OREANDA-NEWS. Fitch Ratings has affirmed Lloyds Bank plc's (Lloyds; A+/Stable/a) GBP18.5bn equivalent mortgage covered bonds at 'AAA'. The Outlook is Stable.

KEY RATING DRIVERS

The rating is based on Lloyds' Long-term Issuer Default Rating (IDR) of 'A+', an unchanged IDR uplift of 1 notch, an unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the 90% asset percentage (AP) that Fitch takes into account in its analysis, which is equal to the 90% 'AAA' breakeven AP (BE AP). This AP supports a 'AA' tested rating on a probability of default basis and a two-notch recovery uplift to a 'AAA' rating. The Stable Outlook on the covered bonds rating reflects that of Lloyds and a three notch-rating cushion to a downgrade of the bank.

The 90% 'AAA' BE AP is unchanged from the level published in May 2015. The equivalent BE over-collateralisation (OC) at 11.1% reflects a 'AAA' credit loss of 5.4% and an asset disposal loss component of 6.9%. The 'AAA' stressed cash flow valuation component increases the BE AP by 0.5%.

The smaller 'AAA' credit loss at 5.4% (2015: 9.7%) reflects the positive impact from the application of the updated UK criteria addendum published in December 2015, as well as a lower sustainable loan-to-value ratio for the cover assets. However, the BE OC is unchanged as a result of the lower negative carry factor (sized in the form of additional mortgages) following a reduction in the post-swap weighted average margin of the covered bonds. The asset disposal loss component in this programme is lower than Lloyd's peers' because of its well-matched asset-and-liability profile.

The unchanged D-Cap of 4 is due to what Fitch assesses as moderate risk of asset segregation, liquidity gap and systemic risk, systemic alternative management and privileged derivatives. The cover-pool specific alternative management remains low risk. The unchanged IDR uplift of 1 reflects the covered bonds exemption from bail-in and that the issuer is systemically important in its domestic market, so that Fitch considers that resolution by other means than liquidation is likely.

Fitch gives credit to the 90% AP as it is used in the asset coverage test and is published in the investor report.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by four or more notches to 'BBB' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 1 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 90%.

The Fitch breakeven AP for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.