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Rating Action:

Moody's affirms RBS's Aa3/C- ratings following APS announcement

03 Nov 2009

Ulster Entities placed on review for possible downgrade

London, 03 November 2009 -- Moody's Investors Service today affirmed the Aa3 senior unsecured debt and deposit ratings of RBS plc and the A1 rating of Royal Bank of Scotland Group (RBSG). The standalone Bank Financial Strength Rating ("BFSR") of Royal Bank of Scotland plc (RBS) was affirmed at C- with a negative outlook (mapping to a baseline credit assessment - BCA - of Baa2). All other ratings including the Aaa-rated government-guaranteed debt instruments of RBS and RBSG remain unchanged.

The D+ BFSR (BCA of Baa3) and the A2/Prime-1 ratings of Ulster Bank Limited and its subsidiaries Ulster Bank Ireland Limited and First Active plc have been placed on review for possible downgrade. The A3 subordinated debt rating of First Active plc has also been placed on review for possible downgrade.

Elisabeth Rudman, Senior Credit Officer at Moody's and lead analyst for RBS, said: "We have affirmed RBS' C- BFSR as we consider the changes to the Asset Protection Scheme do not materially change the bank's capital strength and its ability to withstand further stress from loan losses which are likely to materialise over the next 1 -- 2 years. We affirmed the Aa3 senior debt ratings of RBS as it will remain a leading retail and commercial bank in the UK despite the expected divestments, continuing to benefit from high levels of systemic support."

RBS ANNOUNCEMENT

The key changes announced by RBS are that the pool of assets covered by the Asset Protection Scheme (APS) will be reduced from GBP316bn to GBP282bn (based on end-December 08 financials), the first loss piece to be borne by RBS will be increased from GBP19.5bn to GBP37.5bn, the fee for participation in the APS will be lowered from GBP6.5bn to approx. GBP2.5bn, RBS will receive a higher capital injection through Government B Shares of GBP25.5bn on Day 1 with an GBP8bn contingent capital facility should its Tier 1 Capital ratio fall below 5% (rather than GBP19.5bn on Day 1 with GBP6bn contingent issuance), and RBS will no longer need to give up its Deferred Tax Assets (estimated at approx. GBP10bn). Government ownership will remain at 70.3%, with economic interest rising to 84.4% rather than 82.7%. Pro-forma end-June 2008 capital ratios under the revised framework are 12.5% Core Tier 1 ratio and 16.0% Tier 1 ratio.

In addition, as part of the restructuring plan agreed with the European Commission (EC) RBS will make significant divestments, including part of the UK branch network, RBS Insurance, RBS's interest in RBS Sempra Commodities, and Global Merchant Services. Also, for the next 2 years RBS will defer on coupons of subordinated capital instruments which are deferrable.

AFFIRMATION OF C- BFSR, NEGATIVE OUTLOOK

Moody's considers the revised APS and the accompanying increased government capital injection will continue to provide a significant underpinning to the financial strength of RBS. The revised arrangement provides RBS with more capital upfront, and although it leaves the bank absorbing a higher first-loss piece and provides insurance on a smaller pool of assets, overall we consider the changes to be neutral for the bank's credit profile.

The implementation of the APS as protection against the tail-risk of worse than expected losses remains 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. In addition, RBS will continue to bear the full losses of assets that are not covered by the APS.

AFFIRMATION OF SENIOR DEBT RATINGS, OUTLOOK CHANGED TO STABLE

The affirmation of RBS's Aa3 senior debt and deposit ratings reflects our view that the bank remains of high systemic importance in the UK financial system, as it continues to have leading market shares in SME and retail banking in the UK despite the divestments resulting from the agreement with the EC. Nevertheless, as Moody's has noted previously, it is clear that over the medium term the intention of the Tripartite Authorities is to put in place measures to enable the failure of large, systemic banks to be resolved in a way that could allow losses to be shared by all providers of wholesale funding. When this materialises further, it could put downward pressure on the long-term debt and deposit ratings of large UK banks, including RBS.

NO CHANGE TO OTHER RBS RATINGS

The junior subordinated debt and preference shares of RBS and RBSG (see below) have already been rated on an expected loss basis, on the assumption that any agreement with the EC on state aid remedies will result in the omission of coupons on instruments that are deferrable. The ratings of these instruments have not changed, but the outstanding reviews on the junior subordinated debt and cumulative preference shares will be concluded shortly given today's clarification that they will omit coupons for 2 years on instruments that are deferrable:

The following hybrid ratings remain unchanged:

1) Royal Bank of Scotland:

Senior subordinated rated Baa3 (negative outlook)

Junior subordinated rated Ba1 (under review for possible downgrade)

Non-cumulative preference shares rated B3 (stable outlook)

2) Royal Bank of Scotland Group:

Senior subordinated rated Ba1 (negative outlook)

Junior subordinated rated Ba2 (under review for possible downgrade)

Cumulative preference shares rated Ba3 (negative outlook)

Non-cumulative preference shares rated B3 (stable outlook)

REVIEW OF THE ULSTER BANK ENTITIES

The D+ BFSR currently assigned to Ulster Bank was based on Moody's understanding that Royal Bank of Scotland would insure APS-eligible assets of Ulster bank against any losses. This together with the substantial additional capital that has been injected into Ulster Bank in 2009 would have placed the bank in a much stronger financial position. However Moody's understands that this scheme is no longer being considered by the group. Therefore the review for possible downgrade will focus on how the group plans to mitigate the risks within Ulster Bank without the protection that the insurance scheme would have brought to the three legal entities.

However Ross Abercromby, Vice President/Senior Analyst and the lead analyst for Ulster Bank at Moody's said "Given our view that the high level of support demonstrated to date by Royal Bank of Scotland will continue, our expectation is that the group will replace the previously intended scheme, probably with further capital infusions, which could result in the confirmation of the banks ratings at their current A2/P-1 bank level."

Due to the review for downgrade of the senior debt rating of Ulster Bank Ireland and First Active, Moody's also put both banks' Aa3 Mortgage Backed Promissory Notes on review for possible downgrade. The ratings of the Mortgage Backed Promissory Notes benefits from a two notch uplift from the issuer's senior debt rating. Please refer to the "Framework Agreement in Respect of the issue of Mortgage Backed Promissory Notes" on www.moodys.com.

PREVIOUS RATING ACTIONS

The last rating action on the group was on 10 June 2009 when the senior debt ratings of RBS were affirmed at Aa3 and the BFSR was affirmed at 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 Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

On Review for Possible Downgrade:

..Issuer: First Active plc

....Bank Financial Strength Rating, Placed on Review for Possible Downgrade, currently D+

....Deposit Rating, Placed on Review for Possible Downgrade, currently P-1

....Multiple Seniority Medium-Term Note Program, Placed on Review for Possible Downgrade, currently A3, P-1

....Subordinate Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently A3

....Senior Unsecured Commercial Paper, Placed on Review for Possible Downgrade, currently P-1

....Senior Unsecured Deposit Rating, Placed on Review for Possible Downgrade, currently A2

..Issuer: Ulster Bank Finance PLC

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently A2

..Issuer: Ulster Bank Ireland Limited

....Bank Financial Strength Rating, Placed on Review for Possible Downgrade, currently D+

....Deposit Rating, Placed on Review for Possible Downgrade, currently P-1

....Senior Unsecured Commercial Paper, Placed on Review for Possible Downgrade, currently P-1

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently A2

....Senior Unsecured Deposit Rating, Placed on Review for Possible Downgrade, currently A2

..Issuer: Ulster Bank Limited

....Bank Financial Strength Rating, Placed on Review for Possible Downgrade, currently D+

....Issuer Rating, Placed on Review for Possible Downgrade, currently A2

....Deposit Rating, Placed on Review for Possible Downgrade, currently P-1

....Senior Unsecured Deposit Rating, Placed on Review for Possible Downgrade, currently A2

Outlook Actions:

..Issuer: First Active plc

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Ulster Bank Finance PLC

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Ulster Bank Ireland Limited

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Ulster Bank Limited

....Outlook, Changed To Rating Under Review From Stable

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

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

Moody's affirms RBS's Aa3/C- ratings following APS announcement
No Related Data.
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