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Rating Action:

Moody's downgrades Citizens Financial Group (deposits to A2)

19 Oct 2009

New York, October 19, 2009 -- Moody's Investors Service downgraded the bank financial strength ratings (BFSRs) and long-term deposit and debt ratings of RBS Citizens N.A. and Citizens Bank of Pennsylvania, the operating bank subsidiaries of Citizens Financial Group, Inc. The BFSRs of the two bank subsidiaries were lowered to C+ from B-, and the long-term deposit ratings, to A2 from A1. The short-term deposit and debt ratings of these bank subsidiaries were affirmed at Prime-1. Citizens Financial Group, Inc., a fully owned subsidiary of the Royal Bank of Scotland Group plc (RBSG), is unrated. Following the downgrade, the outlook on the two operating bank subsidiaries is negative. This concludes the review for possible downgrade that was initiated on July 14, 2009. Citizens Financial Group, Inc. and its subsidiaries are collectively referred to hereafter as 'Citizens'.

The downgrade of the two bank subsidiaries' BFSRs and long-term deposit and debt ratings was driven by Moody's view that Citizens' core (pre-provision, pre-tax) profit generation will remain under pressure for the foreseeable future. This weaker core profitability, combined with Moody's expectation that Citizens will need to make elevated provisions for loan losses over the remainder of 2009 and in 2010, will likely cause Citizens to report net losses for 2009 and 2010. Such results would lead to a diminution of Citizens' capital base. The firm's recent strengthening of its capital base from the conversion of $1 billion subordinated debt and $1.6 billion of preferred stock held by RBSG into common equity helps to mitigate this concern.

With regard to profitability, Moody's observed that Citizens' core profitability ratio (pre-provision, pre-tax income to risk-weighted assets) for 2008 had weakened to being below comparably rated peers, and the firm has continued to trail peers for the first half of 2009. Citizens' core profitability has been adversely affected by compression in its net interest margin, and by higher non-interest expenses, although some of these expenses are non-recurring or of a temporary nature. Even after factoring a recovery in the net interest margin and a reduction in expenses for one-off items, Moody's believes it is unlikely that Citizens' core profits will improve over the foreseeable future to historic levels that would be commensurate with a higher rating level.

Turning to asset quality, Moody's noted that Citizens' ratios of net charge-offs to loans for 2008 and in the first half of 2009 have been higher than comparably rated peers, a reflection of the consumer orientation of Citizens' loan portfolio. Citizens' charge-off rate for the loan portfolio continued to rise in the second quarter of 2009, the principal source of the increase being Citizens' portfolio of home equity loans that was originated by third parties. This portfolio declined further in the second quarter of 2009 to $6.3 billion, and now represents 6% of the loan portfolio and 56% of the company's adjusted tangible common equity, including the impact of the boost to common equity from the conversion of the subordinated debt and preferred stock. With some exceptions, charge-off rates for other sections of the loan portfolio have also increased, but overall, Citizens' credit losses appear to be tracking within Moody's expected losses.

In summary, Moody's believes the C+ BFSRs assigned to the two rated bank subsidiaries better reflect its expectation of continuing pressured core profitability and asset quality, strengthened capital adequacy, as well as the strength of Citizens' full-scale retail and commercial banking franchise in a dozen states in the Northeast, Mid-Atlantic and Midwestern regions of the United States.

Moody's expectation of continuing pressure on core profitability and weakness in asset quality at Citizens during the rest of 2009 and in 2010 is based on the rating agency's view that there will be continued pressure on house prices, unemployment and economic growth in the United States over the referenced period. This view is reflected in the negative outlook on Citizens' rated bank subsidiaries.

Moody's expects support for Citizens to be forthcoming from its ultimate parent company, RBSG in the event such support is needed. Indeed, the recent conversion of subordinated debt and preferred stock into common equity is evidence of the parent company's capacity and willingness to provide such support. However, no lift for parental support is incorporated in the long-term deposit and debt ratings assigned to Citizens, because the current C- BFSR of RBSG's lead bank subsidiary is lower than that of Citizens. The BFSR of RBSG's lead bank subsidiary is C-, and RBSG is rated A1 for senior debt.

Downgrades:

..Issuer: Charter One Bank, N.A.

....Subordinate Regular Bond/Debenture, Downgraded to A3 from A2

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

..Issuer: Citizens Bank of Pennsylvania

....Bank Financial Strength Rating, Downgraded to C+ from B-

....Issuer Rating, Downgraded to A2 from A1

....Senior Unsecured Deposit Rating, Downgraded to A2 from A1

..Issuer: RBS Citizens, NA

....Bank Financial Strength Rating, Downgraded to C+ from B-

....Issuer Rating, Downgraded to A2 from A1

....OSO Senior Unsecured OSO Rating, Downgraded to A2 from A1

....Senior Unsecured Deposit Rating, Downgraded to A2 from A1

Outlook Actions:

..Issuer: Charter One Bank, N.A.

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

..Issuer: Citizens Bank of Pennsylvania

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

..Issuer: RBS Citizens, NA

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

The last rating action on Citizens was taken on July 14, 2009 when its BFSRs and long-term deposit and debt ratings were downgraded, and its short-term deposit and debt ratings were affirmed. The BFSRs and the long-term deposit and debt ratings were placed on review for possible downgrade in the same rating action.

The principal methodologies used in rating Citizens were Moody's "Bank Financial Strength Ratings: Global Methodology", published in February 2007, and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", published in March 2007, and available on 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.

Citizens Financial Group, Inc. is an intermediate bank holding company, headquartered in Providence, Rhode Island, with assets of $153 billion as of June 2009.

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael L. Mascarenhas
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Citizens Financial Group (deposits to A2)
No Related Data.
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