NatWest Markets Plc. Update following ratings' affirmation, outlook changed to. Positive. CREDIT OPINION 23 July Update

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1 CREDIT OPINION NatWest Markets Plc Update following ratings' affirmation, outlook changed to positive Update Summary rating rationale We rate NatWest Markets Plc's (NWM; previously the Royal Bank of Scotland plc) senior unsecured debt and deposits at Baa2 (long-term) and Prime-2 (short-term) and its counterparty risk rating (CRRs) at A3(cr) long-term) and P-2(cr) (short-term). RATINGS NatWest Markets Plc Domicile United Kingdom Long Term Debt Baa2 Type Senior Unsecured - Fgn Curr Outlook Positive Long Term Deposit Baa2 Type LT Bank Deposits - Fgn Curr Outlook Positive Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. We align the ratings of the Dutch entity NatWest Markets N.V. (NWM NV; previously Royal Bank of Scotland N.V.) to those of NWM, based upon our expectation that NWM NV will likely become the main entity for the group s wholesale activities in the European Union. The BCA of ba2 for NWM - the group s non-ring fenced bank - reflects: (1) exposure of its earnings to volatility and tail risk from its large capital markets activities; (2) inherently less diversified and hence less stable earnings profile; (3) weak profitability due to continued high restructuring costs and losses on legacy assets; and (4) high use of wholesale funding, albeit mitigated by sound liquidity. NatWest Markets NV s ratings are aligned with those of NatWest Markets. Credit strengths» High liquidity mitigates reliance on confidence-sensitive wholesale funding Contacts» High volume of senior unsecured debt results in two notches of loss-given failure uplift Alessandro Roccati Senior Vice President alessandro.roccati@moodys.com» Moderate probability of government support results in one notch uplift incorporated in its Counterparty Risk Rating Laurie Mayers Associate Managing Director laurie.mayers@moodys.com Credit challenges Nick Hill MD-Banking nick.hill@moodys.com » The implementation of ring-fencing in the UK will weaken the credit profile» High reliance on capital markets activities exposes earnings to volatility and tail-risk» Weak profitability due to ongoing restructuring costs and losses on legacy assets CLIENT SERVICES Americas Asia Pacific Japan EMEA

2 Rating outlook NWM s and NWM NV s ratings outlook is positive, reflecting our expectation that fundamentals will improve over the next eighteen months as the non-core unit will wind-down further, tail risk from legacy litigations recedes and the bank substantially completes its restructuring enabling it to generate more stable and sustainable earnings. Factors that could lead to an upgrade» NWM s and NWM NV s ba2 BCA could be upgraded if NWM were to substantially complete its restructuring, its asset risk profile were to improve due to run-off or disposal of its legacy assets, its profitability and efficiency improved on a sustainable basis, and/ or its capitalisation were to increase significantly. An upgrade of the BCA would likely lead to an upgrade of all ratings. An upgrade could also result from an upgrade of the notional BCA of RBSG, which would likely provide support to these entities in case of need. An upgrade of NWM's and NWM NV's long-term senior unsecured debt and deposit rating could also result from a higher-thanexpected stock of more junior bail-in-able liabilities that would provide greater protection for senior liabilities. Factors that could lead to a downgrade» NWM s and NWM NV s BCAs of ba2 could be downgraded in the event of: (1) a substantial increase in riskier trading activities; (2) a decline in capitalisation; (3) large losses from its book of legacy assets; (4) a material weakening of the liquidity profile; or (5) large unexpected additional restructuring costs. A downgrade of the BCA would likely lead to a downgrade of all ratings. A downgrade could also result from a downgrade of the BCA of RBSG, indicating lower likelihood of support. The ratings could also be downgraded due to a reduction in the stock of bail-in-able liabilities that would reduce the degree of protection for senior ratings. Key indicators Exhibit 1 NatWest Markets Plc (Consolidated Financials) [1] Total Assets (GBP billion) Total Assets (EUR billion) Total Assets (USD billion) Tangible Common Equity (GBP billion) Tangible Common Equity (EUR billion) Tangible Common Equity (USD billion) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) , CAGR/Avg , [1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] Basel II; IFRS. [4] May include rounding differences due to scale of reported amounts. [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented. Source: Moody's Financial Metrics This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Profile NWM will conduct mostly capital markets activities within RBSG group; NWM NV will likely become the entity conducting wholesale activities in the European Union outside the UK. Together, the two entities will account for around 15% of group risk-weighted assets. NatWest Markets will have a significantly weaker credit profile as it will be largely market funded, have a sizeable trading and repo book, and will provide broker-dealer capabilities. We reflect the complexity of the bank's multi-year restructuring program, the high level of operational risk associated with the execution of its restructuring, including structural reform, in a one-notch negative adjustment for Corporate Behaviour, in the qualitative section of our BCA scorecard. The ring-fenced bank subgroup (under an intermediate holding company, NatWest Holdings Ltd) will retain retail & commercial banking activities and will account for around 80% of group risk-weighted assets. The ring-fenced bank sub-group will include National Westminster Bank Plc (NWB; long-term senior unsecured debt rating A2 positive), Ulster Bank Ireland DAC (long-term deposits Baa1 positive), Ulster Bank Limited (UBL, long-term senior unsecured debt rating A2 positive) The Royal Bank of Scotland plc (RBS plc, previously: Adam and Company PLC; long-term deposit rating A1 stable), and Coutts & Company (unrated). NatWest Bank, the largest ring-fenced bank in the ring-fenced sub group, will have a stronger credit profile as it will retain mostly retail and SME activities, and have a more deposit-based funding profile. Exhibit 2 Previous and proposed simplified legal entities group structure Source: Moody s Investors Service on Company data Detailed credit considerations High reliance on capital markets activities exposes to earnings volatility and tail-risk As a result of the implementation of ring-fencing, NWM will have a significantly weaker credit profile than it does currently, as it will become the group s principal entity for conducting capital markets and some other wholesale activities. We consider these activities to be typically more confidence sensitive, opaque and complex and subject to greater earnings volatility than retail and commercial banking. NWM will become largely market funded, have a sizeable derivatives and repo book, and provide broker-dealer capabilities. NWM will retain a decreased but still large presence in global capital markets reflecting the group s objective to support its corporate and financial institution clients, as well as the markets requirements of its ring fenced affiliates, despite the ongoing reduction of the bank's capital markets operations. RWA allocated to capital markets and investment banking operations were 52.9 billion at end-2017, of which 20.6 billion related to legacy assets. Capital markets revenues are inherently volatile, as they largely depend on market conditions, and more confidence sensitive, and are reflected in our asset risk score of ba1. The high degree of volatility of capital markets revenues and inherent although decreasing risks 3

4 carried by this type of activity are reflected in a one-notch negative adjustment for opacity and complexity, in the qualitative section of our BCA scorecard, in line with the treatment for similar banks. Weak profitability due to ongoing restructuring costs and losses on legacy assets The potential earnings volatility stemming from the bank's capital markets activities, will be further exacerbated by ongoing restructuring costs, and potential litigation settlements. In 2017, the NatWest Markets division reported an operating loss of 1 billion (an improvement versus a loss of 1.9 billion in 2016) driven by losses in its non-core activities, while core activities broke-even. We expect NWM to report net losses over the outlook period, due to losses on legacy assets and high restructuring costs. The assigned profitability score of b1 reflects the ongoing profitability challenges at the banks. In order for the bank to achieve a sustainable level of profitability, the efficiency of the core capital markets activities will need to improve. High liquidity mitigates reliance on confidence-sensitive wholesale funding In line with other capital market participants, NWM has large wholesale (secured and unsecured) short-term funding requirements, which increase the institution's sensitivity to market confidence. Positively, its liquidity position will benefit from large and liquid assets, held as a results of its mostly plain vanilla capital markets business and as investments of the down-streamed MREL debt. Our assigned funding and liquidity scores are b3 and aa3 respectively, resulting in a combined liquidity score of ba1. Notching Considerations Loss Given Failure High volume of senior unsecured debt resulting in two notches of loss-given failure uplift from the BCA. We apply our advanced Loss Given Failure (LGF) analysis to NWM as it is domiciled in the UK, which we consider as an operational resolution regime, following the implementation of the EU Bank Resolution and Recovery Directive (BRRD). We include NWM NV in the same at failure waterfall as NWM, due to the ongoing transfer of assets to the UK entity. We assume: (1) residual tangible common equity at failure of 3% of tangible banking assets, (2) losses post-failure of 13% of tangible banking assets, (3) junior wholesale deposits accounting for 100% of the bank's total deposit book, (4) a 25% run-off in junior wholesale deposits, and (5) a 25% probability of deposits being preferred to senior unsecured debt. We consider NWM s perimeter, as we deem this to be the resolution perimeter adopted by the regulator. Under Moody's advanced LGF analysis, the long-term senior unsecured debt and deposit ratings of NWM and NWM NV incorporate two notches of uplift, and the Counterparty Risk Assessment incorporates three notches of uplift, reflecting very low losses in the event of the bank s failure. Government Support Given the low level of systemic importance of these non ring-fenced entities, we expect a low probability of government support for NWM s and NWM NV s deposits, senior unsecured debt and other junior securities, resulting in no uplift. The CRR incorporates a one-notch uplift for government support, given our view that there is a moderate probability of support for the bank's holders of operational liabilities from the UK government, due to the interconnectedness of the bank s capital markets activities with other parts of the global financial system. Counterparty Risk (CR) Assessment Counterparty Risk Assessments (CR Assessments) are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities. NWM's CR Assessment is positioned at A3(cr)/P-2(cr). 4

5 The CR Assessment, prior to government support, is positioned three notches above NWM's adjusted BCA of ba1. The uplift results from the buffer against default provided to the operating obligations by substantial bail-in-able debt and deposits. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than the expected loss. Therefore, we focus purely on subordination and take no account of the volume of the instrument class. The CR Assessment also benefits from one notch of government support. Counterparty Risk Ratings (CRR) Moody s Counterparty Risk Ratings (CRRs) are opinions on the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event that such liabilities are not honoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralised portion of payables arising from derivative transactions and the uncollateralised portion of liabilities under sale and repurchase agreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions. NWM's CRR is positioned at A3/P-2. The CRR is three notches above the bank's standalone BCA of ba1. The uplift derives from the buffer against default provided to the operating obligations by substantial bail-in-able debt and deposits. Although NWM's is likely to have more than a nominal volume of CRR liabilities at failure, this has no impact on the CRRs because the significant level of subordination below the CRR liabilities at the bank already provides the maximum amount of uplift under our rating methodology. The CRR also benefits from one notch of government support, in line with our assumption for CR Assessment. 5

6 Ratings Exhibit 3 Category NATWEST MARKETS PLC Outlook Counterparty Risk Rating Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured Subordinate Jr Subordinate -Dom Curr Commercial Paper Other Short Term Moody's Rating Positive A3/P-2 Baa2/P-2 ba2 ba1 A3(cr)/P-2(cr) Baa2 Ba3 Ba3 (hyb) P-2 (P)P-2 PARENT: THE ROYAL BANK OF SCOTLAND GROUP PLC Outlook Baseline Credit Assessment Adjusted Baseline Credit Assessment Senior Unsecured Subordinate Jr Subordinate Pref. Stock Non-cumulative Pref. Shelf Non-cumulative Commercial Paper Other Short Term Positive baa2 baa2 Baa2 Baa3 Ba1 (hyb) Ba2 (hyb) (P)Ba2 P-2 (P)P-2 Source: Moody's Investors Service 6

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8 Contacts Nick Hill MD-Banking CLIENT SERVICES Alessandro Roccati Senior Vice President 8 Laurie Mayers Associate Managing Director Americas Asia Pacific Japan EMEA