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Global Credit Research - 15 Jul 2010
C- Bank Financial Strength rating outlook to stable from negative; Aa3 debt/deposit ratings affirmed
London, 15 July 2010 -- Moody's has changed the outlook on Royal Bank of Scotland plc's
C- standalone Bank Financial Strength Rating to stable from negative
and affirmed the Aa3 senior debt and deposit ratings, which already
had a stable outlook. The P-1 short-term rating was
also affirmed. The C- Bank Financial Strength Rating maps
to a standalone rating of Baa2 on the long-term rating scale.
The change in outlook is based on the gradual stabilisation that is taking
place in the financial profile of RBS as a result of management actions
to restructure the bank, and a reduced likelihood of the standalone
rating moving lower over the short- to medium term.
The outlook on the C- Bank Financial Strength Rating of National
Westminster Bank plc and the outlooks on the subordinated debt and hybrid
ratings of the group (including RBS NV) were also changed from negative
to stable in line with the outlook change for RBS. The A1/P-1
ratings of the holding company, Royal Bank of Scotland Group,
RATIONALE FOR CHANGE OF OUTLOOK
Since the last rating action in November 2009 when the Bank Financial
Strength Rating was affirmed at C- with a negative outlook following
the finalisation of RBS' accession to the UK government's
Asset Protection Scheme, some notable improvements have become visible:
an ongoing reduction in leverage and strengthening of liquidity,
including (i) an increase in the liquidity pool from GBP121bn at the
end of H109 to GBP165bn at the end of Q110, ii) a reduction
in short-term borrowings from GBP172bn to GBP139bn,
and iii) and an improvement of the loan-to-deposit ratio
from 144% to 131% over the same time period;
a reduction in single-name concentrations;
early indications that the recent high level of asset impairments
may have peaked (GBP2.7bn in Q110, compared to GBP3.3bn
an increase in the Net Interest Margin from 1.75%
in Q309 to 1.92% in Q110 against an environment of margin
compression among many smaller banks and building societies in the UK.
Moody's still considers that the profitability of UK banks will
come under pressure from elevated impairments over 2010 - 2011,
despite early indications that they may be past the peak. The pressure
may come particularly from areas such as consumer finance -- which
is vulnerable to an increase in unemployment, or from commercial
real estate -- where lower quality properties face refinancing challenges
over the next 1 -- 2 years.
However, the rating agency considers that further loan impairments
and structured credit write-downs at RBS can be absorbed at the
bank's C- Bank Financial Strength Rating level. Moreover,
taking into account the Asset Protection Scheme covering GBP282bn
assets and the GBP8bn government contingent capital that was made
available last November, Moody's views RBS as able to withstand
Moody's severe stress test without a need for further capital support.
Nevertheless, the C- Bank Financial Strength Rating also
incorporates the many challenges facing the bank, which is still
in the early stages of a multi-year restructuring process:
the wind-down of the large portfolio of Non-Core
assets (GBP194bn at Q110) and, along with that, a reduction
in the bank's high utilisation of wholesale funding;
the sale of businesses due to European Commission requirements
in return for approval of the state aid;
the reduction of a large sectoral exposure to commercial real estate,
and the embedding of a stronger risk management framework.
Alongside these challenges is the risk of a further downturn in the UK
economy and the management of the inherent risks of the bank's investment
"With the measures that RBS has been taking to restructure the bank,
its standalone credit strength is well captured at the current standalone
rating level with limited downside risks", said Elisabeth
Rudman, a Senior Credit Officer at Moody's and lead analyst
for RBS. "At the same time, we do not expect upward
rating pressure on the rating until the bank has been able to progress
significantly in its restructuring process, notably to further reduce
Non-Core assets and deliver a consistently lower level of impairment
charges. Any upward pressure would also require a visible and sustained
track record illustrating that the risks within the investment bank are
well controlled", Rudman continued.
A key focus for our ratings of complex wholesale investment banks,
which to some extent also applies to RBS, is to what extent the
firm's risk appetite and the management of the capital market activities
exposes investors to higher volatility. Entering into the crisis,
RBS had gaps in its risk management framework. Although new management
has made much progress in strengthening risk management, we believe
it will take some time for new processes and a new culture to be embedded
throughout the entire organisation.
RATIONALE FOR AFFIRMED Aa3 SENIOR DEBT RATING, STABLE OUTLOOK
The Aa3 senior debt rating with a stable outlook continues to incorporate
an expectation of high support by the UK government. (Please also
refer to the Special Comment "Phasing Out Extraordinary Support
Assumptions from UK Bank Ratings" published in March 2009,
for further information on our views on systemic support for UK banks).
Although we expect with time to phase out the levels of extraordinary
support incorporated in the ratings of banks such as RBS (which has 5
notches of uplift from the Bank Financial Strength Rating to the senior
debt ratings), an important factor in our assessment will be the
outcome of further government actions, including the government-sponsored
commission to review splitting investment banking activities from retail
and commercial banking, the development of living wills, and
the timing of the sale of the government's shareholding in RBS.
PREVIOUS RATING ACTION & METHODOLOGY
The last rating action on the bank's Bank Financial Strength Rating
was on 3 November 2009 when the Bank Financial Strength Rating was affirmed
at C- with a negative outlook. The last rating action on
the bank's hybrid ratings was on 22 April 2010 when the review on
30 hybrid and junior subordinated instruments was concluded. 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.
RBS Group is based in the United Kingdom, and had total assets of
GBP 1,696 billion at 31 March 2010.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's changes RBS financial strength outlook to stable from negative
No Related Data.
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