI; as a result of the Court's ruling, Lloyds established the aforementioned reserve to cover the expected lifetime costs. PPI was sold alongside various debt products and repays loans if a borrower's income drops due to unemployment or illness. While the loss was significant, given the non-recurring nature of the loss, DBRS does not view this as an indication of any sustained weakness in Lloyds' business model or franchise. Accordingly, DBRS looks to underlying results as a better gauge of the Group's financial performance.
On a combined business basis, which includes the impact of certain adjustments, including fair value unwind and mark-to-market of the enhanced capital notes,
Lloyds reported a profit before tax of GBP 284 million compared to a loss of GBP 276 million in the prior quarter. The improved quarter-on-quarter underlying results were driven by lower impairment charges partially offset by reduced net interest income, which fell 10% to GBP 3.2 billion. While part of the decrease in net interest income reflects margin compression, the reduction of GBP 20.7 billion of non-core assets also has a negative impact on net interest income levels, as the balance sheet continues to shrink. Net interest margin fell 5 basis points on a linked quarter basis to 2.07%, reflecting the impact of higher funding costs as the Group successfully issued term debt in volatile capital markets. While DBRS recognises the resulting impact on the income statement, DBRS views the planned reduction in non-core assets and the issuance of higher cost, longer-term funding as prudent measures taken in order to strengthen the balance sheet, which in DBRS's view, more than offsets the income statement impact.
Although Lloyds achieved a 30% reduction in impairment charges compared to 4Q10, credit costs remain elevated. Indeed, impairment charges at GBP 2.6 billion increased as compared to the comparable period a year ago, reflecting the weakness in Ireland. In the GBP 585.4 billion customer loan book impaired loans remain high at 11% of the book. Impaired loans increased 3% during the quarter from year-end 2010, to GBP 66.3 billion, with the increase largely attributable to continued growth of impaired loans in the Irish loan book. Non-core loans and advances to customers generated approximately 75% of the Group's impaired loans reflecting their higher risk profile. While credit costs and the quantum of impaired loans remains elevated, DBRS sees the positive trend on a linked quarter basis as illustrating the progress the Group has made in removing risk from the balance sheet.
Lloyds continues to make progress in strengthening its funding and liquidity profile. During the quarter, in a competitive environment, Lloyds grew its customer deposit base by 2% to GBP 389.3 billion. As a result, the
Group's loan-to-deposit ratio improved to 148% from 154% at year-end 2010, and within the core business this ratio was 116%. Importantly, the good deposit growth along with the GBP 13.5 billion of public term issuance completed in the quarter and reduction of non-core assets afforded the Group the ability to further reduce liquidity support from the government and central bank facilities, which declined 26% to GBP 70.4 billion. Regarding capital, at 31 March 2011, the Group's core Tier 1 ratio stood at 10.0%, a slight decrease from year-end 2010 reflecting the statutory loss partially mitigated by a GBP 15 billion, or 4% decline in risk-weighted assets to GBP 390.9 billion.
Notes: All figures are in GBP unless otherwise noted.
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings -- Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.
