Moody’s downgrades Lloyds TSB and BoS

Moody’s Investors Services has downgraded Lloyds TSB and Bank of Scotland as a result of HBOS’ high exposure to risk.

The ratings agency has downgraded the long-term bank deposit and senior debt ratings of Lloyds TSB Bank plc to Aa3 from Aaa and the senior debt rating of Lloyds Banking Group plc to A1 from Aa1.

The bank financial strength rating of Lloyds TSB was downgraded to C+ from B+, with a negative outlook.

Elisabeth Rudman, vice president and senior credit officer in Moody’s Financial Institutions Group, says: “The downgrades reflect the high level of troubled and higher risk exposures within HBOS.

“Moody’s considers these exposures will weaken the profitability and capital adequacy of the overall group, as well as the very significant operational challenge of integrating a larger and weaker bank into the group.”

Moody’s says the lower risk appetite of Lloyds TSB will stand HBOS in good stead but will not translate across to the group’s asset quality indicators for some time due to the size of the HBOS loan book.

The task of merging the two groups represents a substantial challenge for the management team particularly in the midst of a recession, the ratings agency claims.

Rudman adds: “At Lloyds TSB’s current bank financial strength rating of C+ we consider the tolerance for further impairment charges and losses to be around £16bn (beyond what the bank has already indicated is expected to be reported by Lloyds and HBOS in 2008).

“Losses above this level would increase the downward rating pressure on the bank financial strength rating of Lloyds TSB and Bank of Scotland.”