S&P Global Ratings said it has raised its long-term issuer credit rating on Lloyds Banking Group plc — parent of Bank of Scotland and Scottish Widows — and NatWest Group plc, the bank formerly known as RBS, to ‘A-‘ from ‘BBB+’ .

“We believe economic risk is low for U.K. banks,” said S&P Global Ratings. “Improving credit risk fundamentals and structurally high earnings flexibility make economic risks manageable.

“We have, therefore, improved our BICRA (Banking Industry Country Risk Assessment) economic risk assessment for U.K. banks, and maintained the anchor for banks operating in the U.K. at ‘bbb+’.

“Due to the improvement of our view of economic risk in the U.K. banking system, we have taken positive rating actions on the U.K.’s major domestic banks, Lloyds and NatWest.

“These positive actions reflect an improvement in our view of these entities’ capital positions, as well as their strategic and earnings strength.”

On its rationale on Lloyds Banking Group, S&P said: “We raised our long-term issuer credit rating on holding company Lloyds Banking Group PLC to ‘A-‘ from ‘BBB+’ and similarly raised our issue ratings on its senior unsecured debt and regulatory capital instruments by one notch.

“We affirmed our issuer credit ratings, resolution counterparty ratings, and senior unsecured issue ratings on its subsidiaries and raised our issue ratings on their regulatory capital issues.

“The upgrade reflects a strengthening of our assessment of Lloyds’ capital and earnings following a change to our view of lower economic risks in the U.K. banking system. Our RAC (risk-adjusted capital) ratio has improved by about 130 basis points and we now forecast it to remain at 10.5%-11.0% over the next two years.

“The rating action additionally reflects Lloyds’ strengthening profitability and strong capital generation from its deep domestic franchise, robust risk management, and overall sound funding and liquidity profiles.”

On the outlook for Lloyds Banking Group, S&P said: “The stable outlook reflects our view that Lloyds’ solid capitalization and strong competitive position in the U.K. market underpin the rating.

“We expect that the bank’s solid and improving profitability will continue to support strong capital buffers, while its prudent provisioning policies will continue to protect against potential asset quality deterioration.

“Downside scenario … We could lower the ratings if economic and geopolitical challenges triggered significantly higher credit losses than we assume and weakened Lloyds’ business performance and capital levels. We could also lower the ratings if we concluded that Lloyds was unlikely to sustain a RAC ratio above 10%, without other offsetting factors.

“Upside scenario … We are unlikely to take a positive rating action on Lloyds over the outlook horizon.”

On its rationale on NatWest Group, S&P said: “We raised our long-term issuer credit rating on holding company NatWest Group PLC to ‘A-’ from ‘BBB+’ and similarly raised our issue ratings on its senior unsecured debt and regulatory capital instruments by one notch.

“We affirmed our issuer credit ratings, resolution counterparty ratings, and senior unsecured issue ratings on its subsidiaries and raised our issue ratings on their regulatory capital issues.

“The upgrade reflects our view of lower economic risks in the U.K. banking system, which improves our assessment of NatWest’s capital and earnings. Our RAC ratio has improved by about 120 basis points and we now forecast it will reach 10.5%-11.0% at year-end 2027.

“The rating action additionally reflects NatWest’s strong profitability from its deep domestic franchise, disciplined risk management, and sound funding and liquidity profiles.”

On its outlook for NatWest Group, S&P said: “The stable outlook indicates that we expect NatWest’s credit profile to remain robust over our two-year horizon.

“We anticipate that it will maintain healthy earnings in line with management’s guidance, with solid funding and liquidity profiles. We anticipate that our RAC ratio will increase moderately to 10.5%-11.0% through year-end 2027.

“Downside scenario … We could lower the ratings if macroeconomic pressures and geopolitical uncertainties appear likely to materially challenge asset quality and earnings.

“Upside scenario … We are unlikely to take a positive rating action on NatWest over the outlook horizon.”