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Royal Bank of Scotland International Rated 'BBB/A-2'; Outlook Positive

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Royal Bank of Scotland International Rated 'BBB/A-2'; Outlook Positive Research Update: Royal Bank of Scotland International Rated 'BBB/A-2'; Outlook Positive Primary Credit Analyst: Sadat Preteni, London (44) 20-7176-7560; [email protected] Secondary Contact: Alexandre Birry, London (44) 20-7176-7108; [email protected] Table Of Contents Overview Rating Action Rationale Outlook Related Criteria Related Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2018 1 1986956 | 301308293 Research Update: Royal Bank of Scotland International Rated 'BBB/A-2'; Outlook Positive Overview • The Royal Bank of Scotland Group PLC (RBSG) plans to complete a formal separation of its banking operations under the U.K's ring-fencing regime by mid-2018. • Under the upcoming ring-fencing regulations, Jersey-based Royal Bank of Scotland International Ltd. (RBS International) will be one of the non-ring-fenced operating subsidiaries of RBSG. • We are assigning our 'BBB/A-2' ratings to RBS International as we regard this entity as a highly strategic operating subsidiary of RBSG. • The positive outlook reflects our view that we could revise upward RBS' group credit profile over the coming 18-24 months, which would result in an upgrade of RBS International. Rating Action On Jan. 30, 2018, S&P Global Ratings assigned its 'BBB/A-2' long- and short-term issuer credit ratings to RBS International. The outlook is positive. Rationale The U.K. financial regulator's ring-fencing requirements seek to remove the operational and financial dependencies and links between the systemically important activities of major U.K. banks and their less-systemically important, and often risker, activities. Each bank has therefore had to decide how to split those activities between different subsidiaries or whether to cease offering some of them. We understand that these ring-fencing arrangements must be delivered by Jan. 1, 2019. RBS has stated that its target organizational structure is similar to its current divisional structure, and that about 80% of current core risk-weighted assets are expected to be committed to the ring-fenced bank. We note that most of RBSG's U.K. and Western European banking business will be placed in ring-fenced entities under an intermediate holding company--NatWest Holdings Ltd.--while investment banking activities will be in a non-ring-fenced bank, NatWest Markets. RBS International will also sit outside the ring-fence and will be a direct subsidiary of RBSG. We regard RBS International as a highly strategic operating subsidiary of RBSG and rate it one notch below RBS' 'bbb+' group credit profile (GCP) and the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2018 2 1986956 | 301308293 Research Update: Royal Bank of Scotland International Rated 'BBB/A-2'; Outlook Positive 'BBB+' long-term rating on core operating subsidiaries, such as National Westminster Bank PLC. RBS International is RBSG's full-service bank operating in the Crown Dependencies of Jersey, Guernsey, and the Isle of Man, as well as in Gibraltar. More recently, it established wholesale branches in Luxembourg and London. RBS International operates as one of the largest banks in its chosen jurisdictions, with high and resilient market shares across personal, business, and private banking. It also serves as a center of excellence for the group's funds banking activities. RBS International shares the group's name and brand and is integrated with the wider group. We consider that it is highly unlikely to be sold given that it operates in business lines that are integral to the group's strategy (retail and commercial banking). Furthermore, it is well-capitalized and has a strong track record of profitability, having been profitable for 20 years and a steady source of dividends to its parent. In our view, this supports RBS International's highly strategic importance to the group and the strong likelihood of it receiving financial support in case of need. Our assessment of RBS International's group status as highly strategic is constrained by its narrow focus on banking in offshore centers, in addition to its funds banking activities, and its relatively small size compared to the group. Moreover, we consider that RBS International is a business in its own right rather than a booking vehicle for the group. Outlook The positive outlook on RBS International's long-term rating reflects our expectation that we could revise RBS' GCP upward to 'a-' over the coming 18-24 months. We expect that the group's progress with its restructuring will continue to support gradual improvements in its underlying operating and financial performance, and its earnings capacity. We could upgrade RBS International over the coming two years if we revised upward RBS' GCP. We expect RBS International to continue to be rated one notch below core operating entities. We could revise the outlook back to stable if we no longer expected the GCP to improve over our forecast horizon. Related Criteria • General Criteria: Methodology For Linking Long-Term And Short-Term Ratings , April 7, 2017 • General Criteria: Group Rating Methodology, Nov. 19, 2013 • Criteria - Financial Institutions - Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2018 3 1986956 | 301308293 Research Update: Royal Bank of Scotland International Rated 'BBB/A-2'; Outlook Positive • Criteria - Financial Institutions - Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011 • General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research • RBS Ring-Fenced Subsidiaries Outlooks Revised To Positive; Non-Ring-Fenced Entities To Stable; Ratings Affirmed, Nov. 17, 2017 • Various U.K. Bank Ratings Affirmed; Outlooks Revised To Stable Or Positive On Balance Sheet Strengths, But Risks Remain, Nov. 15, 2017 • Adam & Co. Assigned Preliminary 'BBB+/A-2' Ratings; Outlook Stable; RBS Outlook Revised To Negative, Ratings Affirmed, Oct. 5, 2017 • The Royal Bank of Scotland Group PLC, June 28, 2017 Ratings List New Rating; Outlook Action Royal Bank of Scotland International Ltd. Counterparty Credit Rating BBB/Positive/A-2 Additional Contact: Financial Institutions Ratings Europe; [email protected] Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2018 4 1986956 | 301308293 Copyright © 2018 by Standard & Poor’s Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. 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