DBRS Downgrades Citizens Financial Group to ‘A’; Trend Stable

DBRS has today downgraded the long-term ratings of Citizens Financial Group (CFG or the Company) and its related bank subsidiaries, including CFG’s Issuer & Senior Debt rating to ‘A’ from A (high). At the same time, DBRS has confirmed the Short-Term Instruments rating of CFG and its banking subsidiaries. The trend for all ratings is Stable. The ratings have been removed from Under Review with Negative Implications, where they were placed on January 20, 2009.

The ratings of CFG, a wholly owned U.S. subsidiary of RBS, reflect its important role in RBS’ overall strategy. Under the announced restructuring plans at RBS, CFG remains a core business and one that RBS will continue to support as evidenced by a recent $1 billion subordinated debt capital injection from RBS during the first quarter 2009. The ratings also take into consideration a geographically diverse retail business and solid deposit franchise. These strengths are offset by below-peer profitability, a loan portfolio heavily weighted towards a weakening consumer and overall asset quality deterioration.

As a result of CFG’s position in RBS’ overall franchise, DBRS has assigned a SA1 designation to the Company, which implies strong and predictable support from the parent. As a supported rating with a SA1 designation, CFG’s rating will move in tandem with RBS’ ratings, which are currently Stable. The Company remains a core business for RBS and should continue to receive capital to support operations.

With a strong retail banking footprint that spans 12 states, CFG has a large and diverse franchise with over 1,600 branches. Ranked as a top 10 commercial bank by assets in the United States, CFG’s geographically diverse footprint is located within the New England, Mid-Atlantic and Midwest regions. The franchise is strongest in New England and Pennsylvania, where it has leading deposit market shares. Recently, CFG has sold off its Indiana branch network as well as some upstate New York branches as the Company looks to rationalize its branch footprint and devote resources to more strategically important locations.

Like most banks, the economic recession has resulted in significant asset quality deterioration and elevated credit costs. Nonperforming assets (NPAs) to gross loans and other REO totaled 1.04% at the end of 2008 compared to 0.59% a year ago. In Q1 2009, this metric increased to 1.35%. Meanwhile, net charge-offs (NCOs) increased to an annualized 1.69% of average loans compared to 1.48% for the fourth quarter and 0.81% a year earlier. Within the loan portfolio at year-end, CFG had $15 billion in loans that either had LTV’s >90%, or had characteristics that heightened credit risks like interest only/negative amortization loan features. About $11 billion of this was related to home equity products with another $2 billion in high LTV residential mortgages. The serviced-by-other (SBO) home equity portfolio remains the most problematic. DBRS notes that approximately 65% of the loan portfolio is consumer-related, so rising unemployment should continue to pressure earnings and asset quality in 2009. If credit costs continue to invade capital, DBRS expects RBS to inject additional capital to keep CFG well-capitalized by regulatory standards.

In 2008, the Company reported a net loss of $929.3 million driven by a goodwill impairment charge of $1.51 billion and significantly higher credit costs. Specifically, CFG’s loan loss provision increased $1.2 billion to $1.9 billion compared to 2007. In Q1 2009, the Company lost another $165.5 million due to continued elevated credit costs, higher FDIC expenses, a restructuring charge and venture capital losses. To help address weaker financial performance, CFG recently announced a restructuring plan last December. The plan involves closing 67 retail locations, reducing FTEs by approximately 900 positions and the write-off of certain long-lived assets. As a result, CFG recorded a $43 million charge related to the write-down of long-lived assets that are no longer expected to provide future economic benefits in Q4 2008 and took another $20.4 million restructuring charge in the first quarter.

Headquartered in Providence, Rhode Island, CFG is a commercial bank holding company for RBS Citizens, NA and Citizens Bank of Pennsylvania. At March 31, 2009 CFG reported $167.5 billion in assets.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.