(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed RBS Securities Inc.'s (RBSSI)'A-'Long-term Issuer Default Rating (IDR) and 'F1' short-term IDR. RBSSI is a whollyowned 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 RatingOutlook 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 globaltrading and universal bank periodic review, which included the RBS Group.Fitch's outlook for the industry is stable on balance. The positive ratingdrivers include improved liquidity, funding, capitalization and more streamlinedbusinesses, all partly driven by regulation. Offsetting these positive driversare substantial earnings pressure, regulatory uncertainty and heightened legaland operational risk.
RATING ACTION RATIONALE
RBSSI is considered by Fitch to be a strategically important business within TheRoyal Bank of Scotland plc's (RBS) Markets and International Banking (M&IB)segment and remains a significant earnings contributor to the overall group. Assuch, Fitch continues to view the ratings as being closely linked. RBSSI alsorelies on the parent for contingent funding, capital and liquidity needs andwithout such support, the rating would be materially lower on a stand-alonebasis, though the agency recognizes that it is operated as an integral part ofRBS's M&IB segment.
RBSSI relies heavily on wholesale, short-term secured financing, which Fitchviews as a credit negative. However, the firm has extended maturities across itsrepo book and reduced counterparty concentrations. Balance sheet inventory islargely comprised of high quality, liquid securities, primarily U.S. governmentand Agency securities. Contingency funding plans and liquidity stress tests havealso been improved. The firm has also exited certain non-core businesses such ascash equities and emerging markets, though the firm did not carry any materialinventory from these businesses.
The firm's revenues are heavily concentrated in trading one asset class, whichalso places further pressure on the firm's credit profile. As a result, Fitchbelieves RBSSI's franchise is more limited than many of its diversified brokerdealer peers in the United States.
The current ratings incorporate RBS's continuing demonstrated support in theform of capital infusions and credit lines. In addition, the ratings of RBSSIrely on some level of UK government support because the ultimate parent'sviability 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 beforthcoming in the short term.
RBSSI has made improvements to its balance sheet leverage and risk managementinfrastructure over the past several years. Fitch-adjusted leverage stood at12.1x as of June 30, 2012, compared to 12.9x at YE11 and 28.9x at YE10. Thecurrent level is generally consistent with the Fitch-rated broker-dealer peergroup 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 aforeign subsidiary and support may diminish over time. Fitch believes that theUK government will continue to allow support of RBSSI, but that banksubsidiaries may have priority in support in an extreme stress scenario.Furthermore, over time, the UK government may push to separate investmentbanking from core banking activities, which may reduce support over time andcause Fitch to revisit the ratings.
Changes to RBSSI's ratings would move in tandem with RBS's Long- and Short-termIDRs because RBSSI's ratings are driven by that of its parent RBS. If RBSSI wereno longer deemed to be strategically important to RBS, RBSSI's ratings would bedowngraded, potentially by multiple notches.RBSSI is one of two principal operating companies for M&IB in North America. Itsprimary business lines include mortgage and ABS Sales and Trading, Flow CreditSales and Trading, Treasury Markets, Prime Brokerage and Rates Sales andTrading. In addition to being an SEC registered broker dealer, it is also a CFTCdesignated Futures Commission Merchant (FCM). It is also an agent for theFederal 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
. The ratings abovewere solicited by, or on behalf of, the issuer, and therefore, Fitch has beencompensated 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 CompaniesGlobal Financial Institutions Rating CriteriaSecurities Firms Criteria(New York Ratings Team)
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