Fitch: RBS Restructuring Partly Reduces Tail Risks

Fri Nov 1, 2013 10:53am EDT

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(The following statement was released by the rating agency) LONDON, November 01 (Fitch) The plan to reshape RBS's non-core division into an internal bad bank and embark on another, much accelerated restructuring, will crystallise substantial loan impairment charges in Q413, but will reduce some of the tail risks for the bank, Fitch Ratings says. This could ultimately be positive for RBS's Viability Rating. Nonetheless, tail risks still exist for litigation and conduct costs relating to legacy businesses. The creation of an internal bad bank does not entail any immediate changes to group-level exposures. The size of the internal bad bank will also be the same as the current non-core division in net terms (around GBP38bn net of GBP12bn of impairment reserves when the unit is created in January 2014). However, the assets will change in composition and risk-weighted assets will be higher than now at around GBP116bn compared to the risk-weighted assets in the non-core division of around GBP41bn at end-Q313. Retail and SME assets and low-yielding but low capital intensive businesses, will be returned to the core division. Structured products, additional non-performing corporate and commercial real estate loans will be moved to the internal bad bank. The assets being transferred to the bad bank are more capital intensive than the assets now in the non-core division, so the reshaped unit will account for around 5% of the group's loans but 20% of its capital. There will now be a more aggressive run-down strategy that reduces the internal bad bank's assets by 55%-75% in the first two years and by 85%-100% by end-2016. The reduction of assets with high risk-weights should lower capital buffers required by the regulator as a result of stress tests. Overall the group's 'fully-loaded' Basel III common equity Tier 1 (FLBIII CET1) ratio will not materially change as a result of the creation of the internal bad bank. It is expected to fall only by around 10bp, despite an additional GBP4.0bn-GBP4.5bn of impairment charges to be taken in Q413 for reshaping this division. RBS reported a FLBIII CET1 ratio of 9.1% for end-Q313 and now targets a ratio of around 11% by end-2015 and over 12% by end-2016. As previously announced, the bank is further shrinking its markets business. It has also announced that it is divesting all of its US Citizens operations, which no longer fits its new focus. Although these will strengthen capital in the short to medium term, they will also reduce the group's geographical and business diversification. The completion of the government's bad bank review reduces political risks that have been elevated since the summer, but does not entirely remove them. Also, the potential for substantial litigation and conduct costs remains; for example, they could arise from the mis-selling of US mortgage securities, UK interest rate swaps and possibly a probe into foreign-exchange trading. Any particularly disruptive, expensive and extended reputational case or litigation could create negative ratings pressure. There is also execution risk. But with five years of restructuring already completed, during which time non-core assets were reduced from GBP258bn at end-2008 to GBP37bn at end-Q313, we believe the senior management team has sufficient expertise to further derisk the group. Nevertheless, shrinking the Irish commercial real estate book is likely to be difficult until economic conditions improve. The new chief executive has launched another strategic review, so another round of restructuring cannot be ruled out. Contact: Claudia Nelson Senior Director Financial Institutions +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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