Global Credit Research Credit Opinion 26 JUN Credit Opinion: Royal Bank of Scotland Group plc. Royal Bank of Scotland Group plc

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1 Global Credit Research Credit Opinion 26 JUN 2009 Credit Opinion: Royal Bank of Scotland Group plc Royal Bank of Scotland Group plc Edinburgh, United Kingdom Ratings Category Moody's Rating Outlook Stable(m) Senior Unsecured A1 Senior Subordinate Ba1 Jr Subordinate Ba3 Preferred Stock -Fgn Curr B3 Preferred Stock -Dom Curr B3 Preference Stock -Fgn Curr B3 Preference Stock -Dom Curr B3 Commercial Paper P-1 Other Short Term P-1 Citizens Bank of Pennsylvania Outlook Negative Bank Deposits Aa3/P-1 Bank Financial Strength B Issuer Rating Aa3 RBS Citizens, NA Outlook Negative Bank Deposits Aa3/P-1 Bank Financial Strength B Issuer Rating Aa3 Contacts Analyst Phone Elisabeth Rudman/London Ross Abercromby/London Johannes Wassenberg/London Paul Schenk/London Key Indicators Royal Bank of Scotland Group plc [1][2] [3]Avg. Total assets (GBP billion) [4]39.51 Total assets (EUR billion) Total capital (GBP billion) [4]23.13 Return on average assets Recurring earnings power Net interest margin Cost/income ratio (%) Problem loans % gross loans Tier 1 ratio (%) [1] As of December 31. [2] Statement period in which the bank switched to Basel II accounting framework. [3] The average calculations are based on Basel I and Basel II data where applicable. [4] Compound annual growth rate. Opinion

2 RECENT CREDIT DEVELOPMENTS In June 2009 Moody's affirmed the Aa3 senior unsecured rating of RBS and A1 senior unsecured rating of Royal Bank of Scotland Group (RBSG) and changed the outlook from negative to stable. The short-term P-1 ratings of both entities were also affirmed. The BFSR of Royal Bank of Scotland plc (RBS) was confirmed at C- with a negative outlook (mapping to a baseline credit assessment of Baa2) The rating action concluded the outstanding review for possible downgrade of the bank's BFSR. The BFSR had been lowered to C- in January 2009 and had been left under review for possible further downgrade in order to assess the impact of the planned UK Government Asset Protection Scheme (APS). SUMMARY RATING RATIONALE RBS' C- BFSR (BCA of Baa2) with a negative outlook incorporates the benefit of the insurance cover from the UK Government's Asset Protection Scheme (APS) for the group's riskier assets and the additional government capital (GBP19.5bn of B shares and a further optional GBP6bn to be made available alongside the APS), but also reflects the difficulties in restructuring the group, pressures on profitability during the recession in the UK, and the particular challenges associated with operating as a bank with majority government ownership. Moody's considers the APS (which is epected to be finalised in the net couple of months and will cover around GBP325bn of assets) and the accompanying government capital should provide a significant underpinning to the financial strength of RBS. Moreover, the availability and epected full implementation of the APS is a critical requirement for the BFSR at the current level, given the remaining risks on the bank's book, particularly the large single borrower concentrations, remaining structured credit eposures, the global commercial property book and also the broader risks relating to the UK, US and Irish economies. The bank has estimated that its pro-forma Tier 1 ratio (which includes the impact of the APS and the recent debt echange) will increase to 15.4% and the Core Tier 1 ratio to 12.2%. However, Moody's epects these high capital ratios to reduce as the bank absorbs the APS' first-loss piece of GBP 19.5bn, takes provisions on non-covered assets and absorbs costs associated with the restructuring of the firm. In the absence of more detailed information, Moody's has made conservative assumptions regarding the performance of assets that will be outside the APS, and considers that the group's capital levels will drop from an A range to a B range over the net 12 months in Moody's base case, but could drop much lower in our severe loss estimate. RBS is one of the UK's leading banking groups, but the acquisition of ABN AMRO (as part of a consortium with Santander and Fortis) at the start of the global financial crisis in October 2007, left RBS vulnerable to pressure on its balance sheet through the ensuing period, both in terms of capital levels and wholesale funding requirements. Although the bank completed a GBP12bn rights issue in June 2008 (at the same time as announcing GBP5.9billion credit writedowns), severe pressure on the bank in the aftermath of the Lehman Brothers collapse was one of the factors leading to the substantial government support measures announced in October 2008 and January The bank subsequently reported an GBP8.1bn pre-ta loss and GBP24bn net loss in 2008 (proforma taking into account the share of ABN that will remain with RBS). Moody's assesses that the probability of systemic support for RBS in the event of need is very high, which results in a five-notch uplift in the deposit ratings to Aa3/ Prime - 1 from the Baa2 baseline credit assessment. Moody's believes that the most probable scenario is that RBS will remain one of the largest retail and commercial banks in the UK, albeit likely with a reduced international presence: this continues to result in a very high probability of ongoing support from the Aaa-rated UK government, which in Moody's view underpins the Aa3 credit profile even if the bank's intrinsic financial strength should further weaken. At the same time, a further increase in the government's shareholding of RBS will not, ceteris paribus, change our assessment of the bank's senior debt ratings. Credit Strengths - UK government ownership and support - APS will cap future losses - Leading retail and corporate franchises as well as strong insurance market share in the UK - Meaningful US franchise through Citizens Financial Credit Challenges - Volatility in earnings and ongoing writedowns from RBS' capital market activities. - Deteriorating economic outlook in the UK will lead to increased impairments, especially in corporate and commercial property lending.

3 - High credit risk concentrations, increased by the ABN AMRO acquisition - Despite a stable retail and commercial deposit base, etremely challenging wholesale funding environment has led to an increased dependence on central bank repos and UK government guaranteed issuance - Uncertainty over the long-term positioning of the group as it undertakes a radical restructuring of its businesses Rating Outlook The negative outlook on the C- BFSR indicates (i) the outstanding clarification as to which assets will be covered by the APS which will be crucial for the bank's future performance, but also (ii) the bank's sensitivity to our stressed loss estimate, which could further weaken its capital base; and (iii) the challenges the bank will need to manage for the net several years, such as the restructuring and the overhaul of its risk management and governance especially in its Global Banking and Markets division. This should also curb any upward rating pressure on the BFSR for some time. The outlook on the Aa3 senior debt and deposit ratings was changed from negative to stable in June The negative outlook assigned by Moody's in January 2009 reflected the still considerable uncertainty over the bank's long-term strategy at the time and the potential changes to the future shape of its domestic and international activities. Although many uncertainties remain, Moody's considers the APS has underpinned the core UK franchise of the group, and the risk of a more deep-rooted structural change or reduction in the activities of the bank which could have reduced RBS' systemic importance has receded in the last months. What Could Change the Rating - UP Upward rating pressure is not considered likely for the BFSR or debt ratings in the current environment. Over the long term an upgrade of the BFSR would require RBS to demonstrate a near completion of its restructuring, a significantly reduced risk profile of its GBM division as well as a sizeable reduction in its property eposures and large concentration risks. What Could Change the Rating - DOWN Downward pressure on the BFSR would most likely emerge should more capital than the available GBP 6 billion be required to support the business. The debt ratings would be downgraded if there were a significant downgrading in the role of the bank in the UK economy. Recent Results RBSG reported large losses in 2008, largely as a result of writedowns and losses within GBM. RBSG reported a pre-ta loss of GBP8.1bn (pro-forma reflecting the businesses that will remain with RBS) and a net loss of GBP24bn after goodwill writedowns. Credit market eposure writedowns amounted to GBP7.781bn in 2008 (inclusive of reclassified asset impairments), as well as 5.8bn trading asset writedowns, counterparty failures and GBM reserves. The bank's Tier 1 ratio at 31 December 2008 was 9.9% and the Core Tier 1 ratio 6.1%. The bank has estimated that its pro-forma Tier 1 ratio (which includes the impact of the APS and the recent debt echange) will increase to 15.4% and the Core Tier 1 ratio to 12.2%. DETAILED RATING CONSIDERATIONS Detailed considerations for RBSG's currently assigned ratings are as follows: Bank Financial Strength Rating The assigned BFSR is C- (negative outlook). This is 2 notches lower than the C+ outcome of the scorecard, as the assigned BFSR assigns greater weight to the challenges to profitability and asset quality facing the bank over the short-to-medium term. Qualitative Factors (50%) Factor: Franchise Value RBSG has a leading position in the UK financial services market through its two main operating entities, RBS and NatWest. RBSG has strong positions in a range of businesses, particularly retail and corporate banking, as well as

4 significant insurance operations through Churchill and Direct Line. The bank's Global Market & Banking operations (which epanded with the acquisition of ABN AMRO) positioned RBS as a global player in investment banking and capital markets, however we epect a major overhaul of these activities following the losses amassed in The group also has substantial retail and commercial banking activities outside the UK, particularly in the United States, through Citizens Financial Group, and more recently through ABN AMRO's Global Wholesale and International Retail Businesses. The bank's overseas operations and GBM activities are epected to be significantly curtailed as part of the strategic review being led by the group's new Chief Eecutive, Stephen Hester, and the final impact of the fullscale restructuring of the group will only be clear with time. RBSG's score for franchise value is B. Factor: Risk Positioning The market stresses of the past 18 months have highlighted the risks within the bank's capital market activities, including opaque eposures, risk control failures, high leverage, and confidence sensitivity. Credit market eposure writedowns amounted to GBP7.781bn in 2008, as well as GBP5.8bn trading asset writedowns, counterparty failures and GBM reserves. Credit risk concentration remains an important issue for the group going forwards. By industry the group has a significant concentration in the property sector, and the ABN acquisition has led to an increase in single-name concentrations. The Asset Protection Scheme is epected to lead to a reduction in some of these eposures. We assign D for market risk appetite and D for overall risk positioning factor. Factor: Regulatory Environment Trend: Neutral All UK banks are subject to the same score on the regulatory environment. This factor does not address bankspecific issues; instead, it evaluates whether regulatory bodies are independent and credible, demonstrate enforcement powers and adhere to global standards of best practices for risk control. Refer to Moody's Banking System Outlook for the UK, published in May 2008, to obtain a more detailed discussion on the regulatory environment. Factor: Operating Environment Trend: Neutral The operating environment score for RBSG is a blended score reflecting the bank's operations, primarily in the UK, the USA and Ireland. On a blended score basis, the bank receives a score of A- for its overall operating environment. This is the same score as the one relating solely to the UK operating environment. Quantitative Factors (50%) Moody's rates RBS and Nat West at the same level, in recognition of the homogeneous nature of the group's operations under RBSG. These two legal entities are effectively managed as a single unit, albeit through different brands as per RBSG's strategy. Therefore, Moody's considers the consolidated financial fundamentals of RBSG as an important rating factor for the standalone BFSRs of RBS and NatWest. Factor: Profitability RBSG reported large losses in 2008, largely as a result of writedowns and losses within GBM. RBSG reported a pre-ta loss of GBP8.1bn (pro-forma reflecting the businesses that will remain with RBS) and a net loss of GBP24bn after goodwill writedowns. Credit market eposure writedowns amounted to GBP7.781bn in 2008 (inclusive of reclassified asset impairments), as well as GBP5.8bn trading asset writedowns, counterparty failures and GBM reserves. Moody's epects profitability in 2009 to continue to be affected by further writedowns and increased provisions as well as generally weaker revenues across the majority of the bank's business lines due to the deteriorating global economy and pressure on margins.

5 RBSG's score for profitability is D+, but has been adjusted to reflect the impact of further provisions and losses. Factor: Liquidity RBSG has a strong and stable retail deposit book, which funds its loan book, but it also has significant wholesale funding requirements - largely as a result of its capital market activities, which increased as a result of the ABN acquisition. Loans and advances to customers as a percentage of customer deposits stood at 129% as of the end of 2008, in accordance with Moody's calculations (122% at the end of 2007). RBS has relied upon the government's guaranteed debt scheme as well as other collateral-based facilities from central banks during the dislocation in the funding markets. Although Moody's considers these schemes as helpful given the disruption in the term funding markets, Moody's considers a growing reliance on such sources of funding as a weakness in the funding profile. The group also provides liquidity facilities of approimately GBP40 billion to certain commercial paper conduits including multi-seller ABCP conduits which are consolidated in the group's balance sheet for accounting purposes (but not for the purposes of calculating risk-weighted assets) as well as Third-Party ABCP conduits. RBSG scores C for liquidity. Factor: Capital Adequacy In November 2008 the UK Government provided GBP15 billion of ordinary share capital, as well as subscribing to GBP5 billion of preference shares which has subsequently been converted to equity. This has led to the government holding a 70% share of the bank's shareholder equity. Additional government capital is being made available alongside the APS: GBP19.5bn of B shares and a further optional GBP6bn. The bank's Tier 1 ratio at 31 December 2008 was 9.9% and the Core Tier 1 ratio 6.1%. The bank has estimated that its pro-forma Tier 1 ratio (which includes the impact of the APS and the recent debt echange) will increase to 15.4% and the Core Tier 1 ratio to 12.2%. However, Moody's epects these high capital ratios to reduce as the bank absorbs the GBP19.5bn first-loss piece, takes provisions on non-covered assets and absorbs costs associated with the restructuring of the firm. In the absence of more detailed information, Moody's has made conservative assumptions regarding the performance of assets that will be outside the APS, and considers that the group's capital levels will drop from an A range upon implementation of the APS to a B range over the net 12 months in Moody's base case, but could drop much lower in our severe loss estimate. Without the APS scheme, the capital score would be in the D range in our base case. The government has indicated that it is not a permanent investor in UK banks and that its intention over time is to dispose of the investments it has made, although the time frame for eiting its investment is unclear. The scorecard result for capital is B+ based on 2008 data. Factor: Efficiency Trend: Neutral RBSG has historically had a good track record for focusing on operating efficiency. This is evidenced by the group's cost-income ratio, which stood at 40.7% (ecluding ABN AMRO) for the year 2007, compared to 42.4% for the year 2006 ecluding acquisitions. Cost-income ratios were distorted in 2008 by credit writedowns and trading losses and will also be affected in 2009 by losses and restructuring costs. RBSG scores B for efficiency RBSG scores B for efficiency Factor: Asset Quality Impairment charges were GBP6.962bn in 2008 (up from GBP2.104bn in 2007), with a particularly high increase in

6 impaired loans in GBM. Impairment charges were a further GBP2.858bn in Q109. Moody's epects RBS to continue to see deterioration in credit market eposures and loan portfolios over In particular, Moody's considers there is a high risk of further losses on the bank's lending to lower-rated large corporates, which increased significantly due to the acquisition of ABN AMRO, such as the GBP900m provision for the LyondellBasell Industries eposures. In addition, the bank's commercial property and construction eposures (GBP97bn globally, including GBP42bn in RBS UK, GBP17bn in Ulster Bank, GBP31bn in GBM and GBP6bn in Citizens) are epected to lead to further significant losses, particularly in the UK and Ireland, given the price corrections taking place in these markets and the likelihood of increasing tenant arrears and defaults. Development lending was 24.1% of the commercial property lending at the end of We consider that RBS is less likely to be severely impacted by defaults in its GBP 74bn residential mortgage book, which is relatively conservatively positioned with little Self-Cert and a limited Buy-to-Let book of GBP5.2bn. In the US the main deterioration to date at Citizens has been in the USD8bn home equity book originated by third parties, but we epect the rest of the consumer portfolio to eperience greater weakness in RBSG's score for asset quality has been adjusted to C+ to take account of weakening asset quality. Global Local Currency Deposit Rating (Joint Default Analysis) The BFSR of RBS at C- maps to a BCA of Baa2. Given the leading position in retail and commercial banking in the UK, and the government's stake in the group, Moody's continues to assess the probability of systemic support for the Group in the event of need as very high, which leads to a five-notch uplift for the Aa3 deposit and debt ratings of RBS from the Baa2 BCA. Moody's rates RBS and Nat West at the same level, in recognition of the homogeneous nature of the group's operations under RBSG. These two legal entities are effectively managed as a single unit, albeit through different brands as per RBSG's strategy. Therefore, Moody's considers the consolidated financial fundamentals of RBSG as an important rating factor for the standalone BFSRs of RBS and NatWest. The senior debt ratings of RBSG are 1 notch below the senior debt ratings of RBS to reflect structural subordination. Notching Considerations In April 2009 Moody's removed systemic support from the subordinated capital instruments of RBSG and other UK financial institutions. The rating action was prompted by the rating agency's concern that systemic support may not be etended to these instruments in the case of financial distress. The 2009 Banking Act eplicitly provides a broad remit to allow the restructuring of financial institutions with losses to subordinated and hybrid debt holders, and this has increasingly been the practice in the recent restructuring of a number of financial institutions in the UK. Therefore, it is Moody's opinion that the ratings of subordinated and hybrid instruments should be closely aligned to the bank's BFSR and no longer benefit from the support that is epected for senior creditors and depositors of the group. The non-cumulative preference shares of all RBSG entities are B3 (stable outlook), as their ratings are based on an Epected Loss analysis (see below). The ratings of the remaining subordinated capital instruments of the Group are linked to the Baseline Credit Assessment (BCA) of the banks (adjusted to incorporate parental support in the case of Nat West, and one notch structural subordination for the holding company). The plain vanilla subordinated debt instruments are 1 notch below the adjusted BCA, junior subordinated instruments are 2 notches below the adjusted BCA, and cumulative preference shares are 3 notches below the adjusted BCA. The differentiation between dated subordinated and junior subordinated debt, reflects the latter's junior priority of claim to dated subordinated debt and the optional deferral feature. The cumulative preferred securities (with cumulative deferral and non-cash settlement through ACSM), have largely the same features as junior subordinated debt on a going concern basis, but have a preferred claim in liquidation. Under a going concern assumption, the epected loss for investors in these cumulative instruments should therefore be clearly lower than for the non-cumulative preference shares. However, given their categorisation as Tier 1 instruments by the regulators we are concerned that the risk of coupon deferral is higher than for junior subordinated debt. The B3 ratings of the non-cumulative preference shares is based on an epected-loss approach and reflects the rating agency's assumption of a high probability of the omission of coupons and high loss severity over a two-year period. The rating agency's assumption is that EU requirements could lead to the banks eercising their right for optional deferral on these instruments. The outlook for the securities is stable, as it deems a longer period of omission to be unlikely. Moody's has assigned the same rating to the securities of both the operating companies and the holding companies, as it deems the risk of omission to be similar.

7 Foreign Currency Deposit Rating The Foreign Currency Deposit ratings of RBS are unconstrained given that the UK, in common with other EU members, has a country ceiling of Aaa. Foreign Currency Debt Rating The Foreign Currency Debt Ratings of RBS are unconstrained given that the UK, in common with other EU members, has a country ceiling of Aaa ABOUT MOODY'S BANK RATINGS Bank Financial Strength Rating Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and soundness and, as such, eclude certain eternal credit risks and credit support elements that are addressed by Moody's Bank Deposit Ratings. BFSRs do not take into account the probability that the bank will receive such eternal support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability to honor its domestic or foreign currency obligations. Factors considered in the assignment of BFSRs include bankspecific elements such as financial fundamentals, franchise value, and business and asset diversification. Although BFSRs eclude the eternal factors specified above, they do take into account other risk factors in the bank's operating environment, including the strength and prospective performance of the economy, as well as the structure and relative fragility of the financial system, and the quality of banking regulation and supervision. Global Local Currency Deposit Rating A deposit rating, as an opinion of relative credit risk, incorporates the BFSR as well as Moody's opinion of any eternal support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually its deposit obligations. As such, they are intended to incorporate those aspects of credit risk relevant to the prospective payment performance of rated banks with respect to deposit obligations, which includes: intrinsic financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and eplicit eternal support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit insurance schemes which make payments to depositors, but they do recognize the potential support from schemes that may provide assistance to banks directly. According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank is determined by the incorporation of eternal elements of support into the bank's Baseline Risk Assessment. In calculating the Global Local Currency Deposit rating for a bank, the JDA methodology also factors in the rating of the support provider, in the form of the local currency deposit ceiling for a country, Moody's assessment of the probability of systemic support for the bank in the event of a stress situation and the degree of dependence between the issuer rating and the Local Currency Deposit Ceiling. National Scale Rating National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's globally applicable ratings; rather they address relative credit risk within a given country. A Aaa rating on Moody's National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss epectation associated with systemic events that could affect all issuers, even those that receive the highest ratings on the National Scale. Foreign Currency Deposit Rating Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same class of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks, which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currency deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the bank's rating for local currency obligations. Foreign Currency Debt Rating Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign currency deposit ratings, foreign currency debt ratings may also be constrained by the country ceiling for foreign currency bonds and notes; however, in some cases the ratings on foreign currency debt obligations may be allowed to pierce the foreign currency ceiling. A particular mi of rating factors are taken into consideration in order to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local

8 currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility to pierce that ceiling. About Moody's Bank Financial Strength Scorecard Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Factors Royal Bank of Scotland Group plc Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (50%) C+ Factor: Franchise Value B Weakening Market Share and Sustainability Geographical Diversification Earnings Stability Earnings Diversification [2] Factor: Risk Positioning D Weakening Corporate Governance [2] - Ownership and Organizational Compleity Key Man Risk Insider and Related-Party Risks Controls and Risk Management - Risk Management - Controls Financial Reporting Transparency - Global Comparability - Frequency and Timeliness - Quality of Financial Information Credit Risk Concentration Borrower Concentration Industry Concentration Liquidity Management Market Risk Appetite Factor: Operating Environment A- Neutral Economic Stability Integrity and Corruption Legal System Financial Factors (50%) C Factor: Profitability D+ Weakening PPP % Avg RWA - Basel II 2.96% Net Income % Avg RWA - Basel II -5.54% Factor: Liquidity C Neutral (Mkt funds-liquid Assets) % Total Assets 3.39% Liquidity Management Factor: Capital Adequacy B+ Neutral Tier 1 ratio (%) - Basel II 9.90%

9 Tangible Common Equity / RWA - Basel II 7.90% Factor: Efficiency D Neutral Cost/income ratio 69.22% Factor: Asset Quality C+ Weakening Problem Loans % Gross Loans 1.68% Problem Loans % (Equity + LLR) 20.95% Lowest Combined Score (15%) D+ Economic Insolvency Override Neutral Aggregate Score C+ Assigned BFSR C- [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non public information [2] - A blank score under Earnings diversification or Corporate Governance indicates the risk is neutral CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S (MIS) CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. 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