Fitch puts HBOS and Lloyds on negative ratings watch

Fitch Ratings has placed HBOS and Lloyds TSB on a negative ratings alert due to concerns that the merger will damage Lloyds’ credit profile.

The ratings agency has placed HBOS’ long-term Issuer Default Rating of ‘AA’ and Lloyds’ long-term IDR of ‘AA+’ on rating watch negative.

Fitch says it is considers Lloyds to be conservatively managed and that the bank has been relatively unaffected by the credit crunch.

HBOS is rated lower than Lloyds as it has a higher exposure to the deteriorating property market and a greater reliance on wholesale funding markets.

Fitch has voiced concern that by taking on the lower rated HBOS, Lloyds’ credit profile may suffer.

In a statement, Fitch says: “The rating watch in respect of Lloyds reflects the integration risks in undertaking such a substantial transaction at a time of extraordinary financial market turbulence.

“The ratings actions in respect of HBOS reflect primarily the execution risk of such a substantial transaction in volatile and unpredictable markets.”

But the ratings agency also says the news of the takeover should prevent market speculation spilling over to dent confidence among HBOS’ creditors.

Fitch expects to resolve the rating watches once the deal has gone through, which it expects to take place late this year or early 2009.