DBRS Downgrades The Royal Bank of Scotland Group plc to A, Trend Stable

DBRS has today downgraded the ratings of The Royal Bank of Scotland Group plc (RBS or the Company), including the Company’s Senior Debt & Deposits rating to A from A (high). The Royal Bank of Scotland plc (the Bank) has been downgraded to A (high) from AA (low). The Company’s Short-Term Notes rating has been confirmed at R-1 (middle). The senior debt and deposit ratings and the short term ratings are now at DBRS’ rating floor level for critically important banking organisations (CIBs) in the U.K. Accordingly the trend on all ratings is Stable. Concurrently, the long-term ratings have been removed from Under Review with Negative Implications where they were placed on 19 January 2009.

DBRS has also downgraded the debt of ABN AMRO that is economically allocated to RBS businesses; this includes the Long Term Debt and Deposit ratings of ABN AMRO Bank N.V. and the Long-Term Debt rating of ABN AMRO Holdings N.V. The trend on the aforementioned rating is Stable. The debt that has been economically allocated to the Dutch state has been downgraded to the same level, however, these ratings were placed under Review with Positive Implications. DBRS has issued a separate press release discussing this rating action.

Today’s rating action considers the ongoing challenges that RBS is facing as it restructures its business, shrinks its balance sheet, manages its sizeable credit market exposures, and rebalances its funding profile in a difficult operating environment. The size and scale of these challenges are illustrated in the most recent results announced in the Q1 2009 Interim Management Statement. While the results indicated an operating profit before impairment losses of GBP 4.1 billion, driven by record revenues, the Group’s net income was reduced by sizeable loan loss provisions and losses on credit market exposures. Despite record revenues for the quarter, which were bolstered by a one-time gain on the fair value of own debt and above run-rate trading results, underlying earnings were insufficient to absorb the credit costs. Today’s rating action ultimately reflects DBRS expectation that near- to medium-term earnings before taxes and provisions will be reduced, whilst credit costs are expected to remain elevated.

RBS continues to face cyclical and company-specific headwinds as its core markets face prolonged recessions, resulting in increased credit deterioration in its consumer and corporate loan books. Margins are likely to remain under pressure as funding costs remain elevated, base rates low and competition for deposits remains heightened. Further, credit market write downs remain a noteworthy risk, until markets stabilize.

DBRS recognizes that RBS’ core franchise remains very much intact. RBS continues to maintain its top U.K. market position in corporate, commercial, small business, and private banking. Moreover, the strength of the franchise is further illustrated by the increase in both UK current and savings accounts during the quarter.

DBRS views RBS’ pending participation in HM Treasury’s Asset Protections Scheme (APS) as important, as it will reduce the risk of catastrophic losses, however the costs of participation will further pressure near-term earnings. Under the proposal the Company will retain a substantial first-loss position of GBP 19.5 billion. Notwithstanding, the removal loss risk on circa GBP300 billion of assets will have a positive impact on capitalisation and will further progress the Group’s balance sheet restructuring efforts, which is imperative for RBS to return to being a strong stand-alone entity.

As discussed above, the ratings are now at the floor, reflecting DBRS’s view that RBS is a CIB in the U.K. given its scale and significant participation in the capital markets. The floor ratings consider the various capital and liquidity support programmes put in place by HM Treasury. Consistent with DBRS’s Enhanced Methodology for Bank Ratings published in February 2009, given RBS’s long- and short-term ratings are at the floor, further weakening in the Company’s intrinsic strength rating will not result in a concurrent downgrade of the final rating below the floor rating.

Notes:
All figures are in GBP unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.