The ratings reflect Lloyds’ strong domestic franchise and management’s progress in transforming the Group into a lower-risk UK focused retail and commercial bank. The ratings also take into account the need to further strength the Group’s financial profile through retained earnings and continued clean up of its balance sheet.

In line with Scope’s bank rating methodology, the ratings on Lloyds do not incorporate any additional notches for government support, as the agency considers a potential state-bailout scenario to be increasingly unlikely as European Union banking systems move towards a resolution and recovery framework which includes creditor bailin.

In its research, Scope notes that the Group enjoys strong market positions in lower risk retail and commercial banking activities which should generate sustainable earnings. The Group is the UK’s leading provider of current accounts, savings, personal loans, credit cards and mortgages. However, performance continues to be held back by non-core, restructuring and legacy costs stemming from the merger with HBOS in 2009. In 2013, core businesses generated an underlying profit of GBP 7.6bn, while the non-core generated an underlying loss of GBP 1.4bn and accounted for half of total impairments. Reflecting the progress made, as of 2014, the remaining GBP 64bn of non-core assets is being separated into a GBP 33bn run-off portfolio with the remainder being reincorporated into the ongoing Group.

Management’s targets regarding capital, liquidity and asset quality have also been met. At year-end 2013, Lloyds reported a fully-loaded CRD 4 CET1 ratio of 10.3% on a proforma basis and a Group loan-to-deposit ratio of 113%. By year-end 2014, Lloyds is aiming for a cost income ratio between 42% and 44%, from 53% at year-end 2013 excluding St. James’s Place.

As positive rating-change drivers for Lloyds, Scope mentions the continual sell-down of the UK government’s stake (currently at 24.9%) as well as the generation of more stable earnings, supported by a continual improvement in margins and volumes for the core business accompanied by a reduction in non-core, restructuring and legacy costs. On the other hand, if Lloyds is unable to deal effectively with the evolving demands of the national regulator, this would be a negative rating-change driver.

Both the rating drivers and the rating-change drivers are detailed in Scope’s research on Lloyds which supports the ratings.

The following ratings were assigned:

Lloyds Bank plc
- Issuer Credit-Strength Rating (ICSR) at A. The ICSR represents a credit opinion on a bank’s ability to meet its contractual financial commitments on a timely basis and in full while remaining a going concern.
- Senior unsecured debt rating at A.
Lloyds Banking Group plc
- Senior unsecured debt rating at A.

In the near future Scope will rate Lloyds’ short-term debt, as well as subordinated securities and capital instruments.

Scope said that the ratings assigned today to Lloyds, as well as to 17 other large European banks, represent the first step in its rating coverage of the banking industry. The ratings assigned to Lloyds are (i) based on public information, (ii) not solicited by the issuer and (iii) with issuer participation in the process.

The methodology used for the rating assessment is “Bank Rating Methodology” published in February 2014. The methodology used for the financial forecasts of the rating analysis is “Forecasting Bank Financials” published also in February 2014. These methodologies are available on www.scoperatings.com.