DBRS Confirms RBSG Ratings Following the Implementation of the Initial Ring Fencing Transfer Scheme

DBRS Ratings Limited (DBRS) has confirmed the ratings of The Royal Bank of Scotland Group plc (RBSG or the Group), including its BBB Long-Term Issuer Rating. This follows the implementation of the initial Ring-Fencing Transfer Scheme (RFTS), announced on 30 April 2018. As part of the initial RFTS, The Royal Bank of Scotland plc, which was renamed "NatWest Markets plc" ("NWM") on 30 April 2018, transferred its UK retail & commercial banking business to Adam & Company plc and transferred its covered bonds issuance and the Mentor business to National Westminster Bank plc (NatWest). Simultaneously Adam & Company plc was renamed "The Royal Bank of Scotland plc" (RBS plc). The ongoing reorganisation of the Group’s legal entity structure and business model is required as part of the UK’s ring fencing requirements. This will ultimately lead to the splitting of the Group into ring-fenced and non ring-fenced entities prior to the 1 January 2019 deadline. Concurrently, DBRS has confirmed the BBB (high) Long-Term Issuer Ratings of NWM and of The Royal Bank of Scotland N.V. (RBS NV). In addition, DBRS discontinued the ratings of RBS Holdings N.V., RBS Capital Funding Trust V, RBS Capital Funding Trust VI and RBS Capital Funding Trust VII.

The Intrinsic Assessment (IA), which reflects the Group’s combined credit strength, has been confirmed at BBB (high). Taking into account that the ring-fencing results in a broader distribution of the Group’s activities between various operating entities, DBRS has now attached the Group’s IA to RBSG. Previously, the IA of the Group was attached to the lead operating entity, the former The Royal Bank of Scotland plc. The Support Assessment for the Group was maintained at SA3. The trend on all ratings is Stable. Please see a full list of the rating actions at the end of this press release.

KEY RATING CONSIDERATIONS
As part of the ring-fencing reorganisation, the majority of RBSG’s UK and Western European banking business will be placed within five licensed ring-fenced banks grouped under an intermediate holding company, NatWest Holdings Limited. NWM and The Royal Bank of Scotland International (Holdings) Limited will be direct subsidiaries of RBSG outside of the ring-fence. RBS NV will also be a non ring-fenced entity.

The BBB (high) IA of RBSG reflects DBRS’s assessment of the credit strength of the combined Group. While the ringfencing removes some flexibility for managing capital and funding within the Group, DBRS expects the various subsidiaries to remain strongly integrated, allowing RBSG to benefit from synergies across its different business lines. As a result, DBRS’s view of the combined strength of RBSG remains unchanged despite the implementation of ring-fencing. The Group is among the leading financial services providers in the UK, providing a wide range of products and services to personal, commercial and large corporate and institutional customers with a selective international presence. RBSG’s Long-Term Issuer Rating remains at BBB, one notch below the intrinsic assessment of its consolidated operations, in line with DBRS’s approach to rating holding companies. DBRS has not currently assigned a public rating to any of the Group’s ring-fenced entities.

RATING DRIVERS
Upward pressure on the ratings could arise, if the Group successfully resolves the outstanding major legacy issues, while at the same time, generating a track record of improved earnings.
Downward rating pressure could arise from higher than expected litigation or restructuring charges that have a significant adverse impact on earnings and capital. Potential adverse economic effects of the UK’s exit from the EU on the Group’s risk profile could also exert downward pressure on the ratings.

RATING RATIONALE
RBSG’s IA incorporates the strength of the Group’s core retail and commercial banking franchise in the UK, which remains a market leader despite the Group’s long restructuring period. The ratings also consider the Group’s ongoing focus on cost-efficiency, its well-positioned funding and liquidity profile and its improved credit quality and capital position. The ratings also take into account the outstanding legacy issues, notably the mortgage-backed securities litigation in the U.S., the settlement of which could have a significant impact on the Group’s capital position. DBRS notes that the Group successfully resolved some other legacy issues and wound-up the non-core division in 2017. RBSG’s Long-Term Issuer Rating of BBB is one notch below the Group’s IA, in line with DBRS’s approach to rating holding companies.

The confirmation of NWM’s ratings reflect DBRS’ view that the combined strength of RBSG remains unchanged even with the implementation of ring-fencing and therefore NWM remains rated at the same level as the Group IA. Despite regulatory restrictions on capital and funding flows across the ring-fence, DBRS expects various subsidiaries to remain strongly integrated, allowing RBSG to benefit from synergies across its different business lines. As part of the ring-fencing reorganisation, the majority of the UK and Western European banking business has been placed within five key ring-fenced banking entities, National Westminster Bank plc, The Royal Bank of Scotland plc (renamed from Adam & Company plc), Ulster Bank Ireland DAC, Ulster Bank Limited and Coutts and Company. These banks are grouped under an intermediate holding company, NatWest Holdings Limited. The ring-fenced banking group is expected to comprise around 80% of RBSG’s risk-weighted assets. NWM and The Royal Bank of Scotland International (Holdings) Limited are the key entities outside the ring-fence.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Prudential Regulation Authority, SNL Financial and company documents. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Tomasz Walkowicz, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Senior Vice President, Global FIG
Initial Rating Date: October 27, 2004
Last Rating Date: July 14, 2017

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