Global Credit Research Credit Opinion 7 JAN Credit Opinion: Royal Bank of Scotland Group plc. Royal Bank of Scotland Group plc

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1 Global Credit Research Credit Opinion 7 JAN 2009 Credit Opinion: Royal Bank of Scotland Group plc Royal Bank of Scotland Group plc Edinburgh, United Kingdom Ratings Category Moody's Rating Outlook Rating(s) Under Review Senior Unsecured *Aa2 Senior Subordinate *Aa3 Jr Subordinate *A1 Preferred Stock *A1 Preference Stock *A1 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 * Placed under review for possible downgrade on December 22, 2008 Contacts Analyst Phone Elisabeth Rudman/London Ross Abercromby/London Johannes Wassenberg/London Key Indicators Royal Bank of Scotland Group plc [1] Avg. Total assets (GBP billion) [2]35.77 Total assets (EUR billion) Total capital (GBP billion) [2]24.73 Return on average assets Recurring earnings power Net interest margin Cost/income ratio (%) Problem loans % gross loans Tier 1 ratio (%) [1] As of June 30. [2] Compound annual growth rate. Opinion RECENT CREDIT DEVELOPMENTS

2 On December 22nd 2008 Moody's placed under review for possible downgrade the B Bank Financial Strength Rating and the Aa1 senior long and short-term debt and deposit ratings of Royal Bank of Scotland plc (RBS) and the Aa2 senior debt rating of Royal Bank of Scotland Group plc (RBSG). The review will eamine a number of factors which are pressuring the bank's financial profile, including the ongoing volatility in earnings resulting from the bank's capital market activities and credit market eposures, the bank's significant eposures to commercial real-estate (particularly in the UK, Ireland and US), as well the impact of increased provisioning and weaker earnings from its core UK franchise due to the accelerating downturn of the UK economy. The GBP20bn capital raised by the bank from the government provides a significant buffer against additional writedowns and provisions, however, the ongoing earnings volatility and epected decline in asset quality make the bank's ratings less consistent with other B rated financial institutions. On October 13th 2008 the UK Government announced a number of financial support measures for the UK banking sector. This resulted in a GBP20 billion capital investment by the government in RBS, following the government underwriting GBP15 billion of ordinary share capital and subscribing to GBP5 billion of preference shares, and government ownership of the bank reached 58%. Pro forma core tier 1 and total tier 1 capital ratios of RBS increased from 5.2% and 7.9% at end September 08 to approimately 7.9% and 11.6%, respectively, on a proportionally consolidated basis. In addition, the government has also provided a guarantee on new CD, CP and senior unsecured bonds and notes issued by eligible UK banks and building societies for a term of three years or less up until April Moody's has assigned backed-aaa long term ratings and Prime-1 short-term ratings to eligible issuance by RBS under its GBP50 billion EMTN Programme. SUMMARY RATING RATIONALE Moody's assigns a bank financial strength rating (BFSR) of B to Royal Bank of Scotland plc (RBS), which is currently under review for possible downgrade. The Royal Bank of Scotland Group (RBSG) is one of the largest UK banking groups, and the BFSR assigned to RBS, the main operating bank, reflects the breadth of RBSG's franchise in the UK, particularly in retail and corporate banking and insurance, as well as significant activities outside the UK, particularly in the United States, through Citizens Financial Group, and through ABN AMRO's Global Wholesale and International Retail Businesses. However, 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, has left RBS vulnerable to pressure on its balance sheet through the ensuing period, both in terms of capital levels and wholesale funding requirements. RBS has historically had higher levels of preference shares in its capital than peers, and the ABN acquisition was also partially funded through preference shares. Although the bank completed a GBP12bn rights issue in June 2008 at the same time as announcing GBP5.9billion additional credit writedowns, severe pressure on the bank's share price in the aftermath of the Lehman Brothers collapse was one of the factors leading to the government measures of October 2008, which included a 20bn capital injection and led to the government owning 58% of RBS. Moody's assesses that the probability of systemic support for RBS in the event of need is very high, which results in a two-notch uplift in the deposit ratings to Aa1/ Prime - 1 from RBS' Aa3 baseline credit assessment. Moody's assigns long and short term senior debt ratings of Aa2/ Prime-1 to the Royal Bank of Scotland Group plc (RBSG), i.e. one notch below the supported ratings of its key subsidiary, the Royal Bank of Scotland plc (RBS). This, in Moody's opinion, acknowledges the structural subordination of creditors of the holding company relative to creditors of the operating bank. Credit Strengths - Leading retail and corporate franchises as well as growing insurance market share in the UK - Meaningful US franchise through Citizens Financial. - Good track record of integrating acquisitions to date. - Stable retail and commercial deposit base supports RBS' liquidity. 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. - High credit risk concentrations, increased by the ABN AMRO acquisition

3 -Etremely challenging wholesale funding environment is leading to an increased dependence on central bank repos and UK government guaranteed issuance - Uncertainty over the level of UK government involvement in the group's activities, following the capital injection and increasing government interference into the business model of large banks Rating Outlook The BFSR and long term debt ratings were placed under review for possible downgrade on December 22nd What Could Change the Rating - UP The ratings are under review for possible downgrade, and upward rating pressure is not considered likely in the current environment. What Could Change the Rating - DOWN As mentioned above, the review will eamine a number of factors which are pressuring the bank's financial profile: the ongoing volatility in earnings resulting from the bank's capital market activities and credit market eposures, the bank's significant eposures to commercial real-estate (particularly in the UK, Ireland and US), as well the impact of increased provisioning and weaker earnings from its core UK franchise due to the accelerating downturn of the UK economy Recent Results and Developments RBS reported a pro-forma pre-ta loss of GBP691 million in 1H08, compared to a pre-ta profit of GBP5.0 billion in 1H07. The loss was driven by GBP5.9 billion of credit market write-downs and one-off items (ecluding the impact of a GBP812 million fair value gain in the group's own debt) and GBP1.5 billion of impairment losses (up GBP543m). Pro-forma tier 1 and core tier 1 capital ratios (on a Basel II basis) were 8.6% and 5.7%, respectively, at 1H08, compared to 7.0% and 4.0%, respectively at YE07 (Basel I basis). On a statutory basis, the tier 1 and core tier 1 ratios (Basel II basis) were 9.1% and 6.7%, respectively, at 1H08. DETAILED RATING CONSIDERATIONS Detailed considerations for RBSG's currently assigned ratings are as follows: Bank Financial Strength Rating In June 2008 Moody's downgraded the BFSR of RBS, the main operating bank within RBSG, from B+ to B, and then placed the BFSR under review for possible downgrade in December The outcome of Moody's bank financial strength scorecard for RBSG is B-. Qualitative Factors (50%) Factor: Franchise Value The bank's ratings are underpinned by the breadth of RBSG's franchise, and its strong position in the UK financial services market through its two main operating entities, RBS and NatWest. RBSG has leading or strong positions in a range of businesses, particularly retail and corporate banking, as well as significant insurance operations through Churchill and Direct Line. The group also has substantial activities outside the UK, particularly in the United States, through Citizens Financial Group, and through ABN AMRO's Global Wholesale and International Retail Businesses. However, the bank's overseas operations are epected to come under particular scrutiny as part of the strategic review being led by the group's new Chief Eecutive, Stephen Hester. The group reported pro-forma total assets of GBP1.7trn as of 30 June 2008 compared to GBP 1.0 trillion at 30 June 2007, reflecting the acquisition of ABN AMRO. RBSG's score for franchise value is B+. Factor: Risk Positioning Trend: Weakening

4 As for other banks with substantial investment banking operations, the market stresses of the past 18 months have highlighted the risks of this business model, including opaque eposures, risk control failures, high leverage, and confidence sensitivity. RBSG reported cumulative writedowns over on US sub-prime related eposures, other RMBS, CMBS, leveraged finance and monoline eposures of approimately GBP7.4bn as of end of September 2008, as well as a further GBP1.2bn that would have impacted the P&L if the bank had not reclassified certain assets under IAS39 look-back option. In addition, the bank reported losses of approimately GBP1bn after the end of September in its Interim Management Statement of 4th November 2008, as well as potential losses of up to GBP400m related to the Madoff fraud. The strategic review that RBSG announced in November 2008 is epected to lead to a reduction in the risk profile. 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, although we epect RBSG to manage these eposures down over time. We assign C for market risk appetite and C- for overall risk positioning factor. Factor: Regulatory Environment 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 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 Trend: Weakening RBSG's profitability has been hit since the credit crisis by writedowns on credit market eposures. Moody's epects profitability in 2009 to be impacted by further writedowns and increased provisions as well as weaker revenues across the majority of the bank's business lines due to the deteriorating global economy. The bank has also indicated it will be reviewing the possibility of writing down goodwill relating to the ABN and US acquisitions. RBS reported a pro-forma pre-ta loss of GBP691 million in 1H08, compared to a pre-ta profit of GBP5.0 billion in 1H07. The loss was driven by 5.9 billion of credit market write-downs and one-off items (ecluding the impact of a 812 million fair value gain in the group's own debt). Underlying profitability before impairment and writedowns was still up 7% in the first 9 months of 2008, but down 8% before credit writedowns and gains on fair value of debt. Credit market writedowns were GBP206m in Q308 and a further GBP1.2bn would have impacted the P&L if the bank had not reclassified certain assets under IAS39 look-back option. In addition, the bank reported losses of approimately GBP1bn after the end of September, as well as potential losses of up to GBP400m related to the Madoff fraud. RBSG's score for profitability is C+ with a weakening trend. Factor: Liquidity RBSG has a strong and stable retail deposit book, which has withstood the ongoing market turmoil. Loans and

5 advances to customers (gross, ecluding reverse repos) as a percentage of customer lending less customer accounts stood at around 120% as of year-end However, the bank also has significant wholesale funding requirements - largely as a result of its capital market activities, which increased as a result of the ABN acquisition. RBS has utilised the government's guaranteed debt scheme as well as other collateral-based facilities from central banks. Although Moody's considers these schemes as helpful given the disruption in the term funding markets, Moody's will consider in the ongoing rating review the likely level of dependence on such sources of funding. 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 B- for liquidity. Factor: Capital Adequacy The UK Government provided GBP15 billion of ordinary share capital (as well as subscribing to GBP5 billion of preference shares) in November 2008, which has led to the government holding a 58% share of the bank's shareholder equity. The capital injection strengthened the pro forma core tier 1 and total tier 1 capital ratios of RBS from 5.2% and 7.9% at end - September 08 to approimately 7.9% and 11.6%, respectively, on a proportionally consolidated basis. 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. RBS has indicated it will try to replace the government preference shares by 2010, as it is unable to pay dividends on its common shares whilst the government's preference shares are outstanding. Moody's epects all the UK banks to come under pressure to be supportive of consumers and small businesses suffering from the effects of the recession, but as one of the largest banks and with the highest government ownership, RBS will undoubtedly be subject to particular pressure. RBSG would score an A for capital adequacy if adjusted to take full account of the recent capital raising, however we have assigned an adjusted score of B+ to reflect the fact that the current high levels of capital are epected to weaken as a result of further writedowns and provisions. Factor: Efficiency RBSG has 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. As per Moody's calculation, which includes depreciation and goodwill amortisation, the cost-income ratio in 2007 was 55.1% and 53.4% in Ratios in 2008 are distorted by the bank's losses. The group has previously indicated it epected to realise GBP1.15bn of cost savings as well as GBP500m of net revenue benefits from the acquisition of ABN. RBSG scores B for efficiency. Factor: Asset Quality Trend: Weakening Asset quality weakened from H108 with impairment losses up 58% from GBP936m to GBP1.479bn. And the rapid decline in the main economies where RBSG operates (UK, US and Ireland) means that we epect delinquencies to increase in H208 and The group indicated that non-performing loans had increased from 1.47% at H108 to 1.72% at end September 2008 and we epect this trend to accelerate in In the UK we consider that RBS is less likely to be severely impacted by defaults in its GBP 72bn residential mortgage book, which is conservatively positioned with relatively low LTVs and a relatively small proportion of Buy-to-Let (GBP4.3bn), but more likely to require large increases in provisions in relation to its corporate lending book (GBP 76bn in the UK, ecluding property and construction) and commercial property eposures (GBP91bn globally, including GBP59bn in the UK and Ireland). 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 scores B for asset quality, which has been adjusted to C+ to take account of weakening asset quality. Global Local Currency Deposit Rating (Joint Default Analysis)

6 The deposit/debt ratings of Royal Bank of Scotland are Aa1 (under review for possible downgrade)/prime-1. Moody's assesses that the probability of systemic support for Royal Bank of Scotland in the event of need is very high, which results in a two-notch uplift from the Aa3 baseline credit assessment. Notching Considerations The ratings of RBSG, the holding company, are rated one notch below the main operating bank, RBS, to reflect structural subordination. The ratings of RBS's junior obligations are notched off the fully supported deposit rating. 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

7 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 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%) B- Factor: Franchise Value B+ Neutral Market Share and Sustainability Geographical Diversification Earnings Stability Earnings Diversification [2] Factor: Risk Positioning C- Neutral 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 C+ Weakening PPP % Avg RWA 2.66%

8 Net Income % Avg RWA 1.56% Factor: Liquidity B- Neutral (Mkt funds-liquid Assets) % Total Assets 1.96% Liquidity Management Factor: Capital Adequacy C Neutral Tier 1 ratio (%) 7.47% Tangible Common Equity % RWA 5.07% Factor: Efficiency B Neutral Cost/income ratio 54.70% Factor: Asset Quality B Weakening Problem Loans % Gross Loans 1.35% Problem Loans % (Equity + LLR) 15.83% Lowest Combined Score (15%) C Economic Insolvency Override Neutral Aggregate Score B- Assigned BFSR -- [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 MIS'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. 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