Lloyds/HBOS share price Monitor

LLOY.L LLOYDS TSB 297.20 p 1:23AM 59.70 (25.14%) 575,000

[SIZE=+1]Moody's may cut Lloyds TSB, HBOS ratings[/SIZE]
Sept 18, (Reuters) - (The following statement was released by the rating agency)
Sept 18 - Moody's Investors Service today announced that it had placed the
BFSR and long-term ratings of both Lloyds TSB and HBOS(LSE: HBOP.L - news) and
their associated subsidiaries on review for possible downgrade. The rating
action follows the announcement that the entities are planning a merger.
The B+ financial strength rating of Lloyds TSB Bank plc along with its Aaa
senior debt and long-term deposit ratings, as well as the Aa1 senior debt
rating for Lloyds TSB Group (LSE: LLOY.L - news) were all placed on review for possible downgrade.
The B financial strength rating of Bank of Scotland plc along with its
Aa1 senior debt and long-term deposit ratings, as well as the Aa2 debt rating
for HBOS plc (the holding company for Bank of Scotland) were all placed on
review for possible downgrade. The ratings of HBOS and its banking operations
were already on negative outlook following the announcement in April that the
group had taken substantial negative fair value adjustments and reflecting the
vulnerability of the bank to the deteriorating economic environment in the UK.
The Prime-1 short term ratings of both banks were affirmed.
The merger would create the largest retail financial services group in the UK,
whose entities had combined assets of over GBP1 trillion at the end of June
2008. The enlarged group estimates it will have a leading position in core
retail financial products and in household insurance and bancassurance, and be
the third-largest player in mid-market commercial banking.
However, Moody's considers the merger of two large financial institutions,
which poses significant integration risks, will face additional challenges
given the difficult conditions in the global financial markets and the
deteriorating economic environment in the UK.
The review will focus on the following:
- Capital strength of the enlarged group and assumptions for future capital
levels. In this respect, Moody's considers it a positive development that the
final dividend for the enlarged group I 2008 will be paid in shares and that
Lloyds TSB will subtract HBOS' negative fair value adjustments in the AFS
reserve from its capital calculations.
- Cost and revenue synergies: Moody's believes that the considerable
duplication across the two organisations offers significant potential cost
synergies, however implementing cost reductions and reducing balance sheet
exposures could have negative repercussions for the firm's reputation in the
current weak economic environment
- Quality of the joint loan books and vulnerability to the deteriorating
economic environment in the UK. Moody's said that it will consider the on-going
robustness of the commercial property loan book of both firms, given the rapid
decline in property values. With regards to residential mortgages, Moody's
noted that Lloyds TSB's mortgage book (the Cheltenham and Gloucester brand) has
a conservative profile with impairment charges still low at 0.09% of average
mortgage lending in H108. In contrast, the rating agency said that HBOS'
mortgage book contains a substantial element of specialist mortgage lending
(28% of the group's mortgage portfolio, and around 15% of the group's overall
loan portfolio) and arrears across both the standard and specialists books have
deteriorated.
- Funding profile of the enlarged group
- HBOS' structured securities portfolio and the extent to which a further
deterioration in market conditions could lead to additional substantial
negative fair value adjustments (particularly given the potential for further
stress on market prices following the Lehman bankruptcy).
- The legal structure of the group and its subsidiaries post-merger
Moody's noted that the merger is subject to regulatory and shareholder
approval, but considers that it is extremely likely to go ahead, and is
expected to be finalised by end 2008/early 2009.
Moody's also placed under review for possible downgrade the Aa2 Insurance
Financial Strength Rating ('IFSR') and A1 subordinated debt ratings of the
Clerical Medical Investment Group Limited as well as the Aa1 IFSR and Aa3
subordinated debt ratings of Scottish Widows plc, reflecting the companies'
ownership and expected level of support.
The Aa2 deposit rating of Lloyds TSB Offshore Ltd was also placed on review for
possible downgrade, in line with the action on Lloyds TSB Bank plc.
The Aa3 deposit rating of Bank of Scotland (Ireland) was also placed on review
for possible downgrade, in line with the action on its parent, as was the Aa3
deposit rating of Bank of Western Australia Ltd.
At the end of June 2008 Lloyds had total assets of GBP368 billion and HBOS
total assets of GBP681 billion. Lloyds is headquarted in London and HBOS in
Edinburgh.