Fitch Affirms Royal Bank of Scotland Group and Subsidiaries

Thu Jul 24, 2014 11:49am EDT

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(The following statement was released by the rating agency) LONDON, July 24 (Fitch) Fitch Ratings has affirmed The Royal Bank of Scotland Group (RBSG), Royal Bank of Scotland Plc (RBS) and National Westminster Bank plc's (NatWest) Long-term Issuer Default Ratings (IDRs) at 'A' and Short-term IDRs at 'F1'. The Outlooks on the Long-term IDRs are Negative. Fitch has also affirmed RBSG and RBS's Viability Ratings (VR) at 'bbb'. Fitch has assigned a common 'bbb' VR to NatWest, in line with its criteria, 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012 at www.fitchratings.com. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS: IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS RBSG's, RBS's and NatWest's IDRs are driven by the expectation that support would be provided to the group by the UK authorities in case of need. The IDRs are at their Support Rating Floors (SRF). The Support Ratings (SR) and SRF reflect Fitch's view that, as systemically important banks in the UK, support for these banks from the UK authorities (AA+/Stable), in case of need, is still extremely highly likely. RATING SENSITIVITIES: IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS The SRs and SRFs of RBSG, RBS and NatWest, and hence their IDRs, are sensitive to a change in Fitch's assumptions about the on-going availability of extraordinary sovereign support. Changes in assumptions could be driven by a reduction either in the sovereign's ability (for example, triggered by a downgrade of the UK's sovereign rating) or propensity to provide such support. In either case, this would result in a downward revision of the banks' SRFs. The Negative Outlook on RBSG and its subsidiaries' IDRs indicates that Fitch has identified a weakening propensity to provide support by the authorities. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for systemically important banks in the UK (and more broadly in the EU), as demonstrated by a series of legislative, regulatory and policy initiatives at UK and EU levels. We expect the EU's Bank Recovery and Resolution Directive (BRRD) to be implemented into national legislation later in 2014 or in 1H15. In Fitch's view, these regulatory developments will increase the likelihood of senior debt losses in banks if they fail solvability assessments. Fitch expects to then downgrade RBSG's SR to '5' and revise its SRF to 'No Floor'. The timing at this stage is likely to be some point in late 2014 or in 1H15.Following this rating action, Fitch expects to downgrade RBSG's, RBS's and NatWest's IDRs to their common VR. The Short-term IDRs will be aligned with Fitch's equivalence table as described in our criteria. For RBSG and its subsidiaries, given the current VR, the Short-term IDRs and short-term debt ratings would be at the 'F2'/'F3' cross-over point. However, Fitch considers it likely that the liquidity profiles of these banks would warrant the higher of the two rating options available. As such, RBSG's and RBS's and their subsidiaries' Short-term IDRs and debt ratings would likely be downgraded to 'F2'. KEY RATING DRIVERS - VR RBS, RBSG and NatWest are managed as a group and Fitch assesses their creditworthiness on a consolidated basis. The risks of the subsidiary banks are incorporated into our assessment of the group and vice versa. We have therefore assigned a VR to NatWest at the same level as its immediate parent's, RBS, and of its ultimate parent, RBSG. This reflects the high degree of integration across the group and large relative size of the entity in the group context. RBS's and NatWest's VR reflects the significant progress made in improving the group's overall risk profile. The strategy unveiled by its new CEO in February 2014 should result in a better capitalised bank in the medium term, with a much simpler organisational structure. As a result, Fitch expects its operating profitability to improve in the medium term and for the large one-off costs reported in recent years to reduce. Profitability is set to benefit from a more targeted focus on its strong UK franchise where it has leading market shares in SME and mid-corporate business. The group has concentrated on deleveraging and restructuring over the past five years, and much investment is still required for its IT systems and processes. The new transformation and simplification projects should allow for a much leaner organisation, with better systems, procedures and controls. Internal capital generation should become steady and sustainable into the medium term. However, it is likely that some cross winds will impact the group's profitability at least in the short term as it puts through a significant level of transformation costs. The bank now operates with a much more balanced funding profile, with an improved balance between the maturities of its assets and liabilities, with a much reduced reliance on wholesale (particularly short-term) funds, and a large, good quality liquidity buffer. Capitalisation has also been improving, and, by 2016 should compare well with peers. However, capital generation will partly depend on the achievement of the sale of its US subsidiary, Citizens, which is subject to execution risk. The group is targeting a common equity Tier 1 capital ratio of over 12% by 2016. While the proportion of impaired loans on its balance sheet remains high, they have been significantly covered by impairment reserves, reducing the proportion of the bank's capital, which is still at risk from asset valuations. However, significant areas of risk remain. Apart from the execution risks and management time pressures associated with executing its disposal strategies and in re-launching its core businesses, the bank will retain a sizeable Irish exposure through its subsidiary, Ulster Bank Ireland Ltd. A large portion of this entity's residential mortgage loans remain on RBSG's core activities but are significantly underperforming. The group also continues to face large legacy conduct and litigation risks, albeit the ones that have emerged are now well covered by provisions. RBSG's VR is driven by the same factors as those that drive the VRs of RBS and NatWest but in addition, also takes into account the absence of holding company double leverage. RATING SENSITIVITIES - VR Fitch considers that there is scope for gradual improvement of RBSG's VR over the short to medium term. However, there is uncertainty regarding the extent and pace of a potential future upgrade. Positive drivers would include further reductions in risk concentrations, strengthening of capital, greater visibility on its ability to execute its new strategy, and the outcome of overhanging political, litigation and conduct risk. In the longer term, and reflecting its strong core franchise across many segments, and assuming further strengthening in profitability and maintenance of sound key metrics, Fitch sees potential for the VRs of the group and the banks to be upgraded to the 'a' category. Downside risk to RBSG's VR is likely to be driven by external factors, rather than by any change in risk appetite. A particularly disruptive or expensive and extended reputational or litigation event could also create downside risks. RBSG's VR is also sensitive to maintaining a moderate level of holding company double leverage. RBS and NatWest's VRs are also sensitive to changes in group structure, for example as a result of ring fencing which could introduce an element of differentiation between the VRs of the various group entities. This will depend on the restrictions imposed by the ring fence. KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARIES AND AFFILIATED COMPANIES The IDRs of Royal Bank of Scotland International Limited (RBSIL), Royal Bank of Scotland NV (RBS NV) and RBS Securities, Inc. (RBSSI; the group's US-based broker dealer subsidiary) reflect our view of these subsidiaries' strategic or core importance to their ultimate parent, from which they are notched. RBS NV's SR of '1' is based on institutional support and reflects the core nature of this subsidiary to its parent. RBS NV and RBSIL's ratings are equalised because of the high operational integration with their parent. Fitch's view is that they are core to the group's operations, and that they are extremely likely to be supported in case of need. RBSSI's ratings are notched once off RBSG's IDRs to indicate that this subsidiary remains strategically important for the group's Markets business. RBSSI relies on its parent for contingent funding, capital and liquidity needs. The Negative Outlooks on the subsidiaries' Long-term IDRs reflect that on the group's IDRs. The subsidiaries' IDRs will further be sensitive to the agency's perceived continued strategic or core importance to their ultimate parent. Fitch does not expect there to be a widening of notches applied for propensity to provide support to RBS NV and to RBSIL. However, we believe that support for RBSSI may diminish over time as the group reduces its Markets business overall, and specifically in the US, in line with its newly announced strategic plan. This could result in wider notching for this subsidiary in the medium term, in line with its reduced strategic importance. The ratings of RBS Holdings USA Inc's Commercial Paper Programme are equalised with the Short-term IDR of RBSG, reflecting the unconditional guarantee provided by its ultimate parent. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND HYBRID RATINGS - The ratings of all subordinated debt and hybrid securities issued by RBSG group companies are notched down from the common VR assigned to individual group companies, reflecting a combination of Fitch's assessment of their incremental non-performance risk relative to their VRs (up to three notches) and assumptions around loss severity (one or two notches). These features vary considerably by instrument. Innovative Tier 1 and Preferred Stock issued by RBSG which coupon payments proved to be fully discretionary have been rated five notches below the group's VR and have been given 50% equity credit for Fitch Eligible Capital. A number of Tier 1 securities have been rated four notches below the VR (issued by both RBSG and RBS) and have not been given any equity credit as coupon payments are not discretionary. Legacy Upper Tier 2 securities are three notches below the VR because of dividend pushers and stoppers under their terms. RBSG and RBS also have some dated subordinated debt which is rated two notches from their VRs because they may defer payment of interest on these if the PRA requires it or requests it to do so under the terms of the notes. Other Tier 2 debt is notched once in line with Fitch's criteria. The ratings are primarily sensitive to changes in the VRs of the banks or their parents (see 'Assessing and Rating Bank Subordinated and Hybrid Securities' at www.fitchratings.com for more details on the criteria). The rating actions are as follows: Royal Bank of Scotland Group Long-term IDR: affirmed at 'A'; Negative Outlook Senior unsecured debt: affirmed at 'A/F1' Senior unsecured market linked securities: affirmed at 'Aemr' Short-term IDR: affirmed at 'F1' Commercial paper: affirmed at 'F1' Viability Rating: affirmed at 'bbb' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Subordinated debt (possibility to defer under the terms): affirmed at 'BB+' Subordinated debt: affirmed at 'BBB-' Innovative Tier 1 and Preferred stock: affirmed at 'B+' USD1.2bn, US780097AH44; GBP200m XS0121856859; USD1bn US780097AE13 and USD300m US7800978790: affirmed at 'BB-' Royal Bank of Scotland Plc Long-term IDR: affirmed at 'A'; Negative Outlook Senior unsecured debt: affirmed at 'A/F1' Senior unsecured market linked securities: affirmed at 'Aemr' Short-term IDR: affirmed at 'F1' Commercial paper: affirmed at 'F1' Viability Rating: affirmed at 'bbb' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Subordinated Lower Tier 2 debt affirmed at 'BBB-' Subordinated Upper Tier 2 debt affirmed at 'BB' EUR1bn Dated Subordinated Debt, XS0201065496, affirmed at 'BB+' National Westminster Bank plc Long-term IDR: affirmed at 'A'; Negative Stable Short-term IDR: affirmed at 'F1' Long-term and Short-term senior unsecured debt: affirmed at 'A'/ 'F1' Viability Rating: assigned at 'bbb' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Subordinated Lower Tier 2 debt: affirmed at 'BBB-' Subordinated Upper Tier 2 debt: affirmed at 'BB' Royal Bank of Scotland NV Long-term IDR: affirmed at 'A'; Negative Outlook Senior unsecured debt: affirmed at 'A' Senior unsecured market linked securities: affirmed at 'Aemr' Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Subordinated debt: affirmed at 'BBB-' Royal Bank of Scotland International Limited Long-term IDR: affirmed at 'A'; Negative Outlook Short-term IDR: affirmed at 'F1' RBS Holding USA Inc CP programme: affirmed at 'F1' RBS Securities Inc Long-term IDR affirmed at 'A-'; Negative Outlook Short-term IDR affirmed at 'F1'. Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Primary Analyst (RBSSI) Ilya Ivashkvov, CFA Senior Director +1 212 908 0769 33 Whitehall Street New York Secondary Analyst Denzil de Bie Director +44 20 3530 1592 Secondary Analyst (RBSSI) Claudia Nelson Senior Director +44 20 3530 1191 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 4429 91 74 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, 'Assessing and Rating Bank Subordinated and Rating Criteria', dated 31 January 2014, 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here 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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