(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed The Royal Bank of Scotland Group's(RBSG) and The Royal Bank of Scotland Plc's (RBS) Long-term Issuer DefaultRatings (IDR) at 'A', Short-term IDRs at 'F1', Support Ratings at '1' andSupport Rating Floors (SRF) at 'A'. The Outlooks are Stable. The banks'Viability Ratings (VR) have also been affirmed at 'bbb'. A full list of ratingactions is at the end of this comment.
The rating actions on RBSG and RBS were taken in conjunction with Fitch's GlobalTrading and Universal Bank (GTUB) periodic review. Fitch's outlook for thesector is stable on balance. The positive rating drivers include improvedliquidity, funding, capitalization and more streamlined businesses, all partlydriven by regulation. Offsetting these positive drivers are substantial earningspressure, regulatory uncertainty and heightened legal and operational risk.
While these themes are also valid for RBSG, Fitch notes that the bank'sinvestment banking ambition is becoming more focused as the group continues itsrestructuring, de-risking and downsizing. This should result in lower earningsvolatility and less tail risk over time. As this progresses and 'non-core'assets reduce, the group's business, earnings and risk profile (and hence VR)will increasingly be dominated by its core and strong franchises in retail,commercial and corporate banking.
RATING DRIVERS AND SENSITIVITIES - SUPPORT RATINGS, SRF, IDRs AND SENIOR DEBT
RBS's and RBSG's IDRs, senior debt, Support Ratings and SRFs have been affirmedbecause Fitch believes the group's systemic importance to the UK still implies astrong probability of support from the UK authorities if needed. Although on aweakening trend, Fitch expects the UK authorities' propensity to support RBS toremain high while the bank continues its restructuring, while UK and EUregulatory and legislative measures designed to improve bank stability arephased in and until measures designed to weaken the implicit support for banks,at both a UK-specific and at an EU level, can be practically implemented.
These ratings are sensitive to a change in Fitch's assumptions around theability or propensity of the UK government to provide extraordinary support toRBS/RBSG if needed.RATING DRIVERS AND SENSITIVITIES - VR
RBS's VR reflects its strong and profitable core UK retail and commercialbanking franchise, its sound liquidity and the significant progress which hasbeen made in improving the bank's overall risk profile, notably in deleveragingthe balance sheet, reducing reliance on wholesale unsecured funding andembracing a stronger risk culture.
Nonetheless, it also considers the risks (mostly credit) associated with itsmuch reduced but still sizable 'non-core' assets, especially commercial realestate and Irish portfolios, continuing weak overall profitability and residualconcentration risks on the asset side of the balance sheet. Political,litigation and reputational risks also act as a constraint.
Fitch believes that RBSG is well positioned to pursue its strategic plan thanksto its strong core retail and commercial franchises and strengthened governancestructures. Nonetheless, de-risking and de-leveraging, as well as building upliquidity, have had a negative impact on margins. This has exacerbated thepressure on profitability associated with the restructuring process. Bottom lineprofitability remains weak, even if earnings in the 'core' bank - which willbecome more visible as the non-core bank continues to wind down - are sound.
While capital ratios comfortably exceed regulatory requirements, capitalisationneeds to be considered in the context of residual concentration risks and arelatively high level of uncovered non-performing loans (NPLs), which exposesthe bank to further falls in collateral values. A return to sustainableprofitability as the non-core operations continue to wind down is likely to bethe most positive development for the bank's capital flexibility and generation.
On balance, Fitch considers RBSG's VR to be capable of further improvement overthe medium-term. This would likely be driven by a further reduction in creditand market risks and an improvement in profitability whilst maintaining thegroup's strong franchise and liquidity profile.
Downside risk to the bank's VR would most likely be a consequence of adverseexternal factors as an increase in risk appetite is improbable. It would be mostlikely to arise due to a sharper and more drawn-out than anticipateddeterioration in the economic and operating environment and the ensuing assetquality deterioration the bank would face. A particularly disruptive orexpensive and extended reputational or litigation event (the bank is likely tobe exposed to LIBOR-related fines and litigation) could also create downsiderisks.
RBSG's VR and VR sensitivities are driven by the same considerations thatunderpin the VR of its main banking subsidiary, RBS, as well as the absence ofany double leverage.
RATINGS DRIVERS AND SENSITIVITIES - SUBORDINATED AND HYBRID DEBT
Subordinated debt and other hybrid capital issued by RBSG and by RBS, NationalWestminster Bank and Royal Bank of Scotland NV are all notched down from the VRsof RBSG or RBS in accordance with Fitch's assessment of each instrument'srespective non-performance and relative loss severity risk profiles, which varyconsiderably. Their ratings are primarily sensitive to any change in RBSG's orRBS's VRs.
RATINGS DRIVERS AND SENSITIVITIES - SUBSIDIARIES
Royal Bank of Scotland NV (RBS NV) is the former ABN Amro Bank legal entity,much of whose business acquired by RBS is being transferred to RBS plc's balancesheet. Its IDRs are aligned with those of RBS because of its high operationalintegration and the extremely high likelihood it would be supported by RBS ifneeded. Most of its UK and European business has been transferred or are in theprocess of being transferred to the UK operations. Fitch believes it cannot bemeaningfully analysed on a standalone basis (it has no VR) and its IDRs aresensitive to the same considerations that could affect RBS.
National Westminster Bank is a core subsidiary of RBS and, while a separatelegal entity, highly integrated with it operationally. Fitch believes it cannotbe meaningfully analysed on a standalone basis (it has no VR), that its overallrisk profile is indistinguishable from that of RBS and that it is hard tocountenance a default of one bank and not the other. Its IDRs are thus driven bythe same rating drivers and sensitivities as those of RBS.
Royal Bank of Scotland International Limited (RBSI) provides core offshorebanking operations. RBSI's IDRs are the same as those of its parent RBS,reflecting its ownership, the alignment of risk management procedures andoperating platforms with RBS, and the close alignment of RBSI's activities withthose of the RBS Group's core UK bank. In Fitch's opinion there is an extremelystrong likelihood of support being provided by RBS to RBSI should it ever berequired. Its IDRs are thus driven by the same rating drivers and sensitivitiesas those of RBS.
RATING IMPLICATIONS - LEGISLATIVE CHANGE
The UK government's Q212 White Paper proposal to ring-fence UK retail operationscould, depending on the shape of implementation, potentially have majorimplications for legal entities' individual funding and risk profiles within thegroup and create more rating differentiation between legal entities within thegroup than is currently the case. Uncertainty over the ultimate implications andhow they will be addressed by the group means it is not yet something that Fitchhas directly factored into legal entity or debt class ratings. Ratingsimplications could be positive or negative, dependent on legal entityactivities, size/scope of operation and risk profiles, the strength ofring-fences, risk mitigation, group relationships and support etc.
The full list of rating actions is as follows:
Long-term IDR: affirmed at 'A'; Outlook StableSenior unsecured debt: affirmed at 'A'/'F1'Senior unsecured market linked securities: affirmed at 'Aemr'Short-term IDR: affirmed at 'F1'Commercial paper and short-term debt: affirmed at 'F1'Viability Rating: affirmed at 'bbb'Support Rating: affirmed at '1'Support Rating Floor: affirmed at 'A'Subordinated debt: affirmed at 'BB+'Innovative Tier 1 and Preferred stock: affirmed at 'B+'Other hybrids (USD1.2bn, US780097AH44; GBP200m XS0121856859; USD1bn US780097AE13and USD300m US7800978790): affirmed at 'BB-'
Long-term IDR: affirmed at 'A'; Outlook StableSenior unsecured debt: affirmed at 'A'/'F1'Senior unsecured market linked securities: affirmed at 'Aemr'Short-term IDR: affirmed at 'F1'Commercial paper and short-term debt: affirmed at 'F1'Viability Rating: affirmed at 'bbb'Support Rating: affirmed at '1'Support Rating Floor: affirmed at 'A'Guaranteed senior long-term debt: affirmed at 'AAA'Subordinated Lower Tier 2 debt affirmed at 'BBB-'Subordinated Upper Tier 2 debt affirmed at 'BB'EUR1bn Dated Subordinated Debt, XS0201065496 affirmed at 'BB+'RBS NVLong-term IDR: affirmed at 'A'; Outlook StableSenior unsecured debt: affirmed at 'A'/'F1'Senior unsecured market linked securities: affirmed at 'Aemr'Short-term IDR: affirmed at 'F1'Commercial paper: affirmed at 'F1'Support Rating: affirmed at '1'Subordinated debt: affirmed at 'BBB-'
Long-term IDR: affirmed at 'A'; Outlook StableShort-term IDR: affirmed at 'F1'National Westminster Bank plcLong-term IDR: affirmed at 'A'; Outlook StableSenior unsecured debt: affirmed at 'A'/'F1'Short-term IDR: affirmed at 'F1'Support Rating: affirmed at '1'Support Rating Floor: affirmed at 'A'Subordinated Lower Tier 2 debt: affirmed at 'BBB-'Subordinated Upper Tier 2 debt: affirmed at 'BB'
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 CriteriaRating Bank Regulatory Capital and Similar SecuritiesRating FI Subsidiaries and Holding Companies(New York Ratings Team)