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The Royal Bank of Scotland Group plc
Primary Credit Analyst:
Richard Barnes, London (44) 20-7176-7227; richard.barnes@spglobal.com
Secondary Contact:
Pierre Gautier, Paris (33) 1-4420-6711; pierre.gautier@spglobal.com
Table Of Contents
Major Rating Factors
Outlook
Rationale
Related Criteria
Related Research
www.spglobal.com/ratingsdirect May 30, 2019 1The Royal Bank of Scotland Group plc
Major Rating Factors
Issuer Credit Rating
BBB/Stable/A-2
Strengths: Weaknesses:
• Leading positions in core markets, particularly U.K. • Returns and cost efficiency lag some peers', but
retail and commercial banking. show improvement toward management's 2020
targets.
• Long restructuring process is close to completion
and has addressed most legacy risks and refocused • Geographic concentration in the U.K. and Ireland,
the business model. where Brexit brings a risk of weaker economic
conditions.
• Sound funding and liquidity profiles.
• Exposure to political developments due to continued
majority ownership by the U.K. government.
www.spglobal.com/ratingsdirect May 30, 2019 2The Royal Bank of Scotland Group plc
Outlook
The stable outlook on The Royal Bank of Scotland Group plc (RBSG) reflects our expectation that RBSG will
maintain robust balance sheet metrics and strengthen its earnings toward management's targets. We anticipate
that it will return further capital to shareholders through dividends and buybacks, and our risk-adjusted capital
(RAC) ratio will be about 9.5%-10.0% at year-end 2021. We expect that credit impairments will gradually normalize
from the current low level, but overall asset quality will remain sound.
Upside scenario
Having recently raised the ratings, we are unlikely to consider a further upgrade in the near term. However, it is
possible during our two-year outlook horizon if we gain more visibility on the U.K. economy following Brexit, and
RBSG demonstrates a stronger and more consistent business position. The latter would include greater business
stability and a more predictable performance level, including enhanced earnings contributions from the capital
markets and Irish bank subsidiaries. We could also raise the ratings if RBSG maintains a stronger capital position
than we currently expect.
Downside scenario
We could lower the ratings if we become less confident in RBSG's strategic execution and ability to achieve
stronger earnings. Adverse developments in the U.K. economic or political environments could also lead to a
downgrade, such as if we see greater likelihood of a disruptive Brexit process that could challenge RBSG's asset
quality. Given the U.K. government's majority shareholding, we could also lower the ratings if we see an increasing
risk of greater political intervention in RBSG's activities, to the detriment of creditors.
Rationale
We raised the ratings on RBSG and its subsidiaries in May 2019 in recognition of the group's stronger credit
fundamentals following a long period of restructuring and refocusing. Its £585 billion funded balance sheet at March
31, 2019, was about one-half of the level at the peak of the global financial crisis. It has addressed the majority of
legacy assets and legal risks, maintained a robust capital position, and laid the foundations for improved cost efficiency
and earnings. As a result, we believe RBSG's creditworthiness has become more comparable with peers, and we
position its unsupported group credit profile (UGCP) in line with our 'bbb+' anchor rating for U.K. banks.
Although RBSG and its U.K. peers have strengthened their balance sheets, we think that some potential Brexit
outcomes could lead to a more challenging operating and wholesale funding environment. This could lower customer
activity, weigh on the net interest margin, and weaken asset quality beyond our current, relatively benign expectations.
Like its major domestic peers, RBSG has operated under the U.K. ring-fencing regime since January 2019. Although
ring-fencing incrementally weakens the fungibility of group resources and adds some ongoing frictional costs, we do
not regard it as a materially negative factor for the group's overall creditworthiness. The long-term issuer credit ratings
(ICRs) on the NatWest Markets subsidiaries outside the ring-fence are one notch lower than the U.K. ring-fenced
www.spglobal.com/ratingsdirect May 30, 2019 3The Royal Bank of Scotland Group plc
banks, because we see them as slightly less integral to the group.
Anchor:'bbb+' for banks operating mainly in the U.K.
We use our Banking Industry Country Risk Assessment economic and industry risk scores to determine the starting
point, or anchor, for assigning an ICR. U.K.-based clients comprise more than 80% of RBSG's loans, and Ireland is its
main international market.
We view the economic risk trend for the U.K., as it affects its domestic banking sector, as stable. Although economic
growth will remain lackluster, and may well decline in a disruptive Brexit scenario, the sector as a whole is now much
more resilient to a tougher operating environment thanks to the steady strengthening of U.K. banks' balance sheets
over the past decade and the reduction of pockets of risk and legacy assets at the large and diversified banks. An
orderly Brexit with a transitional arrangement is still our base case. However, the risk of a disorderly Brexit has
increased. If such a scenario materializes, or becomes likely, and we see a severe economic shock looming, we could
make a negative revision to the U.K. economic risk score or consider that the economic risk trend had become
negative.
We view the U.K. banking industry risk trend as stable. The domestic reform agenda is well advanced, and banks have
clarity on their future regulatory environment. Banks have adapted to the ring-fencing of retail and small and midsize
enterprise deposits, which took legal effect from January 2019. We assume that past changes in regulatory structures
will now continue to support market discipline, constrain risk appetites, curb adventurous management strategies,
encourage a better conduct and compliance agenda, and still enable the banking industry to yield adequate
profitability. We see limited downside to our industry risk assessment in our base case, though implicit in our
assessment is the expectation that the industry continues on its path toward consistent statutory profitability and a
return to earnings above the cost of capital.
Table 1
The Royal Bank of Scotland Group PLC Key Figures
--Year-ended Dec. 31--
(Mil. £) 2018 2017 2016 2015 2014
Adjusted assets 687,619 731,513 792,176 808,871 1,042,399
Customer loans (gross) 328,792 326,998 327,478 315,111 412,801
Adjusted common equity 31,755 34,219 33,091 39,297 19,085
Operating revenues 12,931 12,924 12,522 13,446 14,720
Noninterest expenses 7,322 7,522 8,061 8,522 9,885
Core earnings 2,777 3,113 2,817 5,628 4,278
Business position: Focus on domestic retail and commercial banking
Our assessment of RBSG's business position balances our view of its strong franchises in core markets with its
elongated and costly restructuring, which is close to completion but still impacts profitability. We also take account of
the current relative underperformance of the Ulster Bank Ireland and NatWest Markets divisions.
RBSG is a leading competitor across U.K. retail and commercial banking, which contributes the majority of revenue
(see chart 1). It is also present in Irish retail and commercial banking through Ulster Bank Ireland. It operates in private
www.spglobal.com/ratingsdirect May 30, 2019 4The Royal Bank of Scotland Group plc
banking mostly under the Coutts brand, and in capital markets under the NatWest Markets brand, which focuses on
providing rates, currencies, and financing services to corporate and institutional clients in core markets. Royal Bank of
Scotland International is headquartered in Jersey and primarily operates across the U.K. offshore islands.
Chart 1
RBSG's strategic plan indicates that its business mix is unlikely to change materially. It intends to source about 90% of
revenue from the U.K., and allocate about 85% of regulatory risk-weighted assets (RWAs) to retail and commercial
banking activities. RBSG generates about one-third of revenue from fees, commissions, and other non-interest income,
indicating reasonable business diversity aside from lending and deposit-taking activities. In contrast, geographic
diversity is limited because RBSG has largely retrenched to the U.K. and Ireland.
Following nine consecutive annual losses in 2008-2016 as legacy costs overwhelmed the earnings power of its core
franchise, RBSG has returned to profitability but still lags better-performing peers. We expect its earnings will
strengthen over our two-year outlook horizon toward management's targets. RBSG's ambitions for 2020 include a
return on tangible equity of at least 12% (up from 8.3% in first-quarter 2019) and a cost-to-income ratio below 50%
(from 63.4% in first-quarter 2019). We see these aims as ambitious but achievable, assuming no large-scale one-off
charges and a favorable revenue environment. In particular, the cost efficiency target implies a considerable
improvement from current levels (see chart 2).
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Chart 2
Our business position assessment incorporates a generally favorable view of RBSG's management team. Its priorities
include improving cost efficiency, continuing innovation and digitalization, and achieving sustainable balance sheet
and revenue growth. Customer satisfaction is also a focus since RBSG lags peers on net promotor score metrics, partly
due to reputational damage following the government bailout and customer discontent with a recent branch closure
program. Following five and a half years in the role, RBSG's CEO Ross McEwan plans to step down after an orderly
handover to his successor. We do not expect this will change the group's strategy, and we see a strong possibility that
the new CEO will be an internal candidate, just as the CFO was succeeded last year by his former deputy.
RBSG's differentiated digital strategy includes new, separately-branded propositions including Mettle for business
customers and Bó in the retail market. We see these launches partly as a mitigant to the industrywide strategic risk
that fintechs gain material market share from large incumbent bank brands. The start-up costs and break-even points
of these propositions appear low in the context of RBSG's overall resources.
The U.K. government injected £45.5 billion of capital into RBSG in 2008-2009 and still owns 62% of the group's
common equity. The government's budget indicates that it plans to fully exit this stake by 2024, later than previously
planned, through buybacks and market placements. In our view, there has been limited government influence on
RBSG's activities to date. However, we note that the opposition Labour party has suggested retaining RBSG in public
ownership to maintain U.K. corporates' and households' access to banking services such as branches. Accordingly, we
think RBSG's credit profile could be influenced by future political developments, at least while it remains majority
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owned by the government. At this stage, there is insufficient information to assess whether the Labour party's proposal
could affect RBSG's credit profile, either positively or negatively.
We consider that RBSG's closest domestic peers are Lloyds Banking Group plc ('a-' UGCP), Barclays PLC ('bbb+'),
Santander UK Group Holdings plc ('bbb+'), and Nationwide Building Society ('a-'). It also competes with the U.K.
ring-fenced and non-ring-fenced subsidiaries of HSBC Holdings plc ('a+'). Internationally, peers with similar UGCPs
and business models include Commerzbank AG ('bbb+'), Danske Bank A/S ('a-'), and Société Générale ('a-'). Most
peers completed business restructurings earlier than RBSG and have achieved stronger and more consistent
performance levels.
Table 2
The Royal Bank of Scotland Group PLC Business Position
--Year-ended Dec. 31--
(%) 2018 2017 2016 2015 2014
Total revenues from business line (mil. £) 13,474 13,175 12,993 15,387 15,337
Commercial banking/total revenues from business line 25.0 26.4 26.3 21.1 20.9
Retail banking/total revenues from business line N/A N/A N/A N/A 0.0
Trading and sales income/total revenues from business line 10.7 8.0 12.1 9.9 25.7
Other revenues/total revenues from business line 13.1 11.8 6.6 22.4 1.5
Investment banking/total revenues from business line 10.7 8.0 12.1 9.9 25.7
Return on average common equity 2.8 1.8 (15.6) (5.3) (12.5)
N/A--Not applicable.
Capital and earnings: Shareholder distributions move ratios toward management targets
RBSG maintained its capital metrics at high levels while it was loss-making and faced material legacy risks. Now that
tail-risks to the balance sheet have substantially diminished, RBSG's focus has turned to reducing the surplus capital it
currently holds in excess of regulatory requirements. In 2018, it paid its first dividend in 10 years, and we assume
further material distributions to shareholders in our capital projections. At year-end 2021, we expect our RAC ratio will
be at the top of the 7%-10% range that is consistent with an adequate assessment of capital and earnings.
Our view of risks to RBSG's capitalization reduced in 2018 following its $4.9 billion civil settlement with the U.S.
Department of Justice (DoJ) to resolve litigation regarding legacy residential mortgage-backed securities (RMBS). Also
in 2018, it contributed £2.0 billion to the employee pension scheme to close the actuarial deficit, with a further £1.5
billion of dividend-linked contributions potentially payable from 2020.
RBSG reported a 16.2% fully-loaded common equity tier-1 (CET1) ratio at March 31, 2019, and it targets about 14% at
year-end 2021. It returned virtually all of its 2018 net attributable profit to shareholders through ordinary and special
dividends. In February 2019, RBSG's shareholders authorized the repurchase of up to 4.99% of its common equity
capital from the U.K. government in any 12-month period. These directed buybacks will be completed at the
government's discretion, and we assume RBSG will resort to further special dividends if the government chooses not to
proceed.
Our RAC ratio was 10.7% at year-end 2018 (see table 3). Consistent with the CET1 trajectory that RBSG has outlined,
www.spglobal.com/ratingsdirect May 30, 2019 7The Royal Bank of Scotland Group plc
we project that the RAC ratio may fall in to the 9.5%-10.0% range at year-end 2021.
Table 3
The Royal Bank of Scotland Group plc Risk-Adjusted Capital Framework Data
Basel III Average Basel III Average S&P
Exposure* RWA RW(%) S&P Global RWA Global RW (%)
(Mil. £)
Credit risk
Government & central banks 152,721 4,514 3.0 2,225 1.5
Of which regional governments and 170 141 82.9 6 3.6
local authorities
Institutions and CCPs 24,896 8,634 34.7 5,759 23.1
Corporate 160,317 81,795 51.0 143,253 89.4
Retail 220,661 42,429 19.2 111,081 50.3
Of which mortgage 178,220 23,507 13.2 66,844 37.5
Securitization§ 14,918 2,970 19.9 7,115 47.7
Other assets† 8,734 5,548 88.0 12,438 142.4
Total credit risk 582,246 145,890 25.1 281,872 48.4
Credit valuation adjustment
Total credit valuation adjustment -- 2,450 -- 7,459 --
Market Risk
Equity in the banking book 548 3,123 186.0 1,358 247.6
Trading book market risk -- 14,837 -- 21,813 --
Total market risk -- 17,960 -- 23,171 --
Operational risk
Total operational risk -- 22,391 -- 26,633 --
Basel III Average Basel II % of S&P Global
Exposure RWA RW (%) S&P Global RWA RWA
Diversification adjustments
RWA before diversification -- 188,691 -- 339,135 100.0
Total Diversification/ Concentration -- -- -- (27,439) (8.1)
Adjustments
RWA after diversification -- 188,691 -- 311,696 91.9
Total adjusted S&P Global RAC
Tier 1 capital Tier 1 ratio (%) capital ratio (%)
Capital ratio
Capital ratio before adjustments 36,223 19.2 36,300 10.7
Capital ratio after adjustments‡ 36,223 19.2 36,300 11.6
*Exposure at default. §Securitization exposure includes the securitization tranches deducted from capital in the regulatory framework. †Exposure
and S&P Global Ratings’ risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions.
‡Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets.
RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31 2018, S&P Global Ratings.
RBSG's reported pretax earnings improved by 50% to £3.4 billion in 2018, primarily due to lower operating and
strategic costs. Its £1.0 billion pretax earnings in first-quarter 2019 were 16% lower year-on-year due to ongoing
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margin compression, particularly in U.K. mortgages, and lower capital market revenue. Operating costs were lower in
absolute terms in first-quarter 2019, and the pace of this decline should accelerate later in the year.
Key elements of our base case RAC projection in 2019-2021 include the following:
• Strengthening profitability, with statutory pretax earnings increasingly steadily to over £5 billion in 2021.
• Aggregate strategic, conduct, and litigation charges falling to about £0.5 billion in 2020 and about £0.2 billion in
2021.
• An absolute reduction in core operating expenses as part of the group's cost-cutting efforts.
• A potential gain from the minority equity stake in Saudi bank Alawwal, which is on course to complete a merger
with local peer SABB in June 2019. This transaction will boost RBSG's CET1 ratio by about 40 basis points (bps) as
it ceases the proportional regulatory consolidation of Alawwal. The transaction should also release a large positive
foreign exchange reserve into earnings, which is capital-neutral.
• Ongoing margin pressure from U.K. residential mortgage competition. Any interest rate increases by the Bank of
England may offer some mitigation through higher earnings on the structural balance sheet hedge and product
repricing opportunities.
• Under the alternative remedies scheme agreed to meet EU state aid requirements, RBSG is incentivizing about
200,000 small business customers to transfer their loans and deposits to other banks. This will involve some loss of
recurring revenue but RBSG will remain a leading player in U.K. commercial banking. RBSG provided for the one-off
costs of the scheme in 2016-2017.
• A loan loss rate normalizing from current low levels to about 30bps in 2021. While U.K. unemployment stays low
and monetary policy remains accommodative, we expect borrowers' repayment capacity will remain sound.
• Broadly flat S&P Global Ratings' RWAs as new lending in the core businesses offsets the run-off of remaining legacy
assets.
• Continued ordinary dividend payments supplemented by share buybacks and special dividends.
We see the quality of capital as satisfactory. In addition to adjusted common equity, total adjusted capital (TAC)--the
numerator of the RAC ratio--incorporates contingent convertible additional tier-1 (AT1) instruments and a legacy
equity preference share issue. In aggregate, these hybrids represent 13% of TAC.
Table 4
The Royal Bank of Scotland Group PLC Capital And Earnings
--Year-ended Dec. 31--
(%) 2018 2017 2016 2015 2014
Tier 1 capital ratio 18.4 17.9 15.2 16.3 11.2
S&P Global Ratings’ RAC ratio before diversification 10.7 11.2 9.9 11.7 9.4
S&P Global Ratings’ RAC ratio after diversification 11.6 12.3 10.8 14.4 12.1
Adjusted common equity/total adjusted capital 87.5 85.7 84.4 85.0 38.2
Net interest income/operating revenues 66.9 69.5 69.5 65.2 62.9
Fee income/operating revenues 18.2 19.0 20.2 21.8 24.0
Market-sensitive income/operating revenues 10.6 8.0 7.0 8.8 9.4
Noninterest expenses/operating revenues 56.6 58.2 64.4 63.4 67.2
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Table 4
The Royal Bank of Scotland Group PLC Capital And Earnings (cont.)
--Year-ended Dec. 31--
(%) 2018 2017 2016 2015 2014
Preprovision operating income/average assets 0.8 0.7 0.6 0.5 0.5
Core earnings/average managed assets 0.4 0.4 0.3 0.6 0.4
RAC--Risk-adjusted capital.
Risk position: Reduced legacy risks benefit the group's profile
We revised our assessment of RBSG's risk position upward to adequate in May 2019 on account of its progress in
addressing legacy assets and legal cases. Credit risk metrics are close to the peer group average, and its restructuring
has produced a smaller organization with less complex capital markets and cross-border activities. Accordingly, we
now believe that its risk position is in line with peers and consistent with the standard assumptions underpinning our
RAC framework. That said, RBSG is geographically concentrated in the U.K. and Ireland, and a disorderly Brexit
process could weaken its asset quality.
In addition to its RMBS settlement with the DoJ, RBSG has made progress in resolving other legal matters. Certain
cases still remain outstanding, but we believe the associated risk to its capital and earnings position is manageable.
RBSG held £767 million of provisions for litigation and regulatory matters at March 31, 2019, and our projections
assume some further charges are required in 2019-2021. In May 2019, RBSG settled with the European Commission in
respect of historic competition law breaches in foreign exchange trading. The aggregate €249 million fine was fully
covered by existing provisions.
Like U.K. peers, RBSG has incurred material costs in compensating customers for historic payment protection
insurance (PPI) misselling. It incurred a further £200 million provision charge in 2018. We believe the £559 million
outstanding provision at March 31, 2019, should be sufficient to cover claims submitted up to the August 2019
deadline, but we do not exclude the possibility of a further top-up.
RBSG's lending is focused on the U.K. and features good sectoral diversity (see chart 3). The customer loan portfolio
has been broadly stable in size for the past five years as new business was offset by the runoff of legacy exposures.
RBSG currently aims for 3% annual loan growth, but this appears optimistic given subdued U.K. credit demand at
present. Residential mortgages are likely to remain the main impetus of growth as RBSG targets a market share closer
to its share of personal current accounts. Reflecting tightened underwriting criteria and limited new business,
commercial property lending reduced to 11% of customer loans at year-end 2018.
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Chart 3
Residential mortgages are underwritten based on the borrowers' repayment capacity, but the loan-to-value (LTV)
profile indicates good collateral cover in the event of foreclosure. The weighted-average LTV of the U.K. Personal
Banking division's mortgage book was 56% at year-end 2018, and 53% for the buy-to-let element (see chart 4). We
expect credit losses on the mortgage portfolio will remain low over our two-year outlook horizon. Commercial
property lending also shows good collateral cover, and the exposure to property development is relatively small.
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Chart 4
Relative to U.K. peers, we see RBSG's underweight position in unsecured consumer credit as a positive factor in our
risk position assessment. This asset class is likely to be among the main sources of credit losses in an economic stress.
RBSG's nonperforming exposures have reduced and its International Financial Reporting Standard 9 (IFRS9) stage 3
loans are now broadly comparable with U.K. peers' (see chart 5). Stage 3 balances fell by almost one-third during 2018
due to write-offs and sales, including the disposal of a €1.4 billion portfolio of impaired Irish mortgages. Ulster Bank
Ireland's 2018 impairment losses included a charge in anticipation of a further sale this year.
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Chart 5
At 13bps of gross customer loans in 2018 and 11bps in the first quarter of 2019, RBSG's impairment charge reflects the
benign credit environment. The 2018 figure included a £101 million IFRS9 management overlay to reflect the more
uncertain U.K. economic outlook in light of Brexit.
The November 2018 Bank of England stress test validated the improving trend in RBSG's risk position (see "Everyone
Passed: Stress Tests Highlight Growing Resilience Of U.K. Banks," published on Nov. 29, 2018). Calculated under the
transitional IFRS9 approach, its CET1 ratio fell to a low point of 9.7%, comfortably above the 7.3% hurdle rate. The
projected credit loss rates indicate that the quality of RBSG's domestic lending is around the industry average (see
table 5).
Table 5
Projected Cumulative Five-Year Impairment Charge Rates On U.K. Lending In The Stress Scenario, Ranked
Ranked best to worst
Mortgage lending to Non-mortgage lending to Commercial real estate (CRE) Lending to business
individuals individuals lending excluding CRE
HSBC (0.7%) Santander UK (20.6%) HSBC (5.9%) Standard Chartered (3.4%)
Barclays (0.9%) HSBC (22.4%) Nationwide (6.0%) HSBC (8.6%)
RBSG (0.9%) RBSG (22.5%) RBSG (6.2%) RBSG (8.7%)
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Table 5
Projected Cumulative Five-Year Impairment Charge Rates On U.K. Lending In The Stress Scenario,
Ranked (cont.)
Ranked best to worst
Mortgage lending to Non-mortgage lending to Commercial real estate (CRE) Lending to business
individuals individuals lending excluding CRE
Nationwide (1.1%) Lloyds (27.0%) Santander UK (6.2%) Barclays (9.2%)
Santander UK (1.5%) Nationwide (27.4%) Barclays (6.7%) Lloyds (9.4%)
Lloyds (3.4%) Barclays (35.9%) Lloyds (7.2%) Santander UK (12.6%)
Source: Bank of England.
We believe that RBSG's capital markets business adds modest complexity to the group's overall risk profile, after
taking into account the streamlined scope and scale of its activities. The reported average one-day 99% value-at-risk
was stable at £19 million in 2018. Other indicators also show a contained risk appetite, such as the reduction of the
NatWest Markets division's regulatory RWAs. These represent 23% of the group's RWAs and are likely to fall as the
division further downsizes remaining legacy assets, including the Alawwal stake. Level 3 assets--those we generally see
as illiquid--totaled £3.3 billion at year-end 2018, or a manageable 9% of TAC.
Our RAC framework does not capture the nontrading market risks arising from RBSG's balance sheet, which we think
are mitigated by its structural hedges. The RAC ratio also does not fully capture potential volatility arising from the
large defined-benefit pension fund, but its 2018 contribution has improved the scheme's funding position and enabled
some asset derisking.
Table 6
The Royal Bank of Scotland Group PLC Risk Position
--Year-ended Dec. 31--
(%) 2018 2017 2016 2015 2014
Growth in customer loans 0.5 (0.1) 3.9 (23.7) (0.8)
Total diversification adjustment/S&P Global Ratings’ RWA before diversification (8.1) (8.8) (8.4) (18.5) (22.2)
Total managed assets/adjusted common equity (x) 21.9 21.6 24.1 20.7 55.1
New loan loss provisions/average customer loans 0.1 0.2 0.1 (0.2) (0.3)
Net charge-offs/average customer loans 0.5 0.3 1.1 2.4 1.2
Gross nonperforming assets/customer loans + other real estate owned 2.5 3.2 3.8 5.1 8.3
Loan loss reserves/gross nonperforming assets 41.0 36.7 35.4 44.8 52.5
RWA--Risk-weighted assets.
Funding and liquidity: Stable deposit franchise underpins robust metrics
RBSG's funding profile is healthy and underpinned by its leading U.K. retail and corporate deposits franchises (see
chart 6). It is active in wholesale funding markets to support the capital markets business and selected customer assets,
and build additional loss-absorbing capacity (ALAC) in line with regulatory requirements. Its dependence on wholesale
funding has declined substantially compared with RBSG's historic position, however.
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Chart 6
Customer deposits have demonstrated stability despite RBSG's historic franchise volatility. Indeed, with a reported
86% loan-to-deposit ratio at March 31, 2019, RBSG has greater deposit funding than most U.K. peers. We expect the
strong and granular deposit base will remain the cornerstone of RBSG's funding position. It is willing to raise the
loan-to-deposit ratio toward 100% as new lending increases, but we expect it will likely operate below that level in
practice. We believe RBSG will be able to refinance its £14 billion outstanding borrowing under the Bank of England
Term Funding Scheme, and £1.8 billion under the similar European Central Bank arrangement, within its usual debt
issuance plans.
Our stable funding ratio was a solid 125% at year-end 2018 partly reflecting the reduction of investment banking
activities, which are more reliant on short-term wholesale and repo funding. RBSG reported a similarly robust 137%
regulatory net stable funding ratio at March 31, 2019.
RBSG currently maintains a more conservative liquidity position than usual while uncertainty persists over Brexit. It
reported a 153% regulatory liquidity coverage ratio at March 31, 2019. Our ratio of broad liquid assets to short-term
wholesale funding was 2.5x at year-end 2018, which similarly indicates good capacity to cope with a temporary
interruption to wholesale market access.
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Table 7
The Royal Bank of Scotland Group PLC Funding And Liquidity
--Year-ended Dec. 31--
(%) 2018 2017 2016 2015 2014
Core deposits/funding base 74.7 70.7 72.0 71.0 66.5
Customer loans (net)/customer deposits 85.8 88.1 91.3 89.0 95.2
Long-term funding ratio 86.7 82.7 83.3 82.1 80.1
Stable funding ratio 124.7 124.9 118.2 121.7 110.1
Short-term wholesale funding/funding base 14.4 18.7 18.1 19.7 21.6
Broad liquid assets/short-term wholesale funding (x) 2.5 2.1 2.0 2.0 1.5
Net broad liquid assets/short-term customer deposits 29.9 30.2 25.6 29.3 18.3
Short-term wholesale funding/total wholesale funding 55.0 61.5 61.9 64.6 56.2
Support: Two notches of ALAC uplift
In our view, RBSG has high systemic importance in the U.K., mainly reflecting its material market share of retail
deposits. Since 2015, we have regarded the prospect of extraordinary government support for U.K. banks as uncertain
in view of the country's well-advanced resolution regime. As a result, we do not reflect implicit government support in
the ratings on U.K. commercial banks. The government's majority shareholding does not affect our conclusion because
it is intended to be temporary.
We view the U.K. resolution regime as effective under our ALAC criteria because, among other factors, we believe it
contains a well-defined bail-in process under which authorities would permit nonviable, systemically important banks
to continue critical functions as going concerns following a bail-in of eligible liabilities.
At end-2018, RBSG's ALAC ratio was 11.2% of S&P Global Ratings' RWA, comfortably above the 8.5% threshold that
we have set for a two-notch ICR uplift (see table 7). We set the threshold above our standard 8% level since RBSG is
required to preposition ALAC in several bank subsidiaries and this constrains intragroup fungibility to a degree. We
expect the ALAC ratio will remain comfortably above 10% as RBSG issues further senior unsecured debt from the
nonoperating holding company (NOHC). It intends to increase the outstanding value of these securities to about £24
billion in January 2022 from £17.5 billion at March 31, 2019.
Table 8
The Royal Bank of Scotland Group PLC -- Summary Of ALAC Calculation As At Dec. 31, 2018
(Mil. £) % of S&P Global Ratings' RWA
A Adjusted common equity 31,755
B Hybrids in TAC 4,545
C (A+B) Total adjusted capital 36,300 9.4
D TAC in excess of our 7% threshold 12,561 3.7
E ALAC-eligible instruments 25,567 7.5
o/w NOHC senior 15,647
o/w dated subordinated 8,792
o/w other 1,128
F (=D+E) ALAC buffer 38,128 11.2
www.spglobal.com/ratingsdirect May 30, 2019 16The Royal Bank of Scotland Group plc
Table 8
The Royal Bank of Scotland Group PLC -- Summary Of ALAC Calculation As At Dec. 31, 2018 (cont.)
(Mil. £) % of S&P Global Ratings' RWA
S&P Global Ratings' RWAs 339,135
Source: S&P Global Ratings database. ALAC--Additional loss-absorbing capacity. RWAs--Risk-weighted assets. TAC--Total adjusted capital.
Additional rating factors: None
No other factors affect the ratings.
Group structure and rated subsidiaries
RBSG is the ultimate NOHC of the group that it heads (see chart 7).
We view the three U.K. bank subsidiaries within the ring fence as core to the group, and we therefore equalize the ICRs
www.spglobal.com/ratingsdirect May 30, 2019 17The Royal Bank of Scotland Group plc
on these entities with the 'a' GCP.
We view the three rated NatWest Markets entities outside the ring fence as highly strategic rather than core. This is
because we believe they are slightly less integral to the group and have a higher risk profile and weaker earnings
record than the domestic retail and commercial banking businesses. We position the ICRs on the NatWest Markets
entities at 'A-', one notch below the GCP. We understand that NatWest Markets N.V. is likely to become a subsidiary of
NatWest Markets Plc during 2019, following the regulatory deconsolidation of Alawwal.
We consider Ulster Bank Ireland DAC and The Royal Bank of Scotland International Ltd. as highly strategic
subsidiaries and also rate them one notch below the GCP.
We do not include ALAC support in the ratings on NOHCs because we do not believe that their senior obligations
would necessarily continue to be serviced in full and on time in a resolution scenario. As a result, we rate the NOHC
one notch below the 'bbb+' unsupported GCP, at 'BBB'.
Hybrid issue ratings
We notch rated hybrid capital instruments from the UGCP in accordance with our bank hybrid criteria, depending on
their features. In all cases, instruments issued or guaranteed by the NOHC are rated one notch below equivalent
instruments issued by an operating entity.
The 'B+' issue rating on the AT1 issued by the NOHC is six notches below the 'bbb+' unsupported GCP, reflecting:
• One notch because the notes are contractually subordinated;
• Two notches because the notes have tier-1 regulatory capital status;
• One notch because the notes contain a contractual write-down clause;
• One notch because the instrument contains a going-concern write-down trigger (defined as the CET1 ratio falling
below 7%), and we expect that the distance to the trigger could fall within a range of 301bps-700bps. The actual
distance to the trigger was 920bps at March 31, 2019, but, since RBSG's stated CET1 ratio target is about 14%, we
believe that this notch remains appropriate on a forward-looking basis; and
• One notch because the notes are issued by a NOHC, where we see structural subordination.
Resolution counterparty ratings (RCRs)
An RCR is a forward-looking opinion of the relative default risk of certain senior liabilities that may be protected from
default through an effective bail-in resolution process for the issuing financial institutions. We have assigned RCRs to
all of RBSG's rated operating entities except The Royal Bank of Scotland International Ltd., which is incorporated in a
jurisdiction where we have not assessed the effectiveness of the resolution regime. The assigned long-term RCRs are
one notch above the respective long-term ICRs except in the case of NatWest Markets Securities Inc. For that entity,
the long-term RCR is in line with the long-term ICR, consistent with our U.S. jurisdiction assessment.
RCRs apply to issuers in jurisdictions where we assess the resolution regime to be effective and we consider the issuer
likely to be subject to a resolution that entails a bail-in if it reaches nonviability.
www.spglobal.com/ratingsdirect May 30, 2019 18The Royal Bank of Scotland Group plc
Related Criteria
• Criteria - Financial Institutions - General: Methodology For Assigning Financial Institution Resolution Counterparty
Ratings, April 19, 2018
• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Guarantee Criteria, Oct. 21, 2016
• Criteria | Financial Institutions | Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing
Capacity, April 27, 2015
• Criteria | Financial Institutions | Banks: Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology
And Assumptions, Jan. 29, 2015
• General Criteria: Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• Criteria | Financial Institutions | Banks: Quantitative Metrics For Rating Banks Globally: Methodology And
Assumptions, July 17, 2013
• Criteria | Financial Institutions | Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And
Assumptions, Nov. 9, 2011
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria | Financial Institutions | Banks: Commercial Paper I: Banks, March 23, 2004
Related Research
• The Royal Bank of Scotland Group plc And Subsidiaries Upgraded On Strengthened Risk Profile; Outlook Stable,
May 16, 2019
• U.K. Banks: Looking At The Facts Rather Than Received Wisdom, March 4, 2019
• Countdown To Brexit: Rating Implications Of A No-Deal Brexit, Feb. 6, 2019
• The 2019 Outlook For U.K. Banks Hinges On Brexit, Jan. 10, 2019
• The Royal Bank of Scotland Group plc, Dec. 12, 2018
• Everyone Passed: Stress Tests Highlight Growing Resilience Of U.K. Banks, Nov. 29, 2018
• Banking Industry Country Risk Assessment: United Kingdom, Nov. 5, 2018
Ratings Detail (As Of May 30, 2019)*
The Royal Bank of Scotland Group plc
Issuer Credit Rating BBB/Stable/A-2
www.spglobal.com/ratingsdirect May 30, 2019 19The Royal Bank of Scotland Group plc
Ratings Detail (As Of May 30, 2019)*(cont.)
Commercial Paper
Foreign Currency A-2
Junior Subordinated B+
Junior Subordinated BB
Junior Subordinated BB-
Preference Stock BB-
Senior Unsecured A-
Senior Unsecured BBB
Short-Term Debt A-2
Subordinated BB+
Issuer Credit Ratings History
16-May-2019 BBB/Stable/A-2
31-May-2018 BBB-/Positive/A-3
07-Jul-2016 BBB-/Stable/A-3
19-Jan-2016 BBB-/Positive/A-3
03-Feb-2015 BBB-/Stable/A-3
Sovereign Rating
United Kingdom AA/Negative/A-1+
Related Entities
National Westminster Bank Plc
Issuer Credit Rating A/Stable/A-1
Resolution Counterparty Rating A+/--/A-1
Commercial Paper
Local Currency A-1
Junior Subordinated BB
Junior Subordinated BB+
Preference Stock BB
Senior Unsecured A
Short-Term Debt A-1
Subordinated BBB-
NatWest Markets N.V.
Issuer Credit Rating A-/Stable/A-2
Resolution Counterparty Rating A/--/A-1
Senior Unsecured A-
Short-Term Debt A-2
Subordinated BB+
NatWest Markets Plc
Issuer Credit Rating A-/Stable/A-2
Resolution Counterparty Rating A/--/A-1
Commercial Paper
Foreign Currency A-2
Junior Subordinated BB
Resolution Counterparty Liability A
www.spglobal.com/ratingsdirect May 30, 2019 20The Royal Bank of Scotland Group plc
Ratings Detail (As Of May 30, 2019)*(cont.)
Senior Unsecured A-
Short-Term Debt A-2
Subordinated BB+
NatWest Markets Securities Inc.
Issuer Credit Rating A-/Stable/A-2
Resolution Counterparty Rating A-/--/A-2
Royal Bank of Scotland International Limited
Issuer Credit Rating A-/Stable/A-2
Royal Bank of Scotland plc (The)
Issuer Credit Rating A/Stable/A-1
Resolution Counterparty Rating A+/--/A-1
Ulster Bank Ireland DAC
Issuer Credit Rating A-/Stable/A-2
Resolution Counterparty Rating A/--/A-1
Ulster Bank Limited
Issuer Credit Rating A/Stable/A-1
Resolution Counterparty Rating A+/--/A-1
*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable
across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.
www.spglobal.com/ratingsdirect May 30, 2019 21The Royal Bank of Scotland Group plc
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