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Announcement:

Moody's affirms Royal Bank of Scotland Group ratings following Trading Statement

10 Dec 2007
Moody's affirms Royal Bank of Scotland Group ratings following Trading Statement

London, 10 December 2007 -- Moody's Investors Service has today affirmed the Aaa/P-1/B+ ratings of the Royal Bank of Scotland plc and National Westminster Bank plc as well as the Aa1/P-1 ratings of the Royal Bank of Scotland Group plc (RBS). The outlook on the Bank Financial Strength Ratings (BFSRs) and long-term debt and deposit ratings remains negative.

The rating action follows the release of the company's full-year 2007 pre-close trading update, in which RBS provided the first details of its expected write-downs due to developments in the credit markets since Q2 2007. RBS's Trading Statement also provided detail on ABN AMRO, the offer for which became unconditional by the Consortium (comprising Fortis, Santander and RBS) in October (please refer to Moody's Press Release of 17 October).

RBS disclosed that, as of 30 November, on its own books and net of hedges and write-downs, it held total exposure of GBP3,377 million encompassing high-grade and mezzanine CDOs, sub-prime trading inventory, and residuals exposure from securitisations. ABN AMRO, in turn, had GBP1,667 million in high-grade CDOs and GBP51 million in sub-prime trading inventory, net of hedges and write-downs.

As a result, RBS said that, for the full year 2007, it expects to book write-downs of approximately GBP950 million related to its exposure to the U.S. sub-prime mortgage markets and GBP250 million from its leverage finance portfolio. At the same time, Moody's notes that the group results will benefit from the positive impact of a GBP250 million mark-to-market gain on the group's own debt as a result of credit spread widening, as well as gains from the disposal of certain non-core assets.

Separately, ABN AMRO is expected to report write-downs of approximately GBP300 million on its sub-prime holdings, which are now accounted for on the same basis as those of RBS. RBS will account for this loss via an accounting adjustment in its investment in ABN AMRO. This, in turn, will reduce the group's Core Tier 1 ratio to a level that Moody's estimates will be approximately 4.5-4.6% with a Tier 1 ratio within the group's target of 7-8%.

Moody's believes that the generally solid performance of the group's other businesses are expected to offset the negative impact of the write-downs related to market events. RBS projects that its operating profit for 2007 will exceed that of 2006 (GBP9,414 million) and be greater than that of the market consensus forecast (excluding the impact of ABN AMRO) of GBP9,775 million. Moody's notes that the group's impairment losses are projected to be flat year-on-year (2006: GBP1,878 million) and decline as a percent of loans and advances (this stood at 0.4 % of loans and advances as of 30 June 2007).

With reference to ABN AMRO, RBS said that the impact of its Asian business was positive and that the integration progress is proceeding smoothly. In addition, RBS has slightly enhanced its projections regarding the earnings accretion and return on investment over those previously announced.

Moody's says that the maintenance of a negative outlook on the ratings reflects the integration challenges in relation to ABN AMRO's Global Wholesale Businesses and International Retail Businesses, as well as the negative short-term impact of the acquisition on the quality of RBSG's capital and historically strong earnings. Moody's further expects that the more difficult global environment will pose additional challenges to RBS in light of the importance of its wholesale lending and related capital markets activities given the recent market turmoil. In line with other banks that have a sizeable US sub-prime exposure, Moody's will be monitoring the hedge effectiveness that RBS has in place against these exposure as well as the sufficiency of the marks taken relative to gross and net exposures.

Nevertheless, Moody's recognises RBSG's strong track record in integrating past acquisitions and the group's robust core earnings capacity and internal capital generation. Moody's says that progress in integrating ABN AMRO and rebuilding RBSG's core capital and profitability in line with its current BFSR within 12-18 months could ultimately lead to the rating outlook being changed back to stable. Conversely, the rating agency cautions that a failure to resolve these issues within the same timeframe could lead to negative rating actions.

Based in Edinburgh, RBS reported total assets of GBP 1,011 million as of 30 June 2007.

London
Lynn Exton
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

No Related Data.
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