DBRS Downgrades RBS Citizens Financial Group, Inc. Senior Debt to A (low), Trend Negative

DBRS, Inc. (DBRS) has today downgraded the Issuer and Long-Term Debt ratings of RBS Citizens Financial Group, Inc. (Citizens or the Company) and its related bank subsidiaries, to A (low) from ‘A’. The ratings action follows DBRS’s downgrade of Citizens’ parent, The Royal Bank of Scotland plc (RBS – rated ‘A’ by DBRS). Further, DBRS has lowered the Short-Term ratings of Citizens to R-1 (low) from R-1 (middle). The trend on the long-term ratings is Negative mirroring that of RBS while the trend on the short-term ratings is Stable. Concurrently, DBRS today has assigned an intrinsic assessment (IA) of A (low) to the operating bank subsidiaries of Citizens. This action removes the ratings from Under Review with Negative Implications, where they were placed on July 15, 2013.

On November 1, 2013, RBS announced, as part of its strategic review, its intention to bring forward the previously announced IPO of Citizens to the second half of 2014 with the aim of fully divesting of the Company by the end 2016. Given the planned divestiture, DBRS no longer views Citizens as a core operating unit of RBS. Nonetheless, DBRS considers Citizens a strategic investment for RBS, and believes RBS will continue to provide support to Citizens to protect this substantial investment, if needed. As such, DBRS will continue to assign an SA1 designation to Citizens as long as it is substantially owned by RBS. As a supported rating with a SA1 designation, Citizens’ rating will move in tandem with RBS’s rating.

The A (low) IA reflects the Company’s solid U.S. regional banking franchise, which benefits from strong competitive positions in key markets across New England, the Mid-Atlantic, and the Midwest. Moreover, DBRS views the Company’s deposit franchise that spans twelve states as well-established and defendable. Importantly to the IA, the announced divesture from RBS should have no impact on the strategy of Citizens. DBRS considers separation risks as manageable, as Citizens is independently managed, self-funded and shares no major IT systems or platforms with RBS.

Moreover, the IA takes into account Citizens sound financial risk profile, which is anchored by a predominately deposit funded balance sheet. Currently, capital ratios are strong and exceed peers, but DBRS expects capital metrics to trend downward towards the peer median by the time Citizens is divested. At June 30, 2013, Citizens’ Basel III fully loaded Common Equity Tier 1 ratio was 14.0%. Positively, Citizens risk profile has improved since the financial crisis with the run-off of non-core assets. As such, DBRS considers Citizens risk profile as acceptable and in line with peers.

The IA also reflects the Company’s below-peer profitability. While DBRS acknowledges that Citizens return on equity is impacted by the Company’s holding more capital than peers, DBRS sees improving profitability to a level more commensurate with the strength of the franchise as the Company’s key challenge over the medium-term. To this end, Citizens continues to shift the mix of its lending book towards more commercial lending with commercial loans accounting for 45% of total loans at June 30, 2013 compared to 32% at year-end 2009.

The Negative trend on the long-term ratings reflects that of RBS. However, from DBRS’s perspective, the underlying fundamentals of Citizens that are considered in the IA are Stable. DBRS notes that upon the commencement of the IPO process, DBRS will lower the rating of the bank holding company, RBS Citizens Financial Group, Inc., by one notch from the operating bank subsidiaries, which is standard DBRS policy for bank holding companies. Further, once RBS no longer owns the majority of Citizens, DBRS will lower the support assessment of Citizens to SA3, which is consistent with other independent banking organizations in the United States.

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 June 30, 2013, Citizens reported $117.8 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 Organizations. Other applicable methodologies include DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt and 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 the 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: Roger Lister
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 15 July 2013

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