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MBNA deal raises questions on capital, asset quality for Lloyds

Lloyds Banking Group Plc's £1.9 billion deal to buy credit card business MBNA Ltd. will boost its revenues but analysts noted it will also erode its CET1 ratio by around 80 basis points as well as raise its exposure to unsecured lending at a time of heightened risks to the U.K. economy.

The £650-million-per-year boost to group revenues will improve net interest margin by roughly 10 basis points per year, but also bring down Lloyds' common equity Tier 1 capital ratio to 12.8%, according to CreditSights. The acquisition of approximately £7 billion of credit card loans from Bank of America Corp. subsidiary FIA Jersey Holdings also raises questions of asset quality, analysts said.

The deal will boost Lloyds' share of the U.K. credit card market from 15% to 26%, but at the same time, expose the bank to "briskly growing" unsecured leverage in the midst of an uncertain economic climate, according to a Dec. 20 note from analysts at S&P Global Ratings.

The transaction, expected to complete in the first half of 2017 and set to be the bank's first major acquisition since the 2008 financial crisis, comes as banks with big mortgage and corporate loan books face possible falls in their capital ratios due to upcoming global rules on risk-weighting. Lloyds' risk-weighted assets could increase by up to 25% under the package widely dubbed "Basel IV", due largely to changes in calculations of operational risk that would take account of its past fines and conduct charges, according to a Dec. 15 note by analysts at Credit Suisse. As the CET1 requirement is calculated as a percentage of risk-weighted assets, this would automatically sap the ratio.

However, Basel IV rules are not likely to be in place for several years, reducing concerns over the MBNA deal, Diarmaid Sheridan, analyst at Davy Research in Dublin, said in an interview.

"There will be an impact, but given the timing of it, the concern isn't as immediate as if it were something that were about to be implemented in a year or two," he said.

Lloyds also expects to generate 160 basis points of CET1 capital per year before dividend, so it should be able to replenish its reserves quickly, CreditSights said.

The acquisition might, however, boost Lloyds' exposure to U.K. consumer debt at "potentially the worst moment" given economic uncertainty surrounding Brexit, according to Neil Wilson, senior market analyst at ETX capital, commenting in The Guardian newspaper.

Lloyds did not respond to a request for additional comment. The company had £222 billion in risk-weighted assets at Sept. 30.