Fitch downgrades Royal Bank of Scotland

PRESS RELEASE: Fitch Downgrades RBS Group Individual Rating1-19-09 1:02 PM EST
Fitch Ratings-London-19 January 2009: Fitch Ratings has today downgraded The Royal Bank of Scotland Group plc's (RBS Group) Individual rating and that of its main operating subsidiaries The Royal Bank of Scotland plc (RBS plc) and National Westminster Bank plc (NatWest) to 'E' from 'B/C'. NatWest's Individual rating has been subsequently withdrawn. Today's action follows RBS Group's announcement that it expects to report an attributable loss of between GBP7bn and GBP8bn for 2008, and that it has reached an agreement to replace GBP5bn of preference shares held by the UK government with new ordinary shares.

The three companies' Long-term Issuer Default Ratings (IDR) and Short-term IDRs are affirmed at 'AA-' (AA minus) and 'F1+' respectively. RBS Group's Support rating has been upgraded to '1' from '5' and its Support Floor has been revised to 'AA-' (AA minus) from 'No Floor'. The Outlook for the IDRs remains Stable, reflecting an expectation of continued strong government support for RBS Group.

Fitch has also downgraded RBS Group's and RBS plc's Tier 1 preference shares to 'BB-' (BB minus) from 'A+', and upper tier 2 hybrid capital instruments issued by group companies to 'BB' from 'A+' and placed all of these securities on Rating Watch Negative.

A full list of ratings actions is available at the end of this release.The loss will arise largely as a result of additional credit market write-downs, lower income in the group's Global Banking & Markets division, impairment provisions relating to Lyondell Basell Industries and Bernard L Madoff Investment Securities LLC, and rising credit impairments across a broad range of portfolios and exposures. In downgrading the Individual ratings, Fitch is signalling its concern over increasing risks and worsening operating outlooks for the group's main businesses, together with the unique challenges the group faces in integrating ABN AMRO businesses in increasingly difficult market conditions. RBS Group also announced that following completion of a review of the carrying value of goodwill, it expects to make a goodwill impairment charge of between GBP15bn and GBP20bn.

The agency views UK government actions to support RBS Group and the broader UK banking system as positive for creditors, but notes the potential for restricted operational flexibility as a result of conditions that could be imposed by the UK government, the group's controlling shareholder. Fitch expects to see some significant changes to the group's strategic direction and priorities following completion of a strategic review. The UK government has today announced fresh measures aimed at supporting the UK financial system and facilitating the availability of credit to UK borrowers. Fitch will comment separately on these particular initiatives but expects RBS Group to be an early user of the new schemes.

Following the announcement in October 2008 that the major UK banks would be recapitalised, underwritten by the UK government, the RBS Group is currently 58% owned by the UK government. The replacement of the government-subscribed preference shares with ordinary shares will increase the UK government's stake in RBS Group to close to 70%. This large government stake, together with ongoing official commitment to provide capital and funding support to the major UK banks, underpins Fitch's continued view of the very strong likelihood of support for the RBS Group, and supports the upgrade of RBS Group's Support rating and Support Floor, as well as a Stable Outlook on the group's IDRs.

The economic outlook for RBS Group's main operating markets (particularly the UK, US and Ireland) is negative over the short- to medium-term and there remains significant uncertainty over the depth and length of the current recession. Fitch expects to see steady pressure on the group's earnings and asset quality as these economies continue to weaken. In the UK, RBS Group has not been as aggressive as some competitors in the residential housing and consumer lending markets and this should offer some protection as these segments continue to weaken. The expected increase in loan impairment charges relating to the group's Regional Markets businesses is GBP0.4bn compared to its November interim management statement. However, its leading share of the UK SME market and significant commercial property and large corporate exposures, where some concentrations have arisen following the ABN AMRO acquisition, are likely to pose some problems. The outlook for commercial property in 2009 remains negative as economic developments continue to put pressure on asset values and rentals. Outside the UK, the group is likely to suffer from asset quality deterioration in the US and Ireland. In the US, Citizens has historically been a low-risk lender, but has an externally sourced portfolio of home equity loans that is showing rapid deterioration, and its core lending is unlikely to escape the problems being felt in the US housing market and by the broader US economy. In Ireland, Ulster Bank faces similar pressures to the UK; a deteriorating economic environment, an abrupt contraction in economic growth forecast, rising unemployment and a worsening outlook for commercial property. Fitch considers that this is likely to lead to weaker revenue generation, sharp rises in impaired loans and steep falls in operating profitability.

RBS Group's capitalisation currently appears adequate following the government's recapitalisation operations, but is expected to decline as problems relating to recessionary economies materialise. The replacement of government preference shares with common equity will add around 86bp to the group's core equity Tier 1 ratio, which is expected to be in the range of 6.9% to 7.4% at end-2008. The Tier 1 ratio is expected to be between 9.5% and 10%. The massive goodwill impairment will not impact regulatory capital, but confirms the huge destruction of shareholder value that came from the ABN AMRO deal. Fitch expects 2009 to be characterised by sharply declining asset quality and pressure on revenues, particularly in businesses more reliant on market activity, thereby impacting internal capital generation severely. The group's funding has stabilised following the implementation of UK government initiatives in October 2008. The RBS Group, as have other UK major banks, has become increasingly reliant on guarantee schemes for longer-term funding, and Fitch does not expect this to diminish in the near-term.

The downgrade of RBS Group's, RBS plc's and Natwest's Individual ratings to 'E' reflects Fitch's opinion that due to the scale of the problems, RBS Group and its main operating banks are clearly reliant on external support - and to a greater extent than most other banks. The future direction of the group's and operating subsidiaries' Individual ratings will depend upon the pace and severity of continued pressures in the operating environment, together with the group's success in integrating ABN AMRO, de-leveraging the group's balance sheet, and implementing a refocused, lower risk, strategy. An additional element of uncertainty is the potential for government pressure to be brought to bear on the group to increase lending volumes to specific economic segments within the UK and it remains to be seen how compatible the group's de-leveraging and de- risking strategy is with government objectives.

Fitch's downgrade of RBS Group's preference shares and upper tier 2 hybrid capital instruments reflects the agency's view that deferral risk has increased significantly for banks that are in receipt of public funds, as well as the group's weakened standalone coupon-servicing capacity, as reflected in its Individual rating. This risk is heightened by the recognition that there is significant capital and financial flexibility to be retained by deferring on such instruments as well as Fitch's opinion that the replacement of government preference shares with common equity will result in a significantly elevated risk that market investors in RBS Group hybrid capital could be expected to share this burden with the UK taxpayer. The upper tier 2 instruments have been rated one notch higher than preference shares at 'BB' to reflect their higher recovery prospects.

The following ratings actions have been taken today:

Royal Bank of Scotland Group plc:Long-term IDR: affirmed at 'AA-' (AA minus); Outlook remains StableSenior unsecured debt: affirmed at 'AA-' (AA minus) Subordinated debt: affirmed at 'A+' Upper Tier 2 instruments: downgraded to 'BB' from 'A+'; on Rating Watch NegativePreferred stock: downgraded to 'BB-' (BB minus) from 'A+'; on Rating Watch NegativeShort-term IDR: affirmed at 'F1+ 'Commercial paper: affirmed at 'F1+';Individual rating: downgraded to 'E' from 'B/C' Support rating: upgraded to '1' from '5'Support Rating Floor: revised to 'AA-' (AA minus) from 'No Floor'

Royal Bank of Scotland plc:Long-term IDR: affirmed at 'AA-('AA minus')' ; Outlook remains StableGuaranteed debt: affirmed at 'AAA' Senior unsecured debt: affirmed at 'AA-('AA minus')' Subordinated debt: affirmed at 'A+' Upper Tier 2 instruments: downgraded to 'BB' from 'A+'; on Rating Watch NegativePreferred stock: downgraded to 'BB-' (BB minus) from 'A+'; on Rating Watch NegativeShort- term IDR: affirmed at 'F1+'Commercial paper: affirmed at 'F1+';Individual rating: downgraded to 'E' from 'B/C' Support rating: affirmed at '1'Support Rating Floor: affirmed at 'AA-' (AA minus)

National Westminster Bank Plc:Long-term IDR: affirmed at 'AA-' (AA minus); Outlook remains StableSenior unsecured debt: affirmed at 'AA-' (AA minus) Subordinated debt: affirmed at 'A+' Upper Tier 2 instruments: downgraded to 'BB' from 'A+'; on Rating Watch NegativePreferred stock: downgraded to 'BB-' (BB minus) from 'A+'; on Rating Watch NegativeShort-term IDR: affirmed at 'F1+ 'Individual rating: downgraded to 'E' from 'B/C'; rating withdrawn Support rating: affirmed at '1'Support Rating Floor: affirmed at 'AA-' (AA minus)

Ulster Bank LtdLong-term IDR: affirmed at 'A+'; Outlook remains StableShort- term IDR: affirmed at 'F1+'Individual rating: 'B/C'; on Rating Watch NegativeSupport rating: affirmed at '1'

Ulster Bank Finance plc:Commercial paper: affirmed at 'F1+'

Ulster Bank Ireland Limited:Long-term IDR: affirmed at 'A+'; Outlook remains StableSenior unsecured debt: affirmed at 'A+' Short-term IDR: affirmed at 'F1+ 'Individual rating: 'B/C'; on Rating Watch NegativeSupport rating: affirmed at '1'

First Active Plc:Long-term IDR: affirmed at 'A+'; Outlook remains StableSenior unsecured debt: affirmed at 'A+' Short-term IDR: affirmed at 'F1+'Commercial paper: affirmed at 'F1+'Individual rating: 'B/C'; on Rating Watch NegativeSupport rating: affirmed at '1'

Greenwich Capital Holdings Inc.:US commercial paper: affirmed at 'F1+'

Citizens Financial Group, Inc.: Long-term IDR: affirmed at 'A+'; Outlook remains StableShort-term IDR: affirmed at 'F1'Individual rating: 'B/C'; on Rating Watch NegativeSupport rating: affirmed at '1'

RBS Citizens, NA (formerly Citizens Bank, NA): Long-term IDR: affirmed at 'A+ '; Outlook remains StableShort-term IDR: affirmed at 'F1'Long-term deposits: affirmed at 'AA-' (AA minus)Short-term deposits: affirmed at 'F1+'Senior unsecured debt: affirmed at 'A+'Subordinated debt: affirmed at 'A' Individual rating: 'B/C'; on Rating Watch NegativeSupport rating: affirmed at '1'

Citizens Bank of Pennsylvania: Long-term IDR: affirmed at 'A+'; Outlook remains StableShort-term IDR: affirmed at 'F1' Long-term deposits: affirmed at 'AA-' (AA minus)Short-term deposits: affirmed at 'F1+'Individual rating: 'B/C'; on Rating Watch NegativeSupport rating: affirmed at '1'

Charter One Bank, NA: Senior unsecured debt: affirmed at 'A+' Subordinated debt: affirmed at 'A'

ABN AMRO Bank NVLong-term IDR: affirmed at 'AA-' (AA minus); Outlook remains StableSenior unsecured debt: affirmed at 'AA-' (AA minus)Subordinated debt: affirmed at 'A+'Upper Tier 2 instruments: downgraded to 'BB' from 'A+'; on RatingWatch NegativeShort-term IDR: affirmed at 'F1+'Commercial Paper and short- term debt: affirmed at 'F1+'Support rating: affirmed at '1'Support Rating Floor: affirmed at 'A-' (A minus)Mortgage covered bonds: remain unaffected by today's action

Contacts: Gordon Scott, +44 (0) 20 7417 4307; James Longsdon, + 44 (0)207 417 4309.

Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Tyrene Frederick-Mack, New York, Tel: +1 212- 908-0540, Email: tyrene.frederick-mack@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, http://www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.


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01-19-091302ET
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