Moody's Puts RBS (RBS) on Review for Downgrade
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Moody's Investors Service has placed on review for downgrade Royal Bank of Scotland plc's (NYSE: RBS) A3 supported long-term debt and deposit ratings, the ratings for the bank's subordinated debt, junior subordinated debt and capital instruments. The long-term ratings of the holding the company, Royal Bank of Scotland Group plc, were also placed on review for downgrade. The firm's Prime-2 short-term ratings were affirmed.
Moody's rating action follows the publication of a recent trading update, in which RBS's management indicated that the group's year-end 2013 results (scheduled to be published on 27 February 2014) would be materially impacted by additional provisions for pending litigations and conduct-related costs. As a result, the bank will report a weaker than previously anticipated regulatory capital position at end-December 2013, weakening its standalone credit profile.
During the review, Moody's will assess whether the bank's credit fundamentals remain compatible with the current ratings given (1) the challenges and risks RBS faces in relation to the execution of its recovery plan; and (2) any actions that RBS's management could pursue in the short-term that could effectively mitigate these risks and further boost the bank's regulatory capital position.
Concurrently, Moody's has placed on review for downgrade all long-term ratings of National Westminster Bank (Natwest) plc and Royal Bank of Scotland NV. These ratings are aligned with those of RBS given the high degree of integration between RBS and these two entities.
RATINGS RATIONALE
Last November, following the conclusion of the UK government review on the possible merit of a breakup of the group, RBS's management announced that over a three-year period it would pursue (1) the accelerated wind-down of its legacy asset portfolio, which includes poor quality assets, such as Irish and UK commercial real-estate loans; and (2) the sale of its US retail and commercial banking business.
The bank also stated it would undertake an urgent and thorough review of its core operations, which could lead to additional actions to further improve its credit profile. At that time, the bank indicated that its capital position would be unchanged during Q4 2013 (despite accounting for material credit costs related to the accelerated disposal of legacy assets), resulting in a Common Equity Tier 1 (CET1) ratio of around 9%. The bank had also indicated that progress towards achieving the aforementioned recovery plan would increase its CET1 ratio over time to 11% in 2015 and 12% in 2016.
However, in its trading update of 27 January 2014, RBS announced that its Q4 2013 results would be impacted by additional provisions. These large charges will lead to a material loss for the year that will reduce the bank's regulatory capital position at end-2013 to between 8.1% and 8.5%. The additional provisions in the trading update include GBP1.9 billion in respect of pending litigations (mainly related to mortgage-backed securities and other securities-related litigations) and GBP965 million of additional conduct-related costs (GBP465 million in respect of Payment Protection Insurance and GBP500 million for Interest Rate Hedging Products). The bank has indicated that at this point in time its capital targets for 2015 and 2016 remain unchanged because these costs, which although being incurred earlier than forecast, were already accounted for in its three-year capital plan. However, their acceleration leaves RBS with less flexibility to manage other unforeseen charges that could further affect its capital position.
As indicated in its press release of 5 November 2013 and other related research, Moody's considers RBS's recovery plan as clear, credible and positive for its creditors over the medium-term, albeit not immune from execution risk. The rating agency believes that, if adequately executed, the recovery plan will gradually improve the bank's currently weak asset quality profile, increase its solvency and will eventually restore the bank's sustainable profitability. However, RBS's recent announcement demonstrates that its management faces a number of short-term headwinds, which could challenge the implementation of this plan and in turn be negative for its creditors. In addition, Moody's believes that the overall downside risks associated with the bank's recovery have increased.
--- FOCUS OF THE REVIEW
During the review, Moody's will assess whether the bank's weakened credit fundamentals remain compatible with the current rating levels, taking into account:
(1) the risks and challenges associated with the execution of its recovery plan;
(2) the pending litigations and regulatory reviews that could lead to larger-than-expected financial losses, before RBS can offset them (at least partially) through other capital-accretive management actions; and
(3) other additional remedial actions that RBS management could decide to pursue, such as further asset disposals, following the review of the bank's core operations.
WHAT COULD MOVE THE RATINGS UP/DOWN
The review could prompt Moody's to lower RBS's standalone credit assessment and downgrade the debt ratings, if the rating agency were to assess that the bank's credit fundamentals, particularly capital and profitability, were no longer compatible with the current rating levels. This assessment will take into account the risks and uncertainties that could challenge the orderly execution of the recovery plan, such as additional unexpected litigation and conduct-related costs.
Given the review for downgrade, there is currently no upward ratings momentum. However, the standalone credit assessment and the ratings could be stabilised if Moody's were to determine that any additional actions announced by RBS management -- for example on the back of its review of the core operations -- were sufficient to adequately mitigate the downside risks the bank is facing towards achieving a full recovery.
The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Credit Ratings to Global Scale Credit Ratings.
Moody's rating action follows the publication of a recent trading update, in which RBS's management indicated that the group's year-end 2013 results (scheduled to be published on 27 February 2014) would be materially impacted by additional provisions for pending litigations and conduct-related costs. As a result, the bank will report a weaker than previously anticipated regulatory capital position at end-December 2013, weakening its standalone credit profile.
During the review, Moody's will assess whether the bank's credit fundamentals remain compatible with the current ratings given (1) the challenges and risks RBS faces in relation to the execution of its recovery plan; and (2) any actions that RBS's management could pursue in the short-term that could effectively mitigate these risks and further boost the bank's regulatory capital position.
Concurrently, Moody's has placed on review for downgrade all long-term ratings of National Westminster Bank (Natwest) plc and Royal Bank of Scotland NV. These ratings are aligned with those of RBS given the high degree of integration between RBS and these two entities.
RATINGS RATIONALE
Last November, following the conclusion of the UK government review on the possible merit of a breakup of the group, RBS's management announced that over a three-year period it would pursue (1) the accelerated wind-down of its legacy asset portfolio, which includes poor quality assets, such as Irish and UK commercial real-estate loans; and (2) the sale of its US retail and commercial banking business.
The bank also stated it would undertake an urgent and thorough review of its core operations, which could lead to additional actions to further improve its credit profile. At that time, the bank indicated that its capital position would be unchanged during Q4 2013 (despite accounting for material credit costs related to the accelerated disposal of legacy assets), resulting in a Common Equity Tier 1 (CET1) ratio of around 9%. The bank had also indicated that progress towards achieving the aforementioned recovery plan would increase its CET1 ratio over time to 11% in 2015 and 12% in 2016.
However, in its trading update of 27 January 2014, RBS announced that its Q4 2013 results would be impacted by additional provisions. These large charges will lead to a material loss for the year that will reduce the bank's regulatory capital position at end-2013 to between 8.1% and 8.5%. The additional provisions in the trading update include GBP1.9 billion in respect of pending litigations (mainly related to mortgage-backed securities and other securities-related litigations) and GBP965 million of additional conduct-related costs (GBP465 million in respect of Payment Protection Insurance and GBP500 million for Interest Rate Hedging Products). The bank has indicated that at this point in time its capital targets for 2015 and 2016 remain unchanged because these costs, which although being incurred earlier than forecast, were already accounted for in its three-year capital plan. However, their acceleration leaves RBS with less flexibility to manage other unforeseen charges that could further affect its capital position.
As indicated in its press release of 5 November 2013 and other related research, Moody's considers RBS's recovery plan as clear, credible and positive for its creditors over the medium-term, albeit not immune from execution risk. The rating agency believes that, if adequately executed, the recovery plan will gradually improve the bank's currently weak asset quality profile, increase its solvency and will eventually restore the bank's sustainable profitability. However, RBS's recent announcement demonstrates that its management faces a number of short-term headwinds, which could challenge the implementation of this plan and in turn be negative for its creditors. In addition, Moody's believes that the overall downside risks associated with the bank's recovery have increased.
--- FOCUS OF THE REVIEW
During the review, Moody's will assess whether the bank's weakened credit fundamentals remain compatible with the current rating levels, taking into account:
(1) the risks and challenges associated with the execution of its recovery plan;
(2) the pending litigations and regulatory reviews that could lead to larger-than-expected financial losses, before RBS can offset them (at least partially) through other capital-accretive management actions; and
(3) other additional remedial actions that RBS management could decide to pursue, such as further asset disposals, following the review of the bank's core operations.
WHAT COULD MOVE THE RATINGS UP/DOWN
The review could prompt Moody's to lower RBS's standalone credit assessment and downgrade the debt ratings, if the rating agency were to assess that the bank's credit fundamentals, particularly capital and profitability, were no longer compatible with the current rating levels. This assessment will take into account the risks and uncertainties that could challenge the orderly execution of the recovery plan, such as additional unexpected litigation and conduct-related costs.
Given the review for downgrade, there is currently no upward ratings momentum. However, the standalone credit assessment and the ratings could be stabilised if Moody's were to determine that any additional actions announced by RBS management -- for example on the back of its review of the core operations -- were sufficient to adequately mitigate the downside risks the bank is facing towards achieving a full recovery.
The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Credit Ratings to Global Scale Credit Ratings.
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