Lloyds Banking Group announces Tier 2 SGD 10NC5 notes at the IPG of 5.5%

Lloyds Banking Group PLC (“Lloyds”) announced a new 10NC5 Tier 2 (“T2”) SGD notes at the initial price guidance (“IPG”) of 5.50%. The T2 issuance is expected to mature on 22 August 2033, while the first call and reset date falls on 22 August 2028. If uncalled, the reset rate will be based on the prevailing 5-year SORA-OIS plus the initial margin upon issuance.

Lloyds is a financial services group primarily operating in the UK. It serves mainly retail and commercial customers, with its business segments divided across – (1) Retail, (2) Commercial Banking, and (3) Insurance, Pensions and Investments. Lloyds prides itself in being highly digitalized, with an estimated 20.6m digitally active customers out of ~26m total customers across its franchise.

Looking at its financial performance, for the half year ended 30 June 2023 (“1H23”), Lloyds sees an overall increase in net income from GBP 8,289m in 1H22 to GBP 9,186m in 1H23. The rise had been mostly due to a 14% higher net interest income and 7% higher other income in 1H23 as compared to 1H22. However, total costs had increased from GBP 4,250m in 1H22 to GBP 4,483m in 1H23 – largely due to continued inflationary pressure. Despite the rise in operating costs, Lloyds’ cost-to-income ratio fell to 48.8% in 1H23, as compared to 51.3% in 1H22. The statutory profit after tax rose considerably by 17% from GBP 2,447m in 1H22 to GBP 2,864m in 1H23 – mostly due to higher net income which offset the increase in operating costs.

Lloyds continue to see an improvement in the net interest margin (“NIM”) with the rise in interest rates, increasing to 3.18% in 1H23 from 2.77% in 1H22. However, on a quarterly basis, NIM had fallen to 3.14% in 2Q23 as compared to 3.22% in 1Q23, reflecting a higher passthrough of deposit rates. Management has guided for the net interest margin to remain above 310 basis points (“bps”) for FY23. Both deposits and lending had remained resilient amidst an uncertain economic environment in the UK, falling slightly by 0.7% and 0.4% quarter-on-quarter respectively in 2Q23.

In terms of credit quality, Lloyds’ CET1 ratio stands at 14.2% as of 30 June 2023, falling from 15.1% as of 31 December 2022. Accounting for the full impact of the announced share buyback at the end of FY22, the pro forma CET1 ratio as of 31 December 2022 is instead lower at 14.1%. Across 1H23, Lloyds had a strong capital generation of 111 bps, which was mostly offset by regulatory changes, the acquisition of Tusker, and dividend payouts. Lloyds intends to sustain the CET1 ratio at a minimum of 12.5%, plus a management buffer of around 1%. The liquidity coverage ratio and net stable funding ratio are at 142% and 130% respectively, and continue to be well above the regulatory requirement of 100%.

Table 1
SGD senior issuances from banks

At the IPG of 5.50%, the new issue by Lloyds appears to be fairly attractive. The new T2 issuance is expected to have a credit rating of Baa1 by Moody’s and BBB+ by Fitch Ratings, while the issuer is rated A3 (Stable) by Moody’s, BBB+ (Stable) by S&P and A (Stable) by Fitch. The IPG at 5.50% for Lloyds’ new issue offers considerable compensation for a slightly lower credit rating (by 1 notch, but remains well within the investment-grade level) and a slightly longer maturity period.

At the same time, we would like to highlight that the final price guidance is likely to come lower than the IPG, within the range of 5.10% to 5.20%. We feel that investors will be fairly compensated for the credit rating and maturity period as compared to the other SGD T2 issuances. Lloyds’ new issuance would be a good consideration for investors seeking SGD T2 subordinated bonds in the medium term.

Lastly, we would like to highlight that there is a loss absorption feature in place given the Tier 2 nature of the bond, which might not be suitable for risk-averse investors.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in ANZ 4.500% 02Dec2032 Corp (SGD) and HSBC 5.300% 14Mar2033 Corp (SGD), and the analyst who produced this report holds a NIL position in the abovementioned securities.

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