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Rating Action:

Moody's downgrades Citizens Financial (deposits to A1); reviews Company for further downgrade

14 Jul 2009

New York, July 14, 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 B- from B, and the long-term deposit and issuer ratings to A1 from Aa3. The short-term deposit ratings of the banks were affirmed at Prime-1. The BFSRs and long-term ratings were also placed on review for possible further possible downgrade. Citizens Financial Group, Inc. is unrated and is a fully owned subsidiary of the Royal Bank of Scotland Group plc (RBSG). Citizens Financial Group, Inc. and its subsidiaries are collectively referred hereafter as 'Citizens'.

Moody's said the downgrade of the BFSRs and the long-term ratings of the two banks was prompted by the weakening in Citizens' core profitability that has reduced its capacity to absorb losses at a time when the company is expected to continue to incur elevated credit costs. This weakening is attributable to net interest margin compression stemming from the asset sensitivity (assets re-pricing faster than liabilities) of the balance sheet and the prevailing low level of interest rates. Also affecting Citizens' core profitability has been the increase in non-interest expense, although some of this increase is of a non-recurring or temporary nature.

Moody's noted that Citizens' asset quality had weakened progressively through 2008 and in the first quarter of 2009, requiring the company to make progressively higher quarterly loan loss provisions. Although charge-off rates have increased for all sections of the loan portfolio, the increase is most pronounced for home equity loans originated by third parties. This component of loan portfolio has been reduced to $6.7 billion as of March 2009, and represents 6% of the loan portfolio and 62% of company's adjusted tangible common equity, including hybrid equity credit. Charge-off rates for other sections of the loan portfolio are broadly similar to, if not more favorable than those of similarly rated peers, Moody's added.

Moody's said the B- BFSRs assigned to the two rated bank subsidiaries capture the weakened financial fundamentals of the company on the one hand, and 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 on the other. Moody's added that although Citizens is a wholly-owned subsidiary of RBSG, its deposit and debt ratings incorporate no lift from that ownership. RBSG is rated A1 for senior debt and the BFSR of its lead bank subsidiary is C-.

The review for possible downgrade of Citizens' BFSRs and long-term deposit and debt ratings will focus on (a) the extent to which Citizens' core profitability is expected to decline and the permanence of such a decline; (b) an assessment of whether Citizens' credit losses will continue to remain within Moody's expectations, and (c) the impact of parental support, if any, to strengthen the company's capital ratios in light of the losses Moody's expects the company to incur in 2009 and 2010.

Downgrades:

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

....Subordinate Regular Bond/Debenture, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A1 from Aa3

..Issuer: Citizens Bank of Pennsylvania

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

....Issuer Rating, Downgraded to A1 from Aa3

....Senior Unsecured Deposit Rating, Downgraded to A1 from Aa3

..Issuer: RBS Citizens, NA

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

....Issuer Rating, Downgraded to A1 from Aa3

....OSO Senior Unsecured OSO Rating, Downgraded to A1 from Aa3

....Senior Unsecured Deposit Rating, Downgraded to A1 from Aa3

Outlook Actions:

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

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

..Issuer: Citizens Bank of Pennsylvania

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

..Issuer: RBS Citizens, NA

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

The last rating action on Citizens was taken on December 23, 2008 when the BFSRs and deposit and debt ratings of the bank subsidiaries were affirmed, and the outlook was changed to negative from stable.

The principal methodologies used in rating this issuer are "Bank Financial Strength Ratings: A Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Ratings Methodologies subdirectory of the Credit Policy & Methodologies directory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy and Methodologies directory.

Citizens Financial Group, Inc. is an intermediate bank holding company, headquartered in Providence, Rhode Island, with reported assets of $168 billion as of March 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 (deposits to A1); reviews Company for further downgrade
No Related Data.
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