FINANCIAL INSTITUTIONS CREDIT OPINION The Royal Bank of Scotland Group plc 22 May 2020 Update post 1Q results Update Summary Rating Rationale The long-term senior unsecured debt rating of The Royal Bank of Scotland Group plc (RBSG) is Baa2 with a positive outlook. RBSG's baa2 Baseline Credit Assessment (BCA) is driven by: (1) its strong capital position, which is higher than that of its peers and above its own target; (2) strong retail and corporate RATINGS franchises which mitigate ongoing pressures on revenue and credit impairments due Domicile Edinburgh, United to Corponavirus-led weak economic environment; (3) its improved risk framework and Kingdom governance; and 4) its exposure to more volatile, complex and loss-making capital markets Long Term CRR Not Assigned activities. Long Term Debt Baa2 Type Senior Unsecured - Fgn RBSG is the ultimate parent and holding company of the ring-fenced operating company Curr Outlook Positive National Westminster Bank plc (NatWest Bank; baa1; A2 positive) and of the non-ring- Long Term Deposit Not Assigned fenced operating company NatWest Markets Plc (NatWest Markets, formerly RBS plc; ba2; Baa2 positive). Please see the ratings section at the end of this report for more information. The ratings and outlook shown Exhibit 1 reflect information as of the publication date. Rating Scorecard - Key Financial Ratios1 RBSG (BCA: baa2) Median baa2-rated banks 25% 45% Contacts 40% 20% 35% Alessandro Roccati +44.20.7772.1603 Factors Liquidity 30% Senior Vice President 15% 25% [email protected] 20% 10% Laurie Mayers +44.20.7772.5582 15% Solvency Factors Solvency Associate Managing Director 5% 10% 5% [email protected] 2.8% 21.3% 23.7% 38.3% 0% 0.4% 0% Nick Hill +33.1.5330.1029 Asset Risk: Capital: Profitability: Funding Structure: Liquid Resources: Problem Loans/ Tangible Common Net Income/ Market Funds/ Liquid Banking MD-Banking Gross Loans Equity/Risk-Weighted Tangible Assets Tangible Banking Assets/Tangible [email protected] Assets Assets Banking Assets Solvency Factors (LHS) Liquidity Factors (RHS) Maxwell Price +44.20.7772.1778 Source: Moody's Banking Financial Metrics Associate Analyst [email protected] CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Credit Strengths » High capitalization » Strong franchises in UK retail and commercial banking » Sound funding and liquidity Credit Challenges » Credit risk converging towards peers. Market activities downsizing but loss-making » Profitability hampered by current negative economic environment and ongoing restructuring costs Rating Outlook RBSG’s senior unsecured debt ratings carry a positive outlook, incorporating our view that during the next eighteen months the group will largely complete its complex multi-year restructuring exercise and will generate more stable and sustainable earnings. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The banking sector has been one of the sectors affected by the shock given the expected impact on asset quality and profitability. Although the initial shock from the coronavirus has been similar across countries, economic outcomes will differ because of different capacities to withstand the shock. The overall risks to our baseline forecasts2 for all countries are skewed to the downside. Factors that Could Lead to an Upgrade » RBSG’s BCA and ratings could be upgraded If the firm were to return to sustainable profitability in line with that of its higher-rated peers, continue to generate capital organically and substantially complete its multi-year restructuring exercise. The ratings could also be upgraded as a result of a sizeable increase in the outstanding liabilities that could be bailed in, resulting in a lower loss- given-failure for senior creditors. Factors that Could Lead to a Downgrade » RBSG’s BCA and ratings could be downgraded if the group's restructuring and de-risking strategy fails to deliver further improvements in its credit fundamentals or with a significant deterioration in the operating environment beyond our base case expectations. The ratings could also be downgraded as a result of a sizeable reduction in the outstanding liabilities that could be bailed in, resulting in a higher loss-given-failure for senior creditors. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 22 May 2020 The Royal Bank of Scotland Group plc: Update post 1Q results MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Key indicators Exhibit 2 The Royal Bank of Scotland Group plc (Consolidated Financials) [1] 12-192 12-182 12-172 12-162 12-152 CAGR/Avg.3 Total Assets (GBP Billion) 564.4 554.3 571.4 552.2 547.3 0.84 Total Assets (USD Billion) 747.6 706.0 773.0 682.3 806.6 (1.9)4 Tangible Common Equity (GBP Billion) 38.1 40.2 40.0 38.7 43.3 (3.1)4 Tangible Common Equity (USD Billion) 50.5 51.1 54.1 47.8 63.8 (5.7)4 Problem Loans / Gross Loans (%) 2.1 2.6 3.6 3.3 4.1 3.15 Tangible Common Equity / Risk Weighted Assets (%) 21.3 21.3 19.9 17.0 17.8 19.56 Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 15.7 18.6 25.8 23.9 24.1 21.65 Net Interest Margin (%) 1.4 1.4 1.5 1.3 1.4 1.45 PPI / Average RWA (%) 1.3 1.5 0.9 -2.5 -0.8 0.16 Net Income / Tangible Assets (%) 0.8 0.0 0.4 0.0 -0.3 0.25 Cost / Income Ratio (%) 79.8 75.9 84.6 158.2 122.1 104.15 Market Funds / Tangible Banking Assets (%) 23.7 23.8 24.0 21.6 21.3 22.95 Liquid Banking Assets / Tangible Banking Assets (%) 38.3 39.3 40.4 36.0 38.5 38.55 Gross Loans / Due to Customers (%) 87.1 87.4 87.9 91.0 89.2 88.55 [1]All figures and ratios are adjusted using Moody's standard adjustments. [2]Basel III - fully loaded or transitional phase-in; IFRS. [3]May include rounding differences because of the scale of reported amounts. [4]Compound annual growth rate (%) based on the periods for the latest accounting regime. [5]Simple average of periods for the latest accounting regime. [6]Simple average of Basel III periods. Sources: Moody's Investors Service and company filings Profile Strong franchises in retail and commercial banking RBSG maintains a leading position in the UK financial services market, where it mainly operates under the NatWest, RBS and Ulster brands. The group also has a relatively small but profitable UK-based wealth management business (Coutts, unrated). Retail and commercial activities continue to provide good underlying “shock absorbers” against the potential earnings volatility stemming from the bank's capital markets activities, restructuring costs and operational risk and costs. RBSG has made substantial progress in its restructuring plan, including: the de-risking of its balance sheet and the reduction of non-core assets; improving its core Personal and Business Banking and Commercial and Private Banking businesses in the UK and in Ireland. However, the group will further downsize and refocus its capital markets business: its subsidiary NatWest Markets will provide a simplified product suite (it will continue to provide currencies, rates and financing activities and substantially reduce the capital allocated to institutional rates) and will focus on corporate clients as compared to its current focus on institutional clients. If successfully executed, the plan will improve NatWest Markets’ credit profile by returning it to modest levels of profitability and reducing its reliance on institutional client revenues. However, execution risk is elevated, and we expect NatWest Markets to report net losses in 2020-22. RBSG's operations are heavily influenced by the operating environment in the UK (UK, Aa2 negative) and its Macro Profile is currently Strong+. Banks in the United Kingdom (UK, Aa2 negative) operate in a large, flexible and competitive economy with high levels of wealth. We believe that operating conditions for UK banks will deteriorate over the next 12-18 months, driven by an uncertain economic backdrop due to the coronavirus, as well as the UK's preparation to leave the European Union (Aaa stable). RBSG recently announced that the group would be renamed NatWest Group plc later in 2020. 3 22 May 2020 The Royal Bank of Scotland Group plc: Update post 1Q results MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Detailed Credit Considerations Numbers quoted reflect 1Q 2020 results. Credit risk converging towards peers. Market activities downsizing but loss-making RBSG's credit quality has materially improved as a result of a reduction in problem loans and the disposal of non-core assets, but remains slightly below its large domestic peers. IFRS 9 Stage 3 customer loans as a proportion of gross loans were 1.9% at 31 December 2019, compared with 2.6% as at 31 December 2018. Litigation and legacy risks have also receded, and RBSG has now settled all major outstanding litigation. The August 2018 settlement with the Department of Justice (DoJ) removed tail risk related to the substantial RMBS litigation. The group had £1.2 billion of outstanding provisions to cover residual Payment Protection Insurance (PPI) mis-selling risk at end-2019, of which £100 million was released during Q1 2020. These achievements will allow RBSG’s management to focus more closely on completing the planned restructuring of the bank.