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Rating Action:

Moody's upgrades NatWest Group's senior unsecured debt ratings to A3 with stable outlook

22 Sep 2022

NatWest Markets' senior unsecured debt ratings upgraded to A1 with stable outlook

London, September 22, 2022 -- Moody's Investors Service (Moody's) has today upgraded the senior unsecured debt ratings of NatWest Group plc (NatWest Group) to A3 from Baa1, and the senior unsecured debt ratings of NatWest Group's main non-ring-fenced bank NatWest Markets Plc (NatWest Markets) to A1 from A2.

The rating agency also upgraded NatWest Group's notional Baseline Credit Assessment (BCA) to a3 from baa1, and NatWest Markets' standalone BCA and Adjusted BCA to baa3 from ba1 and to baa1 from baa2, respectively.

The outlooks on the senior unsecured debt ratings of NatWest Group and NatWest Markets were changed to stable from positive.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468974 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 said that the upgrade of NatWest Group's senior unsecured debt ratings to A3 from Baa1 reflects the upgrade of the group's notional BCA to a3 from baa1, and Moody's unchanged assumptions of moderate loss-given-failure and low probability of government support for NatWest Group's senior bondholders, which do not result in any uplift.

The upgrade of NatWest Group's notional BCA to a3 from baa1 reflects the group's improved profitability, as well as lower execution risk of the planned phased withdrawal from the Republic of Ireland and the finalisation of NatWest Markets' restructuring.

Moody's said that it expects NatWest Group's profitability to improve in the next two years from a low base, reflecting higher revenues and only marginally higher costs, while provisions against loan losses will be low.

According to Moody's, NatWest Group's revenue will continue to improve in the next 12-18 months, as the group reprices its assets in a higher interest rate environment while only partially passing through rate rises to depositors and structural hedges provide further benefit to the net interest income; operating costs will only marginally increase, as inflationary pressures will be partially offset by cost-cutting initiatives. NatWest Group's provisions against expected credit losses will be low in H2 2022 and 2023, as prudent allowance against credit losses (including post-model adjustments) previously made in the pandemic context will mitigate the impact of a weakening macroeconomic environment and loan book deterioration on credit cost.

NatWest Group's profitability will also benefit from the phased withdrawal from Ireland, to be finalised in the next 12-18 months, and from the now-completed restructuring of the capital markets business, which in recent years dragged the group's profitability.

NatWest Group announced its intention to begin a phased withdrawal from the Republic of Ireland in February 2021. Moody's believes that around 90% of its Irish subsidiary Ulster Bank Ireland DAC (UBI DAC, A1 stable, a3) will be transferred to other banks by Q2 2023, and that UBI DAC's stock of customer deposits will materially drop in the next 12-18 months. For further details on NatWest Group's phased withdrawal from Ireland, please refer to the press release entitled "Moody's upgrades Ulster Bank Ireland's long-term deposit and issuer ratings to A1 with stable outlook", published on 22 June 2022 (https://www.moodys.com/research/--PR_466783).

-- NATWEST MARKETS

The upgrade of NatWest Markets' senior unsecured debt ratings to A1 from A2 reflects the upgrade of the banks' Adjusted BCA to baa1 from baa2, Moody's unchanged assumption of extremely low loss-given-failure, which results in a three-notch uplift, and the rating agency's unchanged assumption of a low probability of government support, which does not result in any uplift.

The upgrade of NatWest Markets' Adjusted BCA to baa1 from baa2 reflects the higher capacity of NatWest Group to support its non-ring-fenced banks, as indicated by the upgrade of NatWest Group's notional BCA. Moody's also upgraded the BCA of NatWest Markets to baa3 from ba1, reflecting the restructured business.

NatWest Markets' presence in capital markets has significantly reduced, following the execution of the restructuring plan announced in February 2020 and that recently concluded. The risk for NatWest Group stemming from NatWest Markets' capital markets business significantly decreased in the last two years; for example, NatWest Markets no longer provides exotic long-dated interest-rate products, and it significantly shrunk its business with financial institutions. NatWest Markets is now smaller and it mainly focuses on corporate clients, providing interest-rate and foreign-exchange products. Moody's expects NatWest Markets' profitability to be weak in 2022 and 2023, an improvement compared with the material losses booked in the past and that offset the profits made by the rest of NatWest Group (in particular the retail and corporate business of the ring-fenced entities).

Moody's also said that the ratings of NatWest Markets' main subsidiary in the European Union, NatWest Markets N.V., continue to remain aligned to those of NatWest Markets. The rating agency's approach reflects the high level of integration between the two entities, and Moody's expectation that in a resolution scenario NatWest Markets N.V. would be resolved in close coordination with the group resolution.

OUTLOOK

The outlook on the senior unsecured debt ratings of NatWest Group and NatWest Markets is stable. The outlook reflects Moody's expectation that the main financial metrics (including the liability structure) of NatWest Group and NatWest Markets will remain stable in the next 12-18 months, despite some downside risk, and that NatWest Group's willingness to support NatWest Markets will remain very high.

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

-- NATWEST GROUP

NatWest Group's A3 senior unsecured debt ratings could be upgraded if there is an upgrade of the 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, beyond the group's current funding plan.

The a3 notional BCA could be upgraded if there is a further material and sustainable improvement in the group's profitability, provided that there is no significant deterioration in the UK's macroeconomic environment, the group's asset quality, capital, funding or liquidity.

NatWest Group's A3 senior unsecured debt ratings could be downgraded if there is a downgrade of the notional BCA, or a significant decline in the stock of more junior bail-in-able instruments.

The a3 notional BCA could be downgraded if there is a significant deterioration in the operating conditions in the UK, a spike in problem loans, a decline in the capital ratios below the group's target, or a reduction in profitability.

-- NATWEST MARKETS

NatWest Markets' A1 senior unsecured debt ratings could be upgraded if there is an upgrade of NatWest Group's notional BCA.

A higher BCA for NatWest Markets, which could be driven by a material improvement in profitability and lower reliance on wholesale funding, would not lead to an upgrade of the bank's Adjusted BCA or senior unsecured debt ratings in the absence of an upgrade of NatWest Group's notional BCA.

NatWest Markets' senior unsecured debt ratings could be downgraded if there is a downgrade of NatWest Group's notional BCA, a multi-notch downgrade of NatWest Markets' BCA or a decline in the stock of more junior bail-in-able instruments.

The baa3 BCA could be downgraded if there is a substantial increase in trading activities, a significant decline in the bank's capital, a significant risk management failure or a significant deterioration in its liquidity. A one-notch downgrade of NatWest Markets' BCA would not result in a downgrade of the bank's Adjusted BCA or senior unsecured debt ratings.  

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.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. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. 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_ARFTL468974 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:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• 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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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://ratings.moodys.com/documents/PBC_1288235.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Edoardo Calandro
VP - Senior Credit Officer
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

Laurie Mayers
Associate Managing Director
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.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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