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Rating Action:

Moody's affirms all ratings of NatWest Group and NatWest Bank

17 Dec 2020

Outlook on NatWest Group's senior unsecured debt ratings remains positive

London, 17 December 2020 -- Moody's Investors Service (Moody's) today affirmed all ratings and assessments of NatWest Group plc (NatWest Group), National Westminster Bank Plc (NatWest Bank), The Royal Bank of Scotland plc (RBS) and Ulster Bank Limited (UBL), including the baa2 notional Baseline Credit Assessment (BCA) of NatWest Group and the baa1 BCA of NatWest Bank, RBS and UBL. Moody's also maintained a positive outlook on the Baa2 senior unsecured debt ratings of NatWest Group and on the A2 long-term issuer ratings of NatWest Bank, RBS and UBL, and a stable outlook on the A1 long-term deposit ratings of NatWest Bank, RBS and UBL.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL437432 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

-- NATWEST GROUP

Moody's today affirmed the baa2 notional BCA of NatWest Group, reflecting the group's strong capital, sound funding and liquidity, and the reduced level of market and operational risks but also the likely asset quality deterioration and profitability challenges deriving from the economic shock caused by the coronavirus pandemic.

Moody's said that NatWest Group's asset quality and profitability is being challenged by the coronavirus pandemic. Although problem loans have been broadly stable, the weakening operating environment in the UK has led to a deterioration of NatWest Group's loan book, as for example indicated in the increase in the loans classified under Stage 2 according to the IFRS 9 in 2020. At the same time, Moody's noted that the total allowance for loan losses has materially increased in 2020.

Profitability has also weakened for the NatWest Group, according to Moody's, due to a pandemic-induced spike in expected credit loss charges, and a decline in revenue due to the lower interest rate environment and subdued client activity.

At the same time, Moody's noted that the NatWest Group's capital remains strong, with ratios above most of the group's peers. NatWest Group's funding remains sound and diversified, with a large base of sticky deposits, while the stock of liquid assets remains high.

NatWest Group recently announced that it accelerated the restructuring plan of its non-ring-fenced bank NatWest Markets Plc (NatWest Markets, long-term deposit and senior unsecured debt ratings A3 positive, BCA ba2). NatWest Markets is shrinking its risk-weighted assets and is shifting its focus from institutional clients to being focused on serving the corporate clients of the ring-fenced banks of the NatWest Group. To reflect the accelerated restructuring plan, on 24 November 2020 Moody's upgraded the long-term deposit and senior unsecured debt ratings of NatWest Markets: see "Moody's upgrades NatWest Markets Plc's long-term deposit and senior unsecured ratings to A3", https://www.moodys.com/research/--PR_436404.

Moody's said that a smaller NatWest Markets, which is also more focused on serving the corporate clients of the group and less on institutional clients, will result in a reduction in market and operational risks for the NatWest Group, which will however remain more material than for several of NatWest Group's peers. For this reason, Moody's removed the one-notch negative qualitative adjustment for Opacity and Complexity that it had previously applied to the NatWest Group; the notional BCA of NatWest Group is now positioned at the bottom of Moody's scorecard-indicated range.

The affirmation of NatWest Group's Baa2 senior unsecured debt ratings reflects the affirmation of the baa2 notional BCA; Moody's unchanged moderate loss-given-failure assumption for the senior unsecured debt issued by NatWest Group under the rating agency's Loss Given Failure (LGF) analysis, which does not provide any uplift; and Moody's unchanged assessment of a moderate probability of support from the Government of the United Kingdom (Aa3 stable), which also does not lead to an additional notch of uplift.

-- NATWEST BANK

Moody's today also affirmed the baa1 BCA of NatWest Bank, reflecting the bank's strong capital and stable retail funding, but also Moody's expectation of asset-quality deterioration and profitability challenges as a result of the economic shock caused by the coronavirus pandemic.

In recent years, NatWest Bank underwent a complex reorganisation to comply with the ring-fencing legislation in the UK. For example, the ring-fencing activities are carried out by three separate entities (NatWest Bank, RBS and UBL) under the control of a sub-holding, which also controls a bank in the Republic of Ireland (Ulster Bank Ireland DAC, long-term deposit A3 positive, long-term issuer rating Baa1 positive, BCA ba1). This process is now largely completed, and in the coming months NatWest Bank will merge with its Northern Ireland subsidiary UBL. Moody's therefore removed the one-notch negative qualitative adjustment for Corporate Behaviour that it had assigned to NatWest Bank; the BCA of NatWest Bank is now positioned at the bottom of Moody's scorecard-indicated range.

The affirmation of NatWest Bank's A1 long-term deposit ratings and A2 long-term issuer ratings reflects the affirmation of the baa1 notional BCA; Moody's unchanged very low and low loss-given-failure assumption for the deposits and senior debt of NatWest Bank, respectively, under the rating agency's LGF analysis, which provide a two-notch uplift to NatWest Bank's long-term deposit ratings and a one-notch uplift to NatWest Bank's issuer rating; and Moody's unchanged assessment of a moderate probability of support from the Government of the United Kingdom, which provides an additional notch of uplift.

-- RBS, UBL

The BCA and ratings of RBS and NatWest Bank's subsidiary UBL remain in line with those of NatWest Bank, said Moody's. The rating agency's unchanged approach reflects the high level of operational integration between NatWest Bank, RBS and UBL, which are the main UK ring-fenced banks of NatWest Group.

OUTLOOK

The outlook on the NatWest Group's Baa2 senior unsecured debt ratings is positive. The outlook reflects Moody's view that, over the next 12-18 months, the group will largely complete the restructuring of NatWest Markets, resulting in more stable and sustainable earnings, provided that the operating environment in the UK does not deteriorate beyond the rating agency's current expectations.

The outlook on the long-term issuer ratings of NatWest Bank, RBS and UBL is positive. The outlook reflects the balance between, on one hand, the benefit provided by the years of restructuring; on the other, Moody's expectation of a weakening in asset quality and profitability deriving from the coronavirus-induced economic shock.

The outlook on the long-term deposit ratings of NatWest Bank, RBS and UBL is stable. The outlook balances the potential benefit coming from years of restructuring with a likely lower uplift from government support should the unsupported long-term deposit ratings move up towards the UK sovereign debt rating.

The upward pressure on the ratings of NatWest Group, NatWest Bank, RBS and UBL is also indicated by BCAs that are at the bottom of Moody's scorecard-indicated range.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

-- NATWEST GROUP

A downgrade of NatWest Group's Baa2 senior unsecured debt ratings is unlikely, as indicated by the current positive outlook.

The Baa2 senior unsecured debt ratings could be downgraded if there is a downgrade of the baa2 notional BCA, or a significant reduction in the stock of more junior bail-in-able instruments.

NatWest Group's baa2 notional BCA could be downgraded if there is a significant deterioration in the operating environment.

The Baa2 senior unsecured debt ratings of NatWest Group could be upgraded if there is an upgrade of the baa2 notional BCA, or a significant increase in the stock of more junior bail-in-able instruments, which would provide greater protection to senior liabilities in a resolution scenario.

NatWest Group's baa2 notional BCA could be upgraded following a stabilisation or an improvement in the UK operating environment, provided that the group's loan book does not materially deteriorate and the restructuring of NatWest Markets is completed.

-- NATWEST BANK, RBS, UBL

The A2 long-term issuer ratings of NatWest Bank, RBS and UBL could be upgraded if there is an upgrade of the baa1 BCA or a significant increase in the stock of more junior bail-in-able liabilities of the three banks.

An upgrade of the A1 long-term deposit rating of NatWest Bank, RBS and UBL is unlikely. A higher BCA or a significant increase in the stock of more junior bail-in-able liabilities of the three banks would likely be offset by the removal of the notch of government support uplift, due to the proximity to the UK sovereign debt rating.

The baa1 BCAs of NatWest Bank, UBL and RBS could be upgraded if there were an improvement in their asset-risk profiles; and an improvement in profitability, provided that the macroeconomic environment in the UK does not deteriorate more significantly.

The A1 long-term deposit ratings and the A2 long-term issuer ratings could be downgraded if there were a downgrade of the baa1 BCA or a significant reduction in the stock of bail-in-able liabilities of the three banks.

The baa1 BCAs of NatWest Bank, UBL and RBS could be downgraded if there were a material deterioration in operating conditions in the UK, leading to significantly higher asset risk and lower profitability; a decline in capitalisation; a significant weakening of the subgroup's liquidity; or a weakening of the intragroup capital and liquidity support mechanisms.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL437432 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Endorsement

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edoardo Calandro
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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