The Royal Bank of Scotland plc

Transcription

1 CREDIT OPINION Post rating action update Update Summary rating rationale RATINGS The Royal Bank of Scotland plc Domicile United Kingdom Long Term Debt Baa2 Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Baa2 Type LT Bank Deposits - Fgn Curr Outlook Stable 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. Contacts Alessandro Roccati Senior Vice President alessandro.roccati@moodys.com Laurie Mayers Associate Managing Director laurie.mayers@moodys.com Nick Hill MD-Banking nick.hill@moodys.com The Royal Bank of Scotland plc On 4 April 2018, we downgraded the Royal Bank of Scotland plc (RBS plc) s and the Dutch entity Royal Bank of Scotland N.V. (RBS NV) s long-term senior unsecured debt ratings to Baa2 (from A3, on review for downgrade) and the long-term deposit ratings to Baa2 (from A2, on review for downgrade); their corresponding short-term debt and deposit ratings were confirmed at Prime-2 and downgraded to Prime-2 (from Prime-1) respectively. Concurrently, we downgraded their baseline credit assessments (BCAs) to ba2 (from baa3), their adjusted BCAs to ba1 (from baa3) and the long and short-term counterparty risk assessments (CRAs) to A3(cr) (from A2(cr) on review for downgrade) and P-2(cr) (from P-1(cr) on review for downgrade), respectively. We continue to align the ratings of Dutch entity RBS NV with those of the current RBS plc, based upon our expectation that RBS NV will likely become the main entity for the group s wholesale activities in the European Union outside the UK. The actions reflect our view that, post 1 January 2019 UK ring-fencing implementation, RBS plc s and RBS NV s credit profile will weaken, as they will retain the group s capital markets and wholesale activities, will hold a sizeable trading and repo book, will provide broker-dealer capabilities and will be largely market funded; the safer and less confidence sensitive retail, SME and corporate banking activities will be moved to the group s ring-fenced banks (RFBs). RBS plc s and RBS NV s BCAs of ba2 reflect Moody's expectation that the implementation of ring-fencing regulation in the UK will weaken RBS plc s credit profile: (1) asset risk will be weaker due to its large capital markets activities, which represent a source of volatility and tail-risk; (2) the business will be inherently less diversified with a more confidence sensitive client base; (3) profitability during the outlook period will be poor due to continued high restructuring costs, and losses on legacy assets; and (4) usage of wholesale funding will be high, albeit mitigated by sound liquidity. Credit strengths» High volume of senior unsecured debt resulting in two notches of loss-given failure uplift from the BCA CLIENT SERVICES Americas Asia Pacific Japan EMEA » Moderate probability of government support resulting in one notch uplift incorporated in its Counterparty Risk Assessment» High liquidity mitigates reliance on confidence-sensitive wholesale funding

2 Credit challenges» The implementation of ring-fencing in the UK will weaken the credit profile» High reliance on capital markets activities resulting in exposure to earnings volatility and tail-risk» Profitability expected to be weak due to ongoing restructuring costs and losses on legacy assets Rating outlook RBS plc s and RBS NV s ratings outlook is stable. The stable outlook reflects our expectation that fundamentals will stabilize over the next eighteen months as the non-core unit billion risk-weighted assets (RWAs) at end- 2017, including 6.6 billion related to the under disposal bank Alawwal (long-term deposit rating A3 stable) - will wind-down further, tail risk from legacy litigations recedes and the bank substantially completes its restructuring exercise enabling it to generate more stable and sustainable earnings. Factors that could lead to an upgrade» RBS plc s and RBS NV s ba2 BCA could be upgraded if the banks asset risk profile were to be much stronger than we currently expect, or if its profitability and efficiency improved on a sustainable basis and/or its capitalisation were to be significantly higher; an upgrade of the BCA would only lead to the upgrade of all ratings were it to exceed the current Adjusted BCA of ba1. An upgrade could also result from an upgrade of the notional BCA of The Royal Bank of Scotland Group (RBSG; long-term senior unsecured debt rating Baa3 stable), the group holding company and support provider.» An upgrade of RBS plc s and RBS 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 those classes of liabilities. Factors that could lead to a downgrade» RBS plc s and RBS NV s ba2 BCAs 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 could also result from a downgrade of the BCA of RBSG, the support provider.» 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 junior depositors. 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 Key indicators Exhibit 1 The Royal Bank of Scotland 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 Profile RBS is a UK-based banking and financial services company, headquartered in Edinburgh. RBS provides a wide range of products and services to personal, commercial and large corporate and institutional customers through its two main subsidiaries, The Royal Bank of Scotland and NatWest, as well as through a number of other well-known brands including Ulster Bank and Coutts. Detailed credit considerations The implementation of ring-fencing in the UK will weaken the credit profile RBS plc will transfer most of its Personal & Business Banking and Commercial & Private Banking operations to a ring-fenced banking subgroup (under an intermediate holding company, NatWest Holdings Ltd), which will account for around 80% of group risk-weighted assets. The ring-fenced bank sub-group will include National Westminster Bank Plc (NatWest Bank; long-term senior unsecured debt rating A2 stable), Ulster Bank Ireland DAC (long-term deposits Baa1 stable), Ulster Bank Limited (UBL, long-term senior unsecured debt rating A2 stable) Coutts & Company (unrated) and Adam and Company PLC (Adam & Co - to be renamed The Royal Bank of Scotland plc; long-term deposit rating A1 stable), which will carry out retail & commercial banking across Scotland, England & Wales through the Royal Bank of Scotland brand and branch network. The group's capital market activities will remain with RBS plc, which will be renamed NatWest Markets Plc (NatWest Markets) at the time of the legal transfer of assets and liabilities. RBS International (RBSI; unrated), a subsidiary of RBSG, will retain mostly retail and commercial activities in the UK's Crown Dependencies. 3

4 Exhibit 2 Previous and proposed simplified legal entities group structure Source: Moody s Investors Service on Company data. We reflect the complexity of RBS plc 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. High reliance on capital markets activities resulting in exposure to earnings volatility and tail-risk Under ring-fencing, RBS plc 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. RBS plc will become largely market funded, have a sizeable derivatives and repo book, and provide broker-dealer capabilities. RBS plc 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. The high degree of volatility of capital markets revenues and inherent although decreasing risks 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. Our asset risk score of ba1 reflects the volatile and confidence sensitive nature of the bank s capital markets activities. Profitability expected to be weak 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 RBS plc's profitability over the outlook period to continue to be negatively impacted by elevated restructuring and legacy costs. We expect RBS plc to show net losses over the outlook period, due to losses on legacy assets and high restructuring costs. Further, the efficiency of the core capital markets activities will need to improve, in order for the bank to achieve a sustainable level of profitability 4

5 The assigned profitability score of b1 reflects the ongoing profitability challenges at the banks. Exhibit 3 The (Natwest Markets) division recorded large operating losses in 2017 Source: Moody's Investor Service on Company Data. High liquidity mitigates reliance on confidence-sensitive wholesale funding In line with other capital market participants, RBS plc 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 RBS plc 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 RBS NV in the same at failure waterfall as RBS Plc,due to the ongoing transfer of assets to the UK entity. Our assumptions 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 RBS plc 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 RBS plc and RBS 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 RBS plc s and RBS NV s deposits, senior unsecured debt and other junior securities, resulting in no uplift. The CRA 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. 5

6 Ratings Exhibit 4 Category THE ROYAL BANK OF SCOTLAND PLC Outlook 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 Stable 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 Stable baa3 baa3 Baa3 Ba2 Ba2 (hyb) Ba3 (hyb) (P)Ba3 P-3 (P)P-3 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