NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed RBS Securities Inc.'s (RBSSI)'A-' Long-term Issuer Default Rating (IDR) and 'F1' short-term IDR. RBSSI is a wholly owned indirect subsidiary of The Royal Bank of Scotland Group plc (RBS Group) which is rated by Fitch at 'A/F1' and was also affirmed today. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
Today's rating action on RBSSI was taken in conjunction with Fitch's global trading and universal bank periodic review, which included the RBS Group. Fitch's outlook for the industry is stable on balance. The positive rating drivers include improved liquidity, funding, capitalization and more streamlined businesses, all partly driven by regulation. Offsetting these positive drivers are substantial earnings pressure, regulatory uncertainty and heightened legal and operational risk.
RATING ACTION RATIONALE
RBSSI is considered by Fitch to be a strategically important business within The Royal Bank of Scotland plc's (RBS) Markets and International Banking (M&IB) segment and remains a significant earnings contributor to the overall group. As such, Fitch continues to view the ratings as being closely linked. RBSSI also relies on the parent for contingent funding, capital and liquidity needs and without such support, the rating would be materially lower on a stand-alone basis, though the agency recognizes that it is operated as an integral part of RBS's M&IB segment.
RBSSI relies heavily on wholesale, short-term secured financing, which Fitch views as a credit negative. However, the firm has extended maturities across its repo book and reduced counterparty concentrations. Balance sheet inventory is largely comprised of high quality, liquid securities, primarily U.S. government and Agency securities. Contingency funding plans and liquidity stress tests have also been improved. The firm has also exited certain non-core businesses such as cash equities and emerging markets, though the firm did not carry any material inventory from these businesses.
The firm's revenues are heavily concentrated in trading one asset class, which also places further pressure on the firm's credit profile. As a result, Fitch believes RBSSI's franchise is more limited than many of its diversified broker dealer peers in the United States.
The current ratings incorporate RBS's continuing demonstrated support in the form of capital infusions and credit lines. In addition, the ratings of RBSSI rely on some level of UK government support because the ultimate parent's viability ratings are lower than the current long- and short-term IDRs. The 'F1' short-term IDR reflects Fitch's view that any support if needed would be forthcoming in the short term.
RBSSI has made improvements to its balance sheet leverage and risk management infrastructure over the past several years. Fitch-adjusted leverage stood at 12.1x as of June 30, 2012, compared to 12.9x at YE11 and 28.9x at YE10. The current level is generally consistent with the Fitch-rated broker-dealer peer group and is expected to remain fairly consistent going forward.
RATING DRIVERS AND SENSITIVITIES - IDRs
RBSSI's Long-term IDR is notched down from RBS's IDR because the entity is a foreign subsidiary and support may diminish over time. Fitch believes that the UK government will continue to allow support of RBSSI, but that bank subsidiaries may have priority in support in an extreme stress scenario. Furthermore, over time, the UK government may push to separate investment banking from core banking activities, which may reduce support over time and cause Fitch to revisit the ratings.
Changes to RBSSI's ratings would move in tandem with RBS's Long- and Short-term IDRs because RBSSI's ratings are driven by that of its parent RBS. If RBSSI were no longer deemed to be strategically important to RBS, RBSSI's ratings would be downgraded, potentially by multiple notches.
RBSSI is one of two principal operating companies for M&IB in North America. Its primary business lines include mortgage and ABS Sales and Trading, Flow Credit Sales and Trading, Treasury Markets, Prime Brokerage and Rates Sales and Trading. In addition to being an SEC registered broker dealer, it is also a CFTC designated Futures Commission Merchant (FCM). It is also an agent for the Federal Reserve Term Asset-Backed Securities Loan Facility (TALF). The firm had $130 billion in total assets as of June 30, 2012.
Fitch has affirmed the following ratings of RBS Securities Inc.:
--Long-term IDR at 'A-'; Outlook Stable
--Short-term IDR at 'F1'.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Securities Firms Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Rating FI Subsidiaries and Holding Companies
Global Financial Institutions Rating Criteria
Securities Firms Criteria
Ilya Ivashkov, CFA, +1 212-908-0769
One State Street Plaza
New York, NY 10004
Claudia Nelson, +44 20 3530 1191
Gordon Scott, +44 203 530 1075
Brian Bertsch, +1 212-908-0549
Source: Fitch Ratings