DBRS Maintains RBS Intrinsic Assessment at BBB (high); Snr Ratings remain Under Review Neg

DBRS Ratings Limited (DBRS) has today maintained Royal Bank of Scotland plc’s (RBS or the Bank) intrinsic assessment (IA) at BBB (high). The Bank’s Long-term debt and deposit ratings remain at A (low) Under Review with Negative Implications (URN), with the URN reflecting the action taken on 20th May 2015 to review the systemic support assumptions of 38 European Banking Groups. The short-term rating remains R-1 (low) Stable. The long term ratings of Royal Bank of Scotland Group plc (RBSG or the Group) remain at BBB (high) URN and the short-term rating at R-2 (high) URN.

This action follows a detailed review of the Bank’s performance and outlook. The ongoing restructuring and downsizing of RBS remains a challenging and drawn-out process. However, DBRS considers that the future shape and financial profile of the Group is considerably clearer than it has been over the past 7 years.

RBS continues to make progress in derisking and deleveraging, and DBRS no longer considers credit risk as a major rating driver for the Group, with the Non-Performing Loan ratio (NPL) down to 5.4% at end-March 2015 and coverage levels on remaining NPLs now at 62%.

The key remaining issues for the Group are managing the outstanding litigation/ conduct charges (particularly US RMBS) and completing the restructuring programme (particularly the CIB restructuring, but also the cost reduction programme, the full disposal of Citizens, and the IPO of Williams & Glynn). DBRS expects litigation/ conduct and restructuring charges to weigh significantly on the Bank’s earnings, particularly over the next 2 years. However, the Bank has strengthened capital significantly (reported common equity tier 1 ratio was 11.5% at end-March 2015) and plans to exit a further GBP 170 billion risk-weighted assets (RWAs) over the 2015 – 2019 restructuring period (with a target for RWAs of under GBP 300 billion by the end of 2015). Given the Bank’s track record in carrying out restructuring, we expect RBS’s capital ratios to remain solid, even as it absorbs high restructuring charges and conduct/ litigation costs.

DBRS notes that the Group’s ratings are supported by the fact that it still retains extremely strong market shares in its core activities – retail and commercial banking in the UK, corporate banking/ debt capital markets in UK and Europe, and retail and commercial banking in the still weak but recovering Irish market. Despite the sizeable challenges faced by RBS over the long restructuring period, its market shares in its core businesses have largely remained intact and revenues and margins in these core businesses have remained relatively stable.

The Group also benefits from a strong funding and liquidity position that is derived from the strength of its core client franchises. Usage of wholesale funding continues to decrease and the Group reported a loan-to-deposit ratio of 95% at end-2014.

While the Bank has made considerable progress, there would be downward pressure on the IA if litigation charges or restructuring charges were to exceed current expectations and affect the Group’s capital strength. Continued success with the Bank’s extensive plans is also important to reduce negative pressure from execution risk. Upward pressure on the ratings could arise in the medium term, if the Group successfully executes its wide-ranging cost reduction plan, as well as its accelerated risk reduction/ disposals and earnings volatility recedes.

The Bank’s ratings remain Under Review with Negative Implications due to DBRS’s review of the systemic support assumptions for a number of European Banks initiated on 20th May 2015. The review reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Currently, RBS has a support assessment of SA-2, which results in a one-notch uplift from RBS’s IA of BBB (high) to the final rating of A (low). During the review period DBRS is considering whether to change the support designation of a number of European banks from SA-2 to SA-3, which is the category for banks in countries where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. Such a conclusion would lead to the removal of any uplift and a downgrade of the senior ratings for any affected banks. The review is expected to be completed in September.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Roger Lister
Initial Rating Date: 27 October 2004
Most Recent Rating Update: 20 May 2015

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For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

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