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Rating Action:

Moody's affirms RBS senior debt at Aa3, confirms C- BFSR

10 Jun 2009

Outlook on Aa3 senior debt changed to stable, outlook on C- BFSR is negative

London, 10 June 2009 -- Moody's Investors Service today affirmed the Aa3 senior unsecured rating of RBS and A1 senior unsecured rating of Royal Bank of Scotland Group (RBSG) and changed the outlook from negative to stable. The short-term P-1 ratings of both entities were also affirmed. The BFSR of Royal Bank of Scotland plc (RBS) was confirmed at C- with a negative outlook (mapping to a baseline credit assessment of Baa2)

The bank's hybrid instruments were also confirmed, as detailed below.

The government backed ratings assigned to the debt instruments benefiting from UK government guarantee remain Aaa.

CONFIRMATION OF C- BFSR, NEGATIVE OUTLOOK

This rating action concludes the outstanding review for possible downgrade of the bank's BFSR. The BFSR had been lowered to C- in January 2009 and the rating left under review for possible further downgrade in order to assess the impact of the planned UK Government Asset Protection Scheme (APS).

The confirmed C- BFSR with a negative outlook reflects the benefit of the insurance cover of the Asset Protection Scheme (APS) for the group's riskier assets and the additional government capital (GBP19.5bn of B shares and a further optional GBP6bn to be made available alongside the APS), as well as the difficulties in restructuring the group, pressures on profitability during the recession in the UK, and the particular challenges associated with operating as a bank with majority government ownership.

Moody's considers the APS (which is expected to be finalized in the next couple of months and will cover around GBP325bn of assets) and the accompanying government capital should provide a significant underpinning to the financial strength of RBS. Moreover, the availability and expected full implementation of the APS is a critical requirement for the BFSR at the current level, given the remaining risks on the bank's book, particularly the large single borrower concentrations, remaining structured credit exposures, the global commercial property book and also the broader risks relating to the UK, US and Irish economies.

The bank has estimated that its pro-forma Tier 1 ratio (which includes the impact of the APS and the recent debt exchange) will increase to 15.4% and the Core Tier 1 ratio to 12.2%. However, Moody's expects these high capital ratios to reduce as the bank absorbs the GBP19.5bn first-loss piece, takes provisions on non-covered assets and absorbs costs associated with the restructuring of the firm. In the absence of more detailed information, Moody's has made conservative assumptions regarding the performance of assets that will be outside the APS, and considers that the group's capital levels will drop from an A range to a B range over the next 12 months in Moody's base case, but could drop much lower in our severe loss estimate.

The negative outlook indicates (i) the outstanding clarification as to which assets will be covered by the APS which will be crucial for the bank's future performance, but also (ii) the bank's sensitivity to our stressed loss estimate, which could further weaken its capital base; and (iii) the challenges the bank will need to manage for the next several years, such as the restructuring and the overhaul of its risk management and governance especially in its Global Banking and Markets division. This should also curb any upward rating pressure on the BFSR for some time.

Downward pressure on the BFSR would most likely emerge should more capital than the available GBP 6 billion be required to support the business. While not likely over the short- to medium term, an upgrade of the BFSR would require RBS to demonstrate a near completion of its restructuring, a significantly reduced risk profile of its GBM division as well as a sizeable reduction in its property exposures and large concentration risks.

AFFIRMATION OF SENIOR DEBT RATINGS, OUTLOOK CHANGED TO STABLE

The long-term rating of RBS was affirmed at Aa3 and of RBSG at A1. These ratings incorporate Moody's view of the very high probability of on-going support from the Aaa-rated UK government for the group. Moody's believes that over the longer term RBS is likely to remain one of the largest retail and commercial banks in the UK, albeit likely with a reduced international presence. This size and presence would result in a very high probability of on-going support from the Aaa-rated UK government, even beyond the current phase.

The outlook on the senior debt and deposit ratings was changed from negative to stable. The negative outlook assigned by Moody's in January 2009 reflected the still considerable uncertainty over the bank's long-term strategy at the time and the potential changes to the future shape of its domestic and international activities. Although many uncertainties remain, Moody's considers the APS has underpinned the core UK franchise of the group, and the risk of a more deep-rooted structural change or reduction in the activities of the bank which could have reduced RBS' systemic importance has receded in the last months.

CONFIRMATION OF THE HYBRIDS

The group's hybrid instruments were confirmed with a negative outlook (apart from the non-cumulative preference shares which have a stable outlook). Rating actions have recently been taken on the junior subordinated debt and preference shares of RBSG and RBS plc on 2 June 2009. The dated subordinated debt of RBS plc (Baa3), junior subordinated debt (Ba1) and cumulative preference shares (Ba2) are notched from the BFSR, and therefore the ratings now have a negative outlook, in line with the BFSR. The junior instruments of RBSG are one notch lower.

The non-cumulative preference shares of RBS and RBSG are rated on an expected loss basis (see press release of 2 June 2009 for more detail) and these instruments remain at B3 (stable).

GUARANTEED DEBT/ SUBSIDIARIES

The backed-Aaa ratings assigned to the debt instruments benefiting from UK government guarantee remain Aaa.

The ratings of Ulster Bank Group and its subsidiaries remain on review for possible downgrade in line with the rating action of 8 January 2009. RBS' rated US subsidiaries do not incorporate parental support and are not affected by today's rating actions.

The last rating action on the group was on 2 June 2009 when the hybrid instruments were downgraded, and the last rating action on the BFSR was on 20th January 2009 when it was downgraded from B to C-.

The principal methodologies used in rating this issuer were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Based in Edinburgh, RBS reported total assets of GBP 2,402 billion as of 31 December 2008.

London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms RBS senior debt at Aa3, confirms C- BFSR
No Related Data.
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