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

DBRS, Inc. (DBRS) has today confirmed the Issuer and Long-Term Debt ratings of RBS Citizens Financial Group, Inc. (Citizens or the Company) and its related bank subsidiaries, at A (low). The ratings action follows DBRS’s downgrade of Citizens’ parent, The Royal Bank of Scotland plc (RBS) to A (low). Concurrently, DBRS has confirmed the Short-Term ratings of Citizens at R-1 (low). The trend on the ratings of RBS Citizens Financial Group, Inc. is Negative, while the trend on the operating bank subsidiaries of Citizens is Stable. DBRS has also today confirmed the A (low) intrinsic assessment (IA) of the operating bank subsidiaries of Citizens.

In confirming the ratings and maintaining the SA1 designation for Citizens, DBRS recognizes Citizens’ position as a wholly-owned subsidiary of RBS that would continue to get support from its parent, if needed.

The Negative trend on the bank holding company, RBS Citizens Financial Group, Inc. reflects that upon the commencement of the initial public offering process, DBRS will place the rating of the bank holding company, RBS Citizens Financial Group, Inc., one notch below that of the operating bank subsidiaries, which is standard DBRS policy for stand-alone bank holding companies.

The Stable trend for the operating bank subsidiaries considers DBRS’s view that the underlying fundamentals of Citizens operating banks that are considered in the IA are Stable. Importantly for the IA, the 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.

The confirmation of the A (low) IA reflects the strength of Citizens on a stand-alone basis. In DBRS’s view the Company’s solid U.S. regional banking franchise, its acceptable risk profile and sound balance sheet, which remains primarily deposit funded continue to support the IA at the current level. Moreover, the IA reflects the Company’s subdued yet resilient earnings capacity. Similar to many banking peers, the tepid economic recovery has muted demand for banking products and new lending while the low rate environment has pressured margins. 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.

In confirming the IA, DBRS recognizes the early progress Citizens has made in executing on its strategic initiatives to generate loan growth and improve earnings. Despite the slow growth economy, Citizens achieved quarter-on-quarter loan growth in each of the last two quarters of 2013, including 6% expansion in 4Q13. Importantly, in 4Q13, loan growth was achieved in both the consumer and commercial lending portfolios. Citizens continues to shift the mix of its loan portfolio away from consumer loans towards a mix more reliant on commercial loans. Specifically, commercial loans accounted for 46% of total loans at September 30, 2013 compared to 37% at year-end 2009.

Core profitability is improving supported by growth in earning assets at improved margins and actions taken to reposition the securities available for sale portfolio. For 2013, Citizens reported a pre-tax loss of $3.5 billion, which included a pre-tax $4.4 billion goodwill impairment charge in the Retail Banking unit. Excluding the impairment charge, Citizens generated core earnings of $654 million, a 2% year-on-year (YoY) improvement from 2012. Net interest margin stabilized while non-interest expense, excluding goodwill impairment and litigation settlement expense, was 2% lower YoY. In 4Q13, Citizens generated pre-tax income of $208.0 million, a 27% YoY improvement on higher net interest income and lower expenses.

Regulatory capital ratios are strong and exceed peers. Nonetheless, DBRS expects capital metrics to trend lower towards the peer median by the time Citizens is divested. At December 31, 2013, Citizens’ Basel I Tier 1 capital ratio was 13.5%. With regards to forthcoming regulatory changes, DBRS sees Citizens as well-positioned. Citizens fully loaded Basel III Common Equity Tier 1 ratio was 13.6% at September 30, 2013, the last date data is available.

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 December 31, 2013, Citizens reported $122.3 billion in assets.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents 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: 20 November 2013

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