The Royal Bank of Scotland Group plc

Transcription

1 CREDIT OPINION The Royal Bank of Scotland Group plc Update post interim results Update Summary Rating Rationale The long-term senior unsecured debt rating of The Royal Bank of Scotland Group plc (RBSG) is Baa2 with a positive outlook. RATINGS Domicile United Kingdom Long Term CRR Not Assigned Long Term Debt Baa2 Type Senior Unsecured - Fgn Curr Outlook Positive Long Term Deposit Not Assigned 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. RBSG's Baseline Credit Assessment (BCA) is supported by: (1) its strong capital position, which is higher than that of its peers and above its own target; (2) sustainable earnings from core retail and corporate businesses, which mitigate ongoing high restructuring costs, losses on non-core assets and provide substantial shock absorbers relative to the capital markets business; (3) improved risk framework and governance. The group's BCA is however constrained by (4) exposure to more volatile and complex capital markets activities and reduced non-core assets, which are currently in run-off. RBSG is the ultimate parent and holding company of the non-ring-fenced operating company NatWest Markets Plc (NatWest Markets, former RBS plc) and of the ring-fenced operating company National Westminster Bank plc (NatWest Bank). The long-term senior unsecured debt ratings of NatWest Markets are Baa2 with a positive outlook. The issuer rating of NatWest Bank) is A2 with a positive outlook. Exhibit 1 Rating Scorecard - Key Financial Ratios1 Contacts Alessandro Roccati Senior Vice President alessandro.roccati@moodys.com 45% 18% 4% 16% Solvency Factors Laurie Mayers Associate Managing Director laurie.mayers@moodys.com Median -rated banks 39.9% 17.8% 14% 3% 12% 25% 1% 2% 23.7% 8% 15% 6% 4% 2% 1% 3.4% 5%.1% % Nick Hill MD-Banking nick.hill@moodys.com % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Source: Moody's Banking Financial Metrics CLIENT SERVICES Americas Asia Pacific Japan EMEA % Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets Liquidity Factors (RHS) Liquidity Factors Aleksander Blacha Associate Analyst aleksander.blacha@moodys.com RBSG (BCA: ) 2%

2 Credit Strengths» Capitalization is strong» Large retail and commercial banking earnings mitigate ongoing high restructuring costs and losses on non-core assets» Funding and liquidity are sound Credit Challenges» Asset risk is converging towards peers» Capital markets activities, while reduced, remain sizeable Rating Outlook RBSG s senior unsecured debt ratings carry a positive outlook, incorporating our view that during the next eighteen months the group will largely complete its complex multi-year restructuring exercise and will generate more stable and sustainable earnings. Factors that Could Lead to an Upgrade» An upgrade of RBSG's ratings could occur if the bank were to return to sustainable profitability in line with that of its higher-rated peers, continue to generate capital organically and substantially complete its multi-year restructuring exercise. Factors that Could Lead to a Downgrade» RBSG s ratings could be downgraded if the group's restructuring and de-risking strategy fails to deliver further improvements in its credit fundamentals, weakening its capital, profitability and operational efficiency levels and raising its asset risk. A significant deterioration in the operating environment beyond our base case expectations, potentially resulting from Brexit, may also result in a downgrade of the BCA. The ratings could also be downgraded as a result of a sizeable reduction in the outstanding liabilities that could be bailed in, resulting in a higher loss-given-failure for senior creditors. Key indicators Exhibit 2 The Royal Bank of Scotland Group 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 (%) CAGR/Avg , 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 Gross Loans / Due to Customers (%) [1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scale of reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel III periods presented. Source: Moody's Financial Metrics Profile Full recovery in sight, once restructuring is completed RBSG has made substantial progress in its restructuring plan, including: the de-risking of its balance sheet and the reduction of noncore assets; improving its core Personal and Business Banking and Commercial and Private Banking businesses in the UK and in Ireland; and shrinking its NatWest Markets' capital markets operations. The group has resolved large litigation matters including settlements with the US Department of Justice (DOJ) and the Federal Housing Financing Agency (FHFA) and has topped-up its main pension scheme, thus reducing future capital and earnings volatility stemming from the periodic actuarial revaluations of its pension deficit. All these actions have been taken whilst its capital position has remained strong and above peers, and above management target. We believe that completion of the plan will make RBSG a more efficient UK-focused group: non-recurring charges will further decrease over the next eighteen months, increasing efficiency and making the strong core profitability of the bank s retail and commercial operations more tangible. Management targets a return on tangible equity of above 12% and a cost-to-income ratio of below 5% by 22. Detailed Credit Considerations Asset risk is converging towards peers. Capital markets activities, while reduced, remain sizeable RBSG's credit quality has materially improved as a result of a reduction in problem loans and the disposal of non-core assets, but remains below its large domestic peers. IFRS 9 Stage 3 customer loans as a proportion of gross loans were 3.6% at 1 January 218 (this compares with a 2.7% ratio of problem loan - RBSG's internal definition - as a proportion of gross loans under IAS 39 at end-217). Legacy RWAs were around 23 billion at end-217, representing 11% of group RWAs2. We expect legacy RWAs to continue to decrease as the bank progresses towards the completion of the non-core asset run-off and delivers further material reduction in risk. RBSG's operating environment is heavily influenced by the UK and its Macro Profile is currently Strong +. UK banks benefit from operating in a wealthy and developed country with a very high degree of economic, institutional and government financial strength as well as a low susceptibility to event risk. The main risks to the system now stem from the economic uncertainty resulting from the UK s decision to leave the European Union (EU) and the high level of indebtedness of UK households, which are sensitive to changes in interest rates. UK banks are largely funded by deposits and banks' funding structures have remained relatively stable in the past few years, with slight increases in capital as well as declines in short-term funding. Litigation and legacy risks also receded: RBSG has now settled all major outstanding litigations. The settlement with the Department of Justice (DoJ) removed tail risk related to the substantial RMBS litigation, and will allow RBSG s management to focus more closely on completing the planned restructuring of the bank. This will benefit bondholders if it is substantially achieved. RBSG retains a decreased but still large presence in global capital markets through NatWest Markets reflecting the group s objective of maintaining investment banking capabilities to support its corporate, financial institution and central bank clients. RWAs allocated to the NatWest Markets division (including 14.3 billion legacy RWAs) were 46.5 billion at end-september 218 (around one quarter of the group total). Core capital markets revenues were 1.3 billion for 9m 218, accounting for around 12% of group revenues. Our assigned Asset Risk score of reflects both the improvement RBSG has achieved in credit quality and significantly decreased tail risk from litigation and conduct risks. The one-notch negative adjustment for opacity and complexity reflects the risks and high volatility inherent in RBSG s capital markets activities, as well as the complexity of the group s multi-year restructuring program. 3

4 Capitalization is strong RBSG has one of the highest capital ratios among domestic and international peers, with a CET1 ratio of 16.7% as of end-september 218. The 6 bps CET1 ratio increase during the quarter was driven by a reduction in RWAs combined with quarterly profits. The group expects to be required to meet a CET1 requirement of 11.1% (4.5% plus a 2.1% Pillar 2A add-on plus UK countercyclical capital buffer of 1.% as well as conservation buffer of 2.5% and a GSIB buffer of 1.%) at 1 January 219. Management targets a CET1 ratio in excess of 13%. The group announced an intention to declare an interim dividend of.2 per share and provided a future target of a 4% payout of attributable profits. RBSG also indicated that it will consider additional ways to distribute capital to shareholders from 219. We anticipate capital ratios will decrease starting from 219: we expect organic capital generation of around 1bps in 219 and around 2bps in 22 to be more than offset by capital consumption due to RWA growth, further pension contributions, dividend payments and other distributions. Despite the expected decrease in regulatory capital, RBSG's CET1 ratio will remain well-above the group s target of a CET1 of in excess of 13%. RBSG reported a CRR leverage ratio of 5.4% and a UK leverage ratio of 6.3% at end-september 218, which is well above the UK Prudential Regulation Authority's current 3.25% requirement. Exhibit 3 Capital position remains strong following the US Department of Justice settlement RBSG s CET1 ratio (end-point) and Basel III leverage ratio CET1 ratio 2% 1.1 bn RMBS charge 2. bn pension charge Leverage ratio 3.1 bn RMBS provisions 18% 16% 15.% 14.5% 14.1% 13.4% 14% 16.4% 15.9% 15.5% 14.8% 16.7% 16.1% 12% 1% 8% 6% 5.2% 5.6% 5.1% 5.% 5.1% 5.3% 5.3% 5.4% 5.2% 5.4% 4% 2% % Jun6 Sep6 Dec6 Mar7 Jun7 Sep7 Dec7 Mar8 Jun8 Sep8 Source: RBS s quarterly Interim Management Statements, Moody's RBSG expects its minimum requirement for own funds and eligible liabilities (MREL) to be around 28% of RWAs (including capital buffers) on 1 January 222 ( the end-state ). We assign a capital score of a1, reflecting the strong capital position of the group, mitigated by our view that RBSG's ability to issue capital as a regular course-of-business action, is somewhat constrained by the UK government's (Aa2 stable) majority stake, following the state bail-out of the bank in October 28. Sizeable retail and commercial banking earnings mitigate ongoing high restructuring costs and losses on non-core assets RBSG maintains a leading position in the UK financial services market, where it mainly operates under the NatWest, RBS and Ulster brands. The group also has a relatively small but profitable UK-based wealth management business (Coutts, unrated). Retail and commercial activities continue to provide good underlying shock absorbers against the potential earnings volatility stemming from the bank's capital markets activities, restructuring costs and operational risk and costs. In 217, the group reported 752 million net attributable profit for the year, the first annual profit in ten years, equal to a return on tangible equity of around 2% and a return on assets of around.1%. RBSG's adjusted revenues3 increased 4% year-on-year; adjusted 4

5 operating costs4 reduced by 81 million or 1%. The bank recorded 1.3 billion of litigation and conduct costs and 1.6 billion restructuring costs. In the first nine months of 218, RBSG reported a net profit of 1.6 billion relative to a profit of 1.8 billion the year before. Revenues for the period increased 3% year-on-year, due to higher non-interest income, driven by increased assets under management in the Commercial & Private Banking business. Underlying operating costs5 declined by 2%. During the period, RBSG booked 2 million for payment protection insurance (PPI) claims and 1,19 million of conduct and litigation costs, mostly relating to the US RMBS settlement with the US Department of Justice. In Q4 218, we expect high restructuring costs: RBSG charged 649 million year-to-date, around half of our expectation of a 1.25 billion annual run-rate6 Longer-term, we expect moderate pressure on revenues, cost of credit and profitability metrics, due to Brexit: the period leading up to Brexit will likely result in heightened uncertainty over the UK s future trade relationship with the EU, leading to lower economic growth, reduced demand for credit, a modest increase in unemployment, downward pressure on property prices and potentially higher and more volatile wholesale funding costs. We assign a ba2 score for Profitability, reflecting ongoing profitability pressures. Funding and liquidity are sound RBSG has sound funding and liquidity positions, as reflected in the a3 Combined Liquidity Score. However, in line with other capital market participants, the bank has large, albeit reducing, wholesale (secured and unsecured) funding requirements, which increase the institution's sensitivity to market confidence. RBSG's exposure to wholesale funding is moderate: its gross loans / deposit ratio was 87% at end-september 218 (9% at endseptember 217) and the stock of wholesale funding was 78 billion at end-september 218, of which only 14 billion is short-term. The group's liquidity is sound: the liquidity buffer of 195 billion at end-september 218, well in excess of the 78 billion wholesale funds, indicating a much stronger liquidity position than many of its European peers. At end-september 218, RBSG reported a Basel 3 Net Stable Funding Ratio (NSFR) of 139% and a Liquidity Coverage Ratio (LCR) of 158%. Notching Considerations Loss Given Failure We apply our advanced Loss Given Failure (LGF) analysis to RBSG because it is domiciled in the UK, which we consider as an operational resolution regime, following the implementation of the EU Bank Recovery and Resolution Directive (BRRD). Our standard assumptions assume: (1) residual tangible common equity at failure of 3% of tangible banking assets; (2) losses post-failure of 8% of tangible banking assets; (3) junior wholesale deposits accounting for 26% of the bank's total deposit book; (4) a 25% run-off in junior wholesale deposits; (5) a 5% run-off in preferred deposits; and (6) a 25% probability of deposits being preferred to senior unsecured debt. Our tangible banking assets (TBAs) include group TBAs less Ulster Bank Ireland DAC (UBI, A2 senior unsecured debt rating; ba1 BCA) TBAs, as UBI is based outside the UK. For the holding company's senior unsecured debt (which we consider structurally subordinated to operating companies' senior unsecured debt), our LGF analysis shows a moderate loss-given-failure resulting from the combination of its own volume and the amount of debt subordinated to it. This results in no notching uplift from the notional BCA of. For junior securities, our LGF analysis shows a high level loss-given-failure, given the small volume of debt and limited protection from more subordinated instruments and residual equity. We also incorporate additional notching for junior subordinated and preference share instruments reflecting coupon suspension risk ahead of failure. Government Support For RBSG's senior unsecured debt, we consider the probability of government support from the UK government (Aa2 stable) to be low and therefore we do not include uplift for government support. This is because such support, if needed, would likely only be provided to the operating entities, in order to enable them to maintain critical functions and mitigate risks to financial stability from their failure. 5

6 Rating methodology and scorecard factors Exhibit 4 The Royal Bank of Scotland Group plc Macro Factors Weighted Macro Profile Strong + Factor 1% Historic Ratio Initial Score Expected Trend Assigned Score Key driver #1 Key driver #2 Solvency Asset Risk Problem Loans / Gross Loans 3.4% a3 Operational risk Expected trend Capital TCE / RWA 17.8% aa2 a1 Expected trend Access to capital Profitability Net Income / Tangible Assets.1% b3 ba2 Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 23.7% Term structure Liquid Resources Liquid Banking Assets / Tangible Banking Assets 39.9% a1 a1 Stock of liquid assets Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA a3 Expected trend a3 Aa2 -baa3 Balance Sheet is not applicable. 6

7 Debt class De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA Senior unsecured holding company debt Dated subordinated holding company baa3 debt Junior subordinated holding company ba1 (hyb) debt Holding company cumulative preference ba2 shares Holding company non-cumulative ba2 (hyb) preference shares Instrument class Senior unsecured holding company debt Dated subordinated holding company debt Junior subordinated holding company debt Holding company cumulative preference shares Holding company non-cumulative preference shares Loss Given Failure notching Additional Preliminary Rating Notching Assessment Government Support notching Local Currency Rating baa3 Baa2 (P)Baa3 Foreign Currency Rating Baa2 Baa3 ba1 (hyb) (P)Ba1 (hyb) Ba1 (hyb) -2 ba2 -- (P)Ba2-2 ba2 (hyb) Ba2 (hyb) Ba2 (hyb) [1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. Source: Moody's Financial Metrics Ratings Exhibit 5 Category 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 Moody's Rating Positive Baa2 Baa3 Ba1 (hyb) Ba2 (hyb) (P)Ba2 P-2 (P)P-2 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 Positive A3/P-2 Baa2/P-2 ba2 ba1 A3(cr)/P-2(cr) Baa2 Ba3 Ba3 (hyb) P-2 (P)P-2 Source: Moody's Investors Service 7

8 Endnotes 1 Scorecard ratios are derived as follows: (Problem Loans/Gross Loans, Net Income/Tangible Assets) worse of [average of the last three years and latest interim period, latest period annual or interim]; (TCE/RWA) latest reported period; (Market Funds/Tangible Banking Assets, Liquid Banking Assets/Tangible Banking Assets) latest annual period. 2 At end-september 218, NatWest Markets's legacy RWAs were 14.3 billion, of which 5.8 billion relate to Alawwal Bank (LT deposits rating A3) 3 Revenues excluding own credit adjustments, loss on redemption of own debt, and strategic disposals 4 excluding restructuring, litigation and conduct costs, and VAT recoveries 5 net of restructuring and litigation costs 6 Management budgets 2.5 billion restructuring expenses in ; we calculate a quarterly run-rate of around 3 million and a yearly run-rate of around 1.25 billion. 8

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10 CLIENT SERVICES 1 Americas Asia Pacific Japan EMEA