DBRS Places RBS Citizens Financial Group, Inc. Under Review with Negative Implications

DBRS, Inc. (DBRS) has today placed all ratings of RBS Citizens Financial Group, Inc. (Citizens or the Company) and its related bank subsidiaries, including Citizens’ Issuer & Senior Debt rating of ‘A’ Under Review with Negative Implications. The ratings action follows DBRS’s placement of Citizens’ parent, The Royal Bank of Scotland Group plc (RBS Group or the Group – rated ‘A’), Under Review with Negative Implications (please refer to DBRS press release “DBRS Places the Ratings of The Royal Bank of Scotland Group plc Under Review with Negative Implications issued on July 15, 2013 for further information).

DBRS currently assigns a SA1 designation to Citizens, reflecting the Company’s position in RBS’s global franchise implying strong and predictable support from the parent. As a supported rating with a SA1 designation, Citizens’ rating will move in tandem with RBS’s rating. Nevertheless, DBRS acknowledges that the Group has stated its intention to partially float Citizens in approximately two years. Further, the U.K. government, which owns 80% of RBS, has stated that it has “no strategic interest” in RBS owning Citizens and recommends that RBS fully divest Citizens to fully focus on supporting the U.K. economy and bolster its capital. DBRS will continue to monitor the developments in regards to RBS’s plans to reduce its ownership stake in Citizens. Should ownership be reduced to a level that calls into question the timeliness and willingness of RBS Group to support Citizens, DBRS would likely lower the support assessment to SA3, which is consistent with other independent banking organizations in the United States. Upon completion of the review, DBRS expects to assign an intrinsic assessment (IA) to Citizens reflecting the stand-alone strengths and challenges of the Company.

DBRS views the strengthened capital position of Citizens as well as its improved funding mix and well-entrenched deposit franchise that spans twelve states as positives towards the IA. However, in completing the review and assigning the IA, DBRS will also focus on Citizens’ plans to improve profitability, which has historically lagged peers due to low net interest margin (NIM) reflecting a loan book more weighted towards low yielding residential mortgage lending and the impact, albeit fading, of legacy interest rate swaps. Revenue growth has been challenged by NIM pressure, contraction in the loan portfolio primarily as a result of non-core loan run-off, and reduced fee income. As such, DBRS will not only consider Citizens’ ability to improve its NIM, but also grow interest-earning assets in a slow growth environment while continuing to execute on cost control initiatives. Further, the Company’s ability to expand non-interest income in the face of regulatory changes and a likely slowing in mortgage origination activity due to the evolving interest rate environment will be assessed. While DBRS notes the strengthened capital base of Citizens, however, given the uncertainty of parental ownership, DBRS will seek clarity on capital management plans. DBRS will also consider the Company’s liquidity position and ability to withstand a stressed environment without support from the Group. Finally, DBRS will assess the overall effect of a potential RBS Group divestment on the operating strategy and business of Citizens, and the ultimate impact on the franchise strength of Citizens.

Headquartered in Providence, Rhode Island, RBS Citizens Financial Group, Inc. is a commercial bank holding company for RBS Citizens, NA and Citizens Bank of Pennsylvania. At March 31, 2013, Citizens reported $126.3 billion in assets.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at:
http://www.dbrs.com/about/methodologies

[Amended on June 18, 2014, to reflect actual methodologies used.]

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Rating Committee Chair: William Schwartz
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 21 July 2011

For additional information on this rating, please refer to the linking document under Related Research.