review for downgrade
long-term debt and deposit ratings, the ratings for the bank's
subordinated debt, junior subordinated debt and capital instruments. The
long-term ratings of the holding the company,
short-term ratings were affirmed.
Moody's rating action follows the publication of a recent trading update,
in which RBS's management indicated that the group's year-end 2013
results (scheduled to be published on
materially impacted by additional provisions for pending litigations and
conduct-related costs. As a result, the bank will report a weaker than
previously anticipated regulatory capital position at
weakening its standalone credit profile.
During the review, Moody's will assess whether the bank's credit
fundamentals remain compatible with the current ratings given (1) the
challenges and risks RBS faces in relation to the execution of its
recovery plan; and (2) any actions that RBS's management could pursue in
the short-term that could effectively mitigate these risks and further
boost the bank's regulatory capital position.
Concurrently, Moody's has placed on review for downgrade all long-term
degree of integration between RBS and these two entities.
Last November, following the conclusion of the
the possible merit of a breakup of the group, RBS's management announced
that over a three-year period it would pursue (1) the accelerated
wind-down of its legacy asset portfolio, which includes poor quality
assets, such as Irish and
sale of its US retail and commercial banking business.
The bank also stated it would undertake an urgent and thorough review of
its core operations, which could lead to additional actions to further
improve its credit profile. At that time, the bank indicated that its
capital position would be unchanged during Q4 2013 (despite accounting
for material credit costs related to the accelerated disposal of legacy
assets), resulting in a Common Equity Tier 1 (CET1) ratio of around 9%.
The bank had also indicated that progress towards achieving the
aforementioned recovery plan would increase its CET1 ratio over time to
11% in 2015 and 12% in 2016.
However, in its trading update of
Q4 2013 results would be impacted by additional provisions. These large
charges will lead to a material loss for the year that will reduce the
bank's regulatory capital position at end-2013 to between 8.1% and 8.5%.
The additional provisions in the trading update include
respect of pending litigations (mainly related to mortgage-backed
securities and other securities-related litigations) and
of additional conduct-related costs (
Products). The bank has indicated that at this point in time its capital
targets for 2015 and 2016 remain unchanged because these costs, which
although being incurred earlier than forecast, were already accounted for
in its three-year capital plan. However, their acceleration leaves RBS
with less flexibility to manage other unforeseen charges that could
further affect its capital position.
As indicated in its press release of
research, Moody's considers RBS's recovery plan as clear, credible and
positive for its creditors over the medium-term, albeit not immune from
execution risk. The rating agency believes that, if adequately executed,
the recovery plan will gradually improve the bank's currently weak asset
quality profile, increase its solvency and will eventually restore the
bank's sustainable profitability. However, RBS's recent announcement
demonstrates that its management faces a number of short-term headwinds,
which could challenge the implementation of this plan and in turn be
negative for its creditors. In addition, Moody's believes that the
overall downside risks associated with the bank's recovery have increased.
--- FOCUS OF THE REVIEW
During the review, Moody's will assess whether the bank's weakened credit
fundamentals remain compatible with the current rating levels, taking
(1) the risks and challenges associated with the execution of its recovery
(2) the pending litigations and regulatory reviews that could lead to
larger-than-expected financial losses, before RBS can offset them (at
least partially) through other capital-accretive management actions; and
(3) other additional remedial actions that RBS management could decide to
pursue, such as further asset disposals, following the review of the
bank's core operations.
WHAT COULD MOVE THE RATINGS UP/DOWN
The review could prompt Moody's to lower RBS's standalone credit
assessment and downgrade the debt ratings, if the rating agency were to
assess that the bank's credit fundamentals, particularly capital and
profitability, were no longer compatible with the current rating levels.
This assessment will take into account the risks and uncertainties that
could challenge the orderly execution of the recovery plan, such as
additional unexpected litigation and conduct-related costs.
Given the review for downgrade, there is currently no upward ratings
momentum. However, the standalone credit assessment and the ratings
could be stabilised if Moody's were to determine that any additional
actions announced by RBS management -- for example on the back of its
review of the core operations -- were sufficient to adequately mitigate
the downside risks the bank is facing towards achieving a full recovery.
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