Lloyds Bank Plc€¦ · FINANCIAL INSTITUTIONS CREDIT OPINION 9 January 2017 Update RATINGS Lloyds...

FINANCIAL INSTITUTIONS

CREDIT OPINION9 January 2017

Update

RATINGS

Lloyds Bank PlcDomicile United Kingdom

Long Term Debt A1

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit A1

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Irakli Pipia 44-20-7772-1690VP-Senior [email protected]

Maija Sankauskaite 44-20-7772-1092Associate [email protected]

Laurie Mayers 44-20-7772-5582Associate [email protected]

Nick Hill 33-1-5330-1029Managing Director [email protected]

Lloyds Bank PlcSemiannual Update

Summary Rating RationaleWe rate Lloyds Bank plc's (Lloyds) long-term deposits and senior unsecured debt at A1. Theseratings are underpinned by (1) the bank's baa1 Baseline Credit Assessment (BCA); (2) theresults of our Advanced Loss Given Failure (LGF) leading to a Preliminary Rating Assessment(PRA) for both deposits and senior unsecured debt two notches above the BCA and; (3) amoderate probability of government support, resulting in a further notch of uplift on thePRA for both deposit and senior unsecured debt ratings. The bank's short-term deposit andshort-term debt ratings are Prime-1. We also assign a Counterparty Risk Assessment (CRAssessment) of Aa3(cr)/P-1(cr) to Lloyds. We rate the long- and short-term senior unsecureddebt of Lloyds Banking Group (LBG, the holding company) Baa1 and Prime-2, respectively.

On 28th June we changed the outlooks on Lloyds' and LBG's long-term senior unsecureddebt and Lloyds' deposit ratings to stable from positive, reflecting the headwinds for thebank's profitability and asset quality driven by our expectation of a weaker operatingenvironment following the UK's decision to leave the EU.

Despite these challenges, Lloyd's credit fundamentals remain strong as reflected in its baa1BCA, which is underpinned by: (1) a solid retail, commercial and insurance franchise; (2)robust capital metrics, supported by strong earnings generation; (3) still sizable conductremediation charges; (4) improved asset quality, despite the bank's expansion in riskierconsumer finance and SME segments; and (5) stable and granular deposit base, butsomewhat heightened reliance on market funds.

Exhibit 1

Key Financial Ratios

Source: Moody's Banking Financial Metrics

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBM_1053047

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit Strengths

» Solid asset quality with an impaired loan ratio at 2.0%;

» Strong capital metrics despite headwinds;

» Robust earnings generation supported by retail and commercial banking franchise;

» Stable and granular deposit base.

Credit Challenges

» Expectation of a more challenging operating environment in the UK following the outcome of the EU referendum

» Expansion of relatively riskier lending segments - consumer finance and SME - making the bank's asset quality more sensitive to adeterioration in the economic environment;

» Sizeable conduct remediation costs and other non-core losses, resulting in earnings volatility;

» Relatively high reliance on wholesale funding.

Rating OutlookThe outlook on Lloyds' deposits and senior unsecured debt and on LBG's senior unsecured debt is stable, reflecting the improvingtrends in asset quality and its strong capitalisation. The outlook also incorporates our view that a prolonged period of uncertainty forthe UK, expected following the outcome of the UK referendum, will have negative implications for the country’s medium-term growthoutlook and could lead to: (1) weaker operating profitability due to slower domestic credit demand; and (2) weaker credit quality dueto a likely modest increase in unemployment and downward pressure on property prices in the UK. These drivers will pressure revenues,asset quality and profitability metrics for all banks in the system, although improved credit fundamentals should enable Lloyds to bemore resilient to these strains than some of its peers.

Factors that Could Lead to an UpgradeLloyds' BCA could be upgraded if the bank is able to (1) reduce the impact of conduct remediation and other non-core charges on itsprofitability and return to stable net income; and (2) maintain strong asset quality and capital metrics under the more challengingoperating environment. An upgrade in Lloyds' BCA would likely lead to an upgrade in all long-term ratings.

Factors that Could Lead to a DowngradeLloyds' BCA could be lowered following (1) a more acute than expected deterioration in the UK's operating environment, in particular,economic growth, unemployment and the property market; and/or (2) a material decline in the bank's capital or leverage metrics. Adownward movement in Lloyds' BCA would likely result in downgrades to all long-term ratings.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 9 January 2017 Lloyds Bank Plc: Semiannual Update


Key Indicators

Exhibit 2

Lloyds Banking Group plc (Consolidated Financials) [1]6-162 12-152 12-142 12-132 12-123 Avg.

Total Assets (GBP million) 807,667.0 778,063.0 822,299.0 815,557.0 890,499.0 -2.44

Total Assets (EUR million) 971,854.3 1,055,689.5 1,059,604.4 980,283.9 1,097,925.1 -3.04

Total Assets (USD million) 1,079,682.1 1,146,790.6 1,282,177.7 1,350,774.3 1,447,495.1 -7.14

Tangible Common Equity (GBP million) 44,771.0 42,499.4 43,674.1 34,912.3 35,072.0 6.34

Tangible Common Equity (EUR million) 53,872.3 57,664.0 56,277.9 41,964.0 43,241.4 5.64

Tangible Common Equity (USD million) 59,849.5 62,640.1 68,099.2 57,823.9 57,009.1 1.24

Problem Loans / Gross Loans (%) 1.8 1.9 2.7 5.6 7.5 3.95

Tangible Common Equity / Risk Weighted Assets (%) 20.1 19.1 18.2 12.8 11.3 17.66

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 17.2 18.6 26.1 60.8 79.0 40.45

Net Interest Margin (%) 1.4 1.5 1.4 0.9 0.9 1.25

PPI / Average RWA (%) 3.2 1.5 1.5 1.6 1.5 2.06

Net Income / Tangible Assets (%) 0.6 0.2 0.8 0.1 -0.1 0.35

Cost / Income Ratio (%) 60.5 81.0 79.4 76.6 76.3 74.85

Market Funds / Tangible Banking Assets (%) 22.1 20.6 19.7 19.5 25.0 21.45

Liquid Banking Assets / Tangible Banking Assets (%) 27.2 28.0 26.3 22.6 24.2 25.75

Gross loans / Due to customers (%) 106.1 108.1 108.3 115.6 124.8 112.65

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate basedon IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used foraverage calculationSource: Moody's Financial Metrics

Detailed Rating ConsiderationsThe financial data in the following sections are sourced from LBG's financial statements unless otherwise stated.

Strong asset quality but we expect modest increase in impairments

Lloyds' maintained asset quality in all core portfolios in 2016 and saw a marginal decline in its reported impaired loan ratio to 2.0% atend-September 2016. This follows an 80 basis points improvement in the ratio to 2.1% during the course of 2015, largely driven by thesale of the Irish commercial loan portfolio. Following the deleveraging undertaken over the past few years, Lloyds' run-off portfolio nowaccounts for £11.5 billion, or under 3% of gross lending and around 4% of risk-weighted assets (as of end-June 2016).

The bank continues to expand its UK consumer finance and SME portfolios which have historically represented a much smallerpercentage of its gross lending relative to mortgages: lending in these segments grew by 7% and 3%, respectively, in the first half of2016, and continued to grow in Q3. In addition, Lloyds recently announced1 it had agreed to acquire MBNA Ltd (MBNA, not rated), aUK credit card business, from a subsidiary of Bank of America (rated A1/A1 stable, baa2), which, upon completion, will increase its creditcard lending portfolio by £7 billion to approximately £16 billion.

Consumer finance accounted for 7.6% of Lloyds' total gross lending excluding reverse repos and other items, while SME lendingaccounted for 6.7% as of June 2016. We believe these asset types, despite their higher profit margins, are riskier than Lloyds' traditionalmortgage and corporate credit products, potentially exposing the firm to greater downside risk if the economic environmentdeteriorates.

LBG’s impairment charges increased by 34% to £449 million in the first three quarters of 2016, and its net cost of risk deterioratedsomewhat to 14 basis points from 11 basis points in the same period last year. This was due to lower write-backs and provision releases,while gross cost of risk remained stable at around 26 basis points. The bank's cost of risk will likely show some deterioration over theoutlook period, if the weaker expected economic growth has an impact on employment. However, we expect only a moderate increasein impairments given the low interest rate environment and the bank's conservative underwriting standards.


https://www.moodys.com/credit-ratings/Bank-of-America-NA-credit-rating-600011442


Exhibit 3

Lloyds' credit risk is decliningExhibit 4

Loan book composition, June 2016

Source: LBG financial reports and results presentation Source: LBG financial reports

Lloyds' still faces significant operational risk from legacy products, which has been reflected in the record £4.8 billion provisions setaside during 2015, and additional £1.6 billion charge taken in the first nine months of 2016, of which £1.0 billion relate to mis-soldpayment protection insurance (PPI) policies. The 2016 PPI provision was largely in response to the delay in the Financial ConductAuthority’s (FCA) final policy decision on the time bar for customers to claim compensation, which effectively results in the extensionof the deadline until at least June 2019. It is worth noting, however, that the total conduct provisions in the first nine months of2016 at £1.6 billion saw a decrease of over 30%, compared to £2.4 billion in the same period of 2015. Despite the fact that Lloydseffectively front-loaded the PPI charges, it may have to set aside further provisions, given the unpredictable nature of the claims andremaining uncertainty about the potential deadline, but we expect them to be smaller than what has been set aside in 2016 We alsoview positively the fact that LBG agreed with Bank of America to only assume a limited exposure to claims for MBNA’s mis-sold PPIproducts, with potential liability capped at £240 million.

Our assigned Asset Risk score of baa1 incorporates the factors described above.

Lloyds maintains a strong retail and commercial franchise, which provides a stable base of core earnings but conduct-related and other non-core expenses likely to prolong volatility

Lloyds' leading commercial and retail banking franchise continues to generate significant revenues, providing a good quality earningsstream capable of absorbing further credit impairments and conduct-related costs. The bank remains the largest mortgage lender anddeposit-taker in the UK despite the sale of TSB Banking Group plc (TSB, Baa3 negative) to Banco Sabadell (Baa2/Baa3 stable, ba2).

Lloyds also continues to benefit from the revenue diversification provided by its bancassurance subsidiaries, Scottish Widows (SW, A2stable) and Clerical Medical. However, we note that as part of the implementation of the UK's "ring-fencing" legislation, Lloyds plansto transfer the ownership of its insurance activities to the holding company. Therefore, LBG will be the entity receiving the revenuediversification benefits from these businesses once the ring-fencing is implemented. The bank plans to include the vast majority ofits banking activities within the ring-fenced entity. If its plans are accepted, we see few challenges for Lloyds to implement the ring-fencing legislation and therefore fewer potential changes in its credit profile compared to its large UK peers.

In the nine months to 30 September 2016 Lloyds' statutory pre-tax profit increased by over 50% to £3.3 billion from £2.2 billion inthe same period of 2015, reflecting significantly lower conduct provisions and termination of deconsolidation costs with TSB. Thisreduction in non-core expenses, however, was partially offset by higher restructuring costs and the £0.8 billion charge related to theredemption of Enhanced Capital Notes (ECNs). In addition, the group benefitted from a nearly £0.5 billion gain on the sale of VisaEurope equity holdings.

The bank reported total operating income of £13.2 billion in the first three quarters of 2016, broadly unchanged from 2015, with aslight improvement in net interest income largely balanced by a decrease in other income. Net interest income grew by 1% to £8.6


https://www.moodys.com/credit-ratings/TSB-Banking-Group-plc-credit-rating-824457519

https://www.moodys.com/credit-ratings/Banco-Sabadell-SA-credit-rating-600011156

https://www.moodys.com/credit-ratings/Scottish-Widows-Limited-credit-rating-600039667


billion driven by the 9 basis points improvement in net interest margin (NIM) to 2.72% from 2.63% in the first nine months of 2015,as lower deposit and wholesale funding costs outweighed the reductions in asset yields. Following the 25 basis point base rate cut bythe Bank of England in August, Lloyds lowered a number of its standard variable mortgage rates as well as re-priced down its customerdeposits. Supporting future profitability, the bank continues to replace its high-yield legacy capital and debt instruments with lessexpensive funding and intends to take advantage of the Bank of England’s Term Funding Scheme (TFS).

We believe that the acquisition of the MBNA credit card portfolio will support Lloyds' NIM, which may otherwise face headwinds fromthe low interest rate environment and competition in the UK mortgage market. In addition, the expansion of its unsecured lendingwill also increase earnings diversification, despite higher asset risk, away from the group’s dominant segment of relatively low marginresidential mortgages.

Other income fell by 2% in the period to £4.5 billion, driven by lower insurance income as well as ongoing pricing pressures on fees andcommissions. The insurance subsidiary SW is facing some headwinds on several business lines, reflecting the challenging UK life marketand the sharp decline in higher-margin bancassurance sales through Lloyds branches. This could negatively affect its contribution to thegroup's profitability.

Lloyds continues to demonstrate strong cost management: it achieved a 2% reduction in operating expenses in the first nine monthsof 2016 and reported a cost/income ratio of 47.7% (48.0% in the same period of 2015), reflecting the acceleration of the businesssimplification initiatives.

In summary, despite improving trends, profitability remains a relative weakness for the BCA. Our assigned forward-looking Profitabilityscore of ba3 is higher than that suggested by historic earnings, which were weighed down by PPI charges and non-recurring items, andthus anticipates some recovery as the bank's legacy conduct issues resolve.

Strong capital metrics

Despite the negative impact of the pension plans deficit, £0.8 billion ECNs redemption charge, £1.6 billion of conduct costs and otherextraordinary items, Lloyds' capital position remains robust. Its fully loaded common equity tier 1 (CET1) ratio increased to 13.4% as ofSeptember 2016, on a pro-forma basis post dividend accrual, from 13.0% at end-2015, supported by strong earnings generation in thefirst nine months of 2016 as well as additionally benefitting from the available-for-sale (AFS) revaluation reserve gain on reclassificationof £20 billion of gilts to AFS from held-to-maturity. We expect the bank's CET1 ratio to remain comfortably within its target of around13%, despite the negative impact on capital of the MBNA transaction. The bank's flexible dividend policy will aid the preservation ofstrong capitalisation, as Lloyds has committed to consider the distribution of surplus capital, through special dividends or share buy-backs, in excess of c.12% CET1 plus a further year's ordinary dividend.

The bank's risk-weighted assets (RWA) remained broadly stable at £222 billion at end-September 2016. The reported fully loadedleverage ratio was 4.8% as of the same date, which is above the current regulatory requirement of 3%.

Including high trigger contingent capital instruments, the bank had a Tangible Common Equity (TCE) / RWA ratio of 20.1% as of June2016, up from 19.1% as of December 2015, according to our calculations. This ratio is materially different from the regulatory ratiosince it does not include deductions from significant investments and includes all of the bank's high trigger additional tier 1 securities.



Exhibit 5

The bank's fully-loaded CRDIV CET1 and leverage ratios are strong

2015 CET1 ratio on a pro-forma basisSource: LBG results presentations

Our assigned Capital score of aa3 reflects the strength of the group's capital and leverage position. The score also incorporates (1)the adjusted values of the TCE/RWA and leverage ratios after deducting the capital deployed at insurance subsidiaries; and (2) thevulnerability of the bank's capital position to a material downturn in the UK housing market.

Stable granular funding profile and adequate liquidity, however, despite some reduction, the use of wholesale fundingremains relatively high

The bank's funding position has improved as its use of market funding has declined significantly in recent years, mainly because ofthe reduction in the size of the bank's non-core portfolio. Nevertheless, market funding remains relatively high by global standards:it represented 22.1% of Lloyds' tangible banking assets at H1 2016, up from 20.6% at end-2015. Lloyds' net loan-to-deposit ratiodecreased to 106% in September 2016 (109% in December 2015), as the bank saw a £6 billion growth in customer accounts (mainlycorporate), while the loan book shrank by £3 billion for the same period, reflecting a reduction in low-yield mortgage lending.Meanwhile, the total wholesale funding marginally increased to £125 billion at end-Q3 2016 from £120 billion at end-2015. The group,however, continued to optimise its wholesale funding structure in 2016 through replacing more expensive legacy instruments withlower-cost funding. Our Funding Structure score of baa1 reflects the bank's relatively high use of market funds as well as our view thatLloyds benefits from a solid and granular retail deposit base.

Lloyds' liquid banking assets accounted for 27.2% of its tangible banking assets at the end of June 2016, according to our calculations,broadly in line with 28% at end-2015. The group also reported a liquidity coverage ratio (LCR) in excess of 100% and LCR-eligibleassets of £140 billion at end-Q3 2016. We expect the liquidity ratios to moderately decrease given the recent acquisition of MBNAassets and as Lloyds returns to positive organic lending growth. We assign a Liquid Resources score of baa1 to reflect this expectedtrend.

Our BCA of baa1 is positioned in the mid-point of the a3-baa2 range offered by our scorecard.

Notching ConsiderationsLoss Given Failure and Additional Notching

We apply our Advanced Loss Given Failure (LGF) analysis to Lloyds because it is domiciled in the UK, which is subject to the EU BankResolution and Recovery Directive (BRRD), and which we consider to be an operational resolution regime. We assume residual tangiblecommon equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5%run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured debt. We also assume thatthe junior proportion of Lloyds' deposits is in line with the estimated EU-wide average of 26%. These are in line with our standardassumptions.



Under these assumptions, Lloyds' deposits are likely to face a very low loss-given-failure, due to the loss absorption provided bysubordinated debt and, potentially, by senior unsecured debt should deposits be treated preferentially in a resolution, as well as thevolume of deposits themselves. This results in a Preliminary Rating Assessment (PRA) for Lloyds' deposits of a2, two notches abovethe bank's baa1 BCA. For Lloyds' senior unsecured debt, our LGF analysis also shows a very low loss-given-failure resulting from acombination of its own volume and the amount of debt subordinated to it. This results in a PRA of a2, two notches above the BCA.

For the holding company LBG's senior unsecured debt, which we assume to be economically subordinated to Lloyds' senior unsecureddebt - our LGF analysis shows a moderate loss-given-failure resulting from the combination of its own volume and the amount of debtsubordinated to it. This results in a PRA in line with Lloyds' BCA, or baa1.

For junior securities issued by Lloyds and LBG, our LGF analysis indicates a high loss-given-failure, given the small volume of debtand limited protection from more subordinated instruments and residual equity. We also incorporate additional notching for juniorsubordinated and preference share instruments reflecting coupon suspension risk ahead of failure. The resulting PRAs are set out at theend of this report.

Government Support

The implementation of BRRD has caused us to reconsider the potential for government support to benefit certain creditors. GivenLloyds' systemic importance to the UK economy, we believe there is a moderate probability of government support for the operatingcompany's junior deposits and senior unsecured debt, resulting in a one-notch uplift from the PRA.

For holding company LBG's senior unsecured debt, we consider the probability of government support to be low. This is because suchsupport would only be likely to be provided to the operating entity, to be able to maintain its critical functions and mitigate risks tofinancial stability arising from its failure, while holding company creditors would be expected to bear losses if necessary.

For other junior securities, we continue to assume a low probability of government support, and, as such, the ratings for theseinstruments do not include any related uplift.

Counterparty Risk Assessment

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessment is positioned at Aa3(cr)/P-1(cr). The CR Assessment, prior to government support, is positioned three notchesabove the Adjusted BCA of baa1, based on the cushion against default provided to the senior obligations represented by the CRAssessment by more subordinated instruments - including junior deposits and senior unsecured debt - amounting to about 23% ofTangible Banking Assets. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CRAssessment captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely onsubordination and take no account of the volume of the instrument class.

The CR Assessment also benefits from one notch of government support, in line with our support assumptions on deposits andsenior unsecured debt. This reflects our view that any support provided by governmental authorities to a bank which benefits seniorunsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well,consistent with our belief that governments are likely to maintain such operations as a going-concern in order to reduce contagion andpreserve a bank's critical functions.

About Moody's Bank Scorecard

Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong



divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.

Rating Methodology and Scorecard Factors

Exhibit 6

Lloyds Banking Group plcMacro FactorsWeighted Macro Profile Very

Strong -100%

Financial ProfileFactor Historic

RatioMacro

AdjustedScore

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 3.0% a2 ← → baa1 Quality of assets Operational risk

CapitalTCE / RWA 20.1% aa1 ↓ aa3 Capital retention Stress capital resilience

ProfitabilityNet Income / Tangible Assets 0.4% baa3 ↓ ↓ ba3 Expected trend Earnings quality

Combined Solvency Score a1 baa1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 20.6% baa1 ← → baa1 Expected trend Extent of market

funding relianceLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 28.0% a2 ↓ baa1 Expected trend Quality of liquid assets

Combined Liquidity Score a3 baa1Financial Profile baa1

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: Aa1Scorecard Calculated BCA range a3-baa2Assigned BCA baa1Affiliate Support notching 0Adjusted BCA baa1

Balance Sheet in-scope(GBP million)

% in-scope at-failure(GBP million)

% at-failure

Other liabilities 149,182 23.2% 191,052 29.7%Deposits 410,496 63.7% 368,625 57.2%

Preferred deposits 303,767 47.2% 288,579 44.8%Junior Deposits 106,729 16.6% 80,047 12.4%

Senior unsecured bank debt 40,519 6.3% 40,519 6.3%Dated subordinated bank debt 14,119 2.2% 14,119 2.2%Junior subordinated bank debt 1,601 0.2% 1,601 0.2%Preference shares (bank) 5,672 0.9% 5,672 0.9%Dated subordinated holding company debt 2,144 0.3% 2,144 0.3%Junior subordinated holding company debt 10 0.0% 10 0.0%Preference shares (holding company) 911 0.1% 911 0.1%Equity 19,319 3.0% 19,319 3.0%Total Tangible Banking Assets 643,973 100% 643,973 100%



De jure waterfall De facto waterfall NotchingDebt classInstrumentvolume +

Subordination

Sub-ordination

Instrumentvolume +

Subordination

Sub-ordination

De jure De factoLGF

notchingguidance

versusBCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment 25.5% 25.5% 25.5% 25.5% 3 3 3 3 0 a1 (cr)Deposits 25.5% 6.8% 25.5% 13.1% 2 3 2 2 0 a2Senior unsecured bank debt 25.5% 6.8% 13.1% 6.8% 2 1 2 2 0 a2Dated subordinated bank debt 6.8% 4.3% 6.8% 4.3% -1 -1 -1 -1 0 baa2Junior subordinated bank debt 4.3% 4.0% 4.3% 4.0% -1 -1 -1 -1 -1 baa3 (hyb)Cumulative bank preference shares 4.0% 3.0% 4.0% 3.0% -1 -1 -1 -1 -2 ba1 (hyb)Senior unsecured holding company debt 6.8% 6.8% 6.8% 6.8% 0 0 0 0 0 baa1Dated subordinated holding companydebt

6.8% 4.3% 6.8% 4.3% -1 -1 -1 -1 0 baa2

Holding company cumulative preferenceshares

4.0% 3.0% 4.0% 3.0% -1 -1 -1 -1 -2 ba1 (hyb)

Holding company non-cumulativepreference shares

4.0% 3.0% 4.0% 3.0% -1 -1 -1 -1 -2 ba1 (hyb)

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 3 0 a1 (cr) 1 Aa3 (cr) --Deposits 2 0 a2 1 A1 A1Senior unsecured bank debt 2 0 a2 1 A1 A1Dated subordinated bank debt -1 0 baa2 0 Baa2 Baa2Junior subordinated bank debt -1 -1 baa3 (hyb) 0 Baa3 (hyb) Baa3 (hyb)Cumulative bank preference shares -1 -2 ba1 (hyb) 0 Ba1 (hyb) Ba1 (hyb)Senior unsecured holding company debt 0 0 baa1 0 Baa1 Baa1Dated subordinated holding companydebt

-1 0 baa2 0 Baa2 Baa2

Holding company cumulative preferenceshares

-1 -2 ba1 (hyb) 0 -- Ba1 (hyb)

Holding company non-cumulativepreference shares

-1 -2 ba1 (hyb) 0 Ba1 (hyb) Ba1 (hyb)

Source: Moody's Financial Metrics



Ratings

Exhibit 7Category Moody's RatingLLOYDS BANK PLC

Outlook StableBank Deposits A1/P-1Baseline Credit Assessment baa1Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment Aa3(cr)/P-1(cr)Senior Unsecured A1Subordinate Baa2Jr Subordinate Baa3 (hyb)Pref. Stock Ba1 (hyb)Commercial Paper P-1Other Short Term -Dom Curr (P)P-1

PARENT: LLOYDS BANKING GROUP PLC

Outlook StableSenior Unsecured Baa1Subordinate Baa2Bkd Jr Subordinate -Dom Curr Baa3 (hyb)Pref. Stock Non-cumulative Ba1 (hyb)Preference Shelf (P)Ba1Other Short Term -Dom Curr (P)P-2

LLOYDS TSB BANK PLC HONG KONG BRANCH

Commercial Paper P-1LLOYDS BANK PLC (AUSTRALIA)

Outlook StableSenior Unsecured MTN (P)A1Subordinate MTN (P)Baa2Other Short Term (P)P-1

SCOTTISH WIDOWS LIMITED

Outlook StableInsurance Financial Strength A2Subordinate -Dom Curr Baa1 (hyb)

CHELTENHAM & GLOUCESTER PLC

Jr Subordinate -Dom Curr Baa3CLERICAL MEDICAL FINANCE PLC

Outlook StableBkd Jr Subordinate -Dom Curr Baa1 (hyb)

Source: Moody's Investors Service



Endnotes1 For more details please see 'LBG's acquisition of MBNA will boost market share in consumer finance creating further earnings diversification', 22 December

2016


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