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Moody's reviews Royal Bank of Scotland's ratings for downgrade

February 13, 2014

Moody's Investors Service has today placed on

review for downgrade Royal Bank of Scotland plc's (RBS) A3 supported

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, Royal Bank of Scotland

Group plc, were also placed on review for downgrade. The firm's Prime-2

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 27 February 2014) would be

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 end-December 2013,

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

ratings of National Westminster Bank (Natwest) plc and Royal Bank of

Scotland NV. These ratings are aligned with those of RBS given the high

degree of integration between RBS and these two entities.


Last November, following the conclusion of the UK government review on

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 UK commercial real-estate loans; and (2) the

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 27 January 2014, RBS announced that its

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 GBP1.9 billion in

respect of pending litigations (mainly related to mortgage-backed

securities and other securities-related litigations) and GBP965 million

of additional conduct-related costs (GBP465 million in respect of

Payment Protection Insurance and GBP500 million for Interest Rate Hedging

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 5 November 2013 and other related

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.


During the review, Moody's will assess whether the bank's weakened credit

fundamentals remain compatible with the current rating levels, taking

into account:

(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.


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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Source: EMBIN (Emerging Markets Business Information News)

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