(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 Default Ratings (IDR) at 'A', Short-term IDRs at 'F1', Support Ratings at '1' and Support Rating Floors (SRF) at 'A'. The Outlooks are Stable. The banks' Viability Ratings (VR) have also been affirmed at 'bbb'. A full list of rating actions is at the end of this comment.
The rating actions on RBSG and RBS were taken in conjunction with Fitch's Global Trading and Universal Bank (GTUB) periodic review. Fitch's outlook for the sector 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.
While these themes are also valid for RBSG, Fitch notes that the bank's investment banking ambition is becoming more focused as the group continues its restructuring, de-risking and downsizing. This should result in lower earnings volatility 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 affirmed because Fitch believes the group's systemic importance to the UK still implies a strong probability of support from the UK authorities if needed. Although on a weakening trend, Fitch expects the UK authorities' propensity to support RBS to remain high while the bank continues its restructuring, while UK and EU regulatory and legislative measures designed to improve bank stability are phased 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 the ability or propensity of the UK government to provide extraordinary support to RBS/RBSG if needed. RATING DRIVERS AND SENSITIVITIES - VR
RBS's VR reflects its strong and profitable core UK retail and commercial banking franchise, its sound liquidity and the significant progress which has been made in improving the bank's overall risk profile, notably in deleveraging the balance sheet, reducing reliance on wholesale unsecured funding and embracing a stronger risk culture.
Nonetheless, it also considers the risks (mostly credit) associated with its much reduced but still sizable 'non-core' assets, especially commercial real estate and Irish portfolios, continuing weak overall profitability and residual concentration 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 thanks to its strong core retail and commercial franchises and strengthened governance structures. Nonetheless, de-risking and de-leveraging, as well as building up liquidity, have had a negative impact on margins. This has exacerbated the pressure on profitability associated with the restructuring process. Bottom line profitability remains weak, even if earnings in the 'core' bank - which will become more visible as the non-core bank continues to wind down - are sound.
While capital ratios comfortably exceed regulatory requirements, capitalisation needs to be considered in the context of residual concentration risks and a relatively high level of uncovered non-performing loans (NPLs), which exposes the bank to further falls in collateral values. A return to sustainable profitability as the non-core operations continue to wind down is likely to be the most positive development for the bank's capital flexibility and generation.
On balance, Fitch considers RBSG's VR to be capable of further improvement over the medium-term. This would likely be driven by a further reduction in credit and market risks and an improvement in profitability whilst maintaining the group's strong franchise and liquidity profile.
Downside risk to the bank's VR would most likely be a consequence of adverse external factors as an increase in risk appetite is improbable. It would be most likely to arise due to a sharper and more drawn-out than anticipated deterioration in the economic and operating environment and the ensuing asset quality deterioration the bank would face. A particularly disruptive or expensive and extended reputational or litigation event (the bank is likely to be exposed to LIBOR-related fines and litigation) could also create downside risks.
RBSG's VR and VR sensitivities are driven by the same considerations that underpin the VR of its main banking subsidiary, RBS, as well as the absence of any double leverage.
RATINGS DRIVERS AND SENSITIVITIES - SUBORDINATED AND HYBRID DEBT
Subordinated debt and other hybrid capital issued by RBSG and by RBS, National Westminster Bank and Royal Bank of Scotland NV are all notched down from the VRs of RBSG or RBS in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in RBSG's or RBS'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 balance sheet. Its IDRs are aligned with those of RBS because of its high operational integration and the extremely high likelihood it would be supported by RBS if needed. Most of its UK and European business has been transferred or are in the process of being transferred to the UK operations. Fitch believes it cannot be meaningfully analysed on a standalone basis (it has no VR) and its IDRs are sensitive to the same considerations that could affect RBS.
National Westminster Bank is a core subsidiary of RBS and, while a separate legal entity, highly integrated with it operationally. Fitch believes it cannot be meaningfully analysed on a standalone basis (it has no VR), that its overall risk profile is indistinguishable from that of RBS and that it is hard to countenance a default of one bank and not the other. Its IDRs are thus driven by the same rating drivers and sensitivities as those of RBS.
Royal Bank of Scotland International Limited (RBSI) provides core offshore banking operations. RBSI's IDRs are the same as those of its parent RBS, reflecting its ownership, the alignment of risk management procedures and operating platforms with RBS, and the close alignment of RBSI's activities with those of the RBS Group's core UK bank. In Fitch's opinion there is an extremely strong likelihood of support being provided by RBS to RBSI should it ever be required. Its IDRs are thus driven by the same rating drivers and sensitivities as those of RBS.
RATING IMPLICATIONS - LEGISLATIVE CHANGE
The UK government's Q212 White Paper proposal to ring-fence UK retail operations could, depending on the shape of implementation, potentially have major implications for legal entities' individual funding and risk profiles within the group and create more rating differentiation between legal entities within the group than is currently the case. Uncertainty over the ultimate implications and how they will be addressed by the group means it is not yet something that Fitch has directly factored into legal entity or debt class ratings. Ratings implications could be positive or negative, dependent on legal entity activities, size/scope of operation and risk profiles, the strength of ring-fences, risk mitigation, group relationships and support etc.
The full list of rating actions is as follows:
Long-term IDR: affirmed at 'A'; Outlook Stable Senior 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 US780097AE13 and USD300m US7800978790): affirmed at 'BB-'
Long-term IDR: affirmed at 'A'; Outlook Stable Senior 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 NV Long-term IDR: affirmed at 'A'; Outlook Stable Senior 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 Stable Short-term IDR: affirmed at 'F1' National Westminster Bank plc Long-term IDR: affirmed at 'A'; Outlook Stable Senior 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 Criteria Rating Bank Regulatory Capital and Similar Securities Rating FI Subsidiaries and Holding Companies (New York Ratings Team)