DBRS Confirms RBS at BBB (high), Trend Revised to Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of The Royal Bank of Scotland plc (RBS or the Bank) at BBB (high) for Senior Debt & Deposits, “A” for the Long-Term Critical Obligations and R-1 (low) for the Short-Term Notes rating. The Intrinsic Assessment (IA) for RBS is BBB (high), whilst the support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the Bank’s final ratings are positioned in line with its IA. A full list of ratings is included at the end of the press release.

In revising the trend to Stable, DBRS recognises the progress that RBS has continued to make over the past 18 months in restructuring the Group, illustrated by the full disposal of Citizens in October 2015, and the 84% reduction in RBS Capital Resolution’s (RCR) funded assets since its inception in January 2014. As a result, RBS has also demonstrated further improvements in asset quality, costs, funding and capital. The Group continues to face both legacy conduct issues (particularly US RMBS), and execution risks, especially relating to the disposal of Williams & Glyn (the European Commission-mandated bank branch disposal). Whilst the final US RMBS settlement could be substantial, DBRS notes that RBS has cumulative provisions of GBP 3.8 billion relating to the case, including an additional GBP 1.5 billion booked in 4Q15. DBRS also notes the Group’s strong track record to-date in restructuring its operations, and given the Bank’s currently strong capital ratios would expect the Group to be able to meet these challenges whilst maintaining satisfactory capitalisation.

RBS’s asset quality continues to improve, benefiting from several years of significant progress in deleveraging non-strategic assets, and improved credit quality across the Group’s core markets of the UK and Ireland. This is reflected in the Group’s impaired loan ratio of 3.6% at end-1Q16, compared with 3.9% at end-2015, and 6.8% at end-2014. RBS’s funding and liquidity position also strengthened further in 2015, with the usage of wholesale funding down 32% year-on-year (YoY), to GBP 79.1 billion. This compares favourably to a total liquidity portfolio of GBP 156 billion at end-2015.

The Group’s profitability, however, remains weak, with any underlying earnings generation still weighed down by litigation/conduct charges, restructuring costs and/or other charges. In light of this, DBRS views positively the continued focus on cost reductions, with underlying costs down GBP 983 million in 2015, ahead of the Group’s cost-savings plan for the year. DBRS also notes the Group’s solid capitalisation level, which positions the Group well to deal with any further charges. At end-1Q16, RBS reported a fully-loaded CRD IV Common Equity Tier 1 (CET1) ratio of 14.6%, an increase of 340 basis points (bps) from end-2014 (following the disposal of Citizens and ongoing derisking), and a fully-loaded Basel 3 leverage ratio of 5.3%.

DBRS also notes the Group’s extremely resilient market shares in its core activities of retail and commercial banking in the UK, corporate banking and debt capital markets in the 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. At end-February 2016, the HM Treasury’s economic interest in RBS was 72.6%.

RATING DRIVERS
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.

Downward rating pressure could arise if litigation or restructuring charges were to exceed current expectations and affect the Group’s capital strength. Continued success with the Group’s extensive plans is also important to reduce negative pressure from execution risk.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016). These can be found can be found at: http://www.dbrs.com/about/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.

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

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: October 27, 2004
Most Recent Rating Update: September 29, 2016

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