The Royal Bank of Scotland Group Plc
Total Page：16
File Type：pdf, Size：1020Kb
The Royal Bank of Scotland Group plc Primary Credit Analyst: Richard Barnes, London (44) 20-7176-7227; [email protected] Secondary Contact: Pierre Gautier, Paris (33) 1-4420-6711; [email protected] Table Of Contents Major Rating Factors Outlook Rationale Related Criteria Related Research www.spglobal.com/ratingsdirect May 30, 2019 1 The 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 2 The 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 3 The 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 4 The 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). www.spglobal.com/ratingsdirect May 30, 2019 5 The Royal Bank of Scotland Group plc 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.