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[FONT="]Fitch Ratings-London-23 October 2009: Fitch Ratings has today revised the rating watch on three of The Royal Bank of Scotland Group plc's (RBS Group, rated 'AA-'/ Stable) cumulative preference shares and one tier 1 security - all rated 'B' - to Evolving (RWE) from Negative (RWN). It has also revised the Watch on 14 upper tier 2 securities issued by its subsidiary, The Royal Bank of Scotland plc (RBS) and seven upper tier 2 securities issued by its subsidiary, National Westminster Bank plc (NatWest) - which are all rated 'B+' - to RWE from RWN. A full rating breakdown is provided below.[/FONT]
[FONT="]In addition, Fitch has placed five dated subordinated (lower tier 2) bonds issued by RBS Group and one dated subordinated bond issued by RBS, which are all rated 'A+', on RWN.[/FONT]
[FONT="]The rating actions reflect a review of the securities' coupon deferral risk following a clarification by RBS Group on its contractual rights and technical deferral features in respect of these securities.[/FONT]
[FONT="]The three non-cumulative preference shares on RWE have 'must pay' features. However, coupon payments are still contingent on RBS Group having sufficient distributable reserves and not being in breach of the Financial Services Authority's (FSA) regulatory capital requirements. Fitch notes that the main risk to distributable reserves would be another substantial impairment charge against the carrying value of RBS Group's investments in its subsidiaries, like the 2008 write-down of its investment in the ABN AMRO acquisition vehicle. RBS Group created GBP14bn of distributable reserves at the time of its share-raising in 2008 and Fitch understands that a similar scheme could be used to create further distributable reserves when RBS Group issues new shares as part of its expected participation in the UK government's asset protection scheme (APS). RBS Group's participation in the APS is critical for its capital position. Assuming participation in the APS is confirmed by end-2009, Fitch believes RBS Group's capital levels to be sound. However, Fitch notes that the FSA has flexibility to set capital requirements of individual banks at levels considerably in excess of the minimum, and may well be under pressure from the European Commission to do so in order to adhere to the objective of "burden sharing".[/FONT]
[FONT="]Fitch will resolve the RWE on the three non-cumulative preference shares once there is confirmation of RBS Group's participation in the APS and the nature of any "burden sharing" imposed by the European Commission in assessing its approval of the state aid received by the group. The ratings could be upgraded should the 'must pay' features be sustained.[/FONT]
[FONT="]The RWE on the 14 upper tier 2 securities issued by RBS and one innovative tier 1 security by RBS Group reflects the fact that interest payments cannot be deferred if RBS Group pays a coupon on any class of its share capital. As RBS Group's share capital includes both ordinary and preference shares, the interest deferral risk for these securities is most immediately linked to the abovementioned non-cumulative preference shares with "must pay" features i.e. a payment on the non-cumulative preference shares effectively "pushes" the upper tier 2 and innovative tier 1 security coupons.[/FONT]
[FONT="]The five dated subordinated (lower tier 2) securities placed on RWN permit interest payments to be deferred, but only on a cumulative basis (and with interest accruing on deferred payments) and only for as long as RBS Group is in deferral on all coupons/dividends in respect of all of its shares, both ordinary and preference. Fitch believes their cumulative nature, with interest accruing on deferred payments, effectively make these instruments incapable of 'burden sharing' unless RBS Group never makes a dividend/coupon payment on any class of its shares again, which Fitch views as improbable.[/FONT]
[FONT="]Additionally, the European Commission has always maintained that it will balance any deferral requirements with needing to ensure a bank's refinancing capability. RBS Group and its subsidiaries are substantial issuers of debt and the non-payment of interest on these dated subordinated securities, even if technically permitted, would potentially be detrimental to the group's relationships with bondholders, particularly in the US, where the dated subordinated securities were issued. Such a non-payment would also be contrary to a core objective of the European Commission for banks to wean themselves off state aid as quickly as possible. The RWN in respect of these securities reflects the possibility of coupon deferral, but Fitch believes the risk to be very limited.[/FONT]
[FONT="]The RWN on the the dated subordinated security issued by RBS, rated 'A+', reflects the technical ability, as outlined in the underlying prospectus and pricing supplement, to defer coupons should the FSA require it. Given the disruption this could cause to the group's relationships with investors and the group's imminent re-capitalisation, Fitch deems it unlikely that the FSA would require this, but the RWN nonetheless reflects this risk.[/FONT]
[FONT="]The RWN on the dated subordinated securities will also be resolved once there is a definitive resolution of the issues surrounding the non-cumulative preference shares.[/FONT]
[FONT="]The ratings actions are as follows:[/FONT]
[FONT="]The Royal Bank of Scotland Group plc (RBS Group)Preference shares: 'B'; Rating Watch revised to RWE from RWN - USD300m non-cumulative preference shares, Series H (US7800978790)- USD1bn non-cumulative preference shares, Series 1 (US780097AE13)- GBP 200m non-cumulative preference shares, Series 1 (XS0121856859)[/FONT]
[FONT="]Innovative tier 1: 'B'; Rating Watch revised to RWE from RWN- USD1.2bn regulatory tier 1 securities (US780097AH44)[/FONT]
[FONT="]All other rated preference shares and tier 1 securities are rated 'B' and remain on RWN[/FONT]
[FONT="]Dated subordinated bonds: 'A+'; placed on RWN- USD350m subordinated bonds due 2018 (US780097AM39)- USD750m subordinated bonds due 2014 (US780097AN12)- USD1bn subordinated bonds due 2014 (US780097AL55)- USD300m subordinated bonds due 2011 (US780097AB73)- USD675m subordinated bonds due 2015 (US780097AP69)[/FONT]
[FONT="]All other subordinated bonds rated 'A+' are affirmed[/FONT]
[FONT="]The Royal Bank of Scotland plc (RBS)Upper tier 2 securities: 'B+'; Rating Watch revised to Evolving from Negative- GBP175m Undated Subordinated Notes (XS0116447599)- GBP400m Undated Subordinated Callable Step-Up Notes (XS0247645160)- GBP350m Fixed Rate Undated Subordinated Notes (XS0137784426)- EUR500m Undated Subordinated Notes (XS0195230635)- EUR1bn Undated Subordinated Notes (XS0195231526)- GBP500m Undated Subordinated Notes (XS0193721544)- GBP500m Undated Subordinated Notes (XS0164828385)- CAD700m Undated Subordinated Callable Step-Up Notes (CA780097AR28)- GBP200m Undated Subordinated Bonds (XS0045071932)- GBP600m Undated Subordinated Notes (XS0206633082)- GBP500m Undated Subordinated Notes (XS0144810529)- GBP900m Undated Subordinated Notes (XS0154144132)- GBP500m Undated Subordinated Notes (XS0138939854)- JPY25bn Unsubordinated Notes (XS0203781660[/FONT]
[FONT="]Dated subordinated bonds: 'A+'; placed on RWN- EUR1bn dated subordinated bond due 2021 (XS0201065496)[/FONT]
[FONT="]All other subordinated bonds rated 'A+' are affirmed[/FONT]
[FONT="]National Westminster Bank plc (NatWest)Upper tier 2 securities: 'B+'; Rating Watch revised to Evolving from Negative- EUR100m Undated Subordinated Notes (XS0102480786)- EUR400m Undated Subordinated Notes (XS0102480869)- GBP200m Undated Subordinated Step-Up Notes (XS0102493680)- GBP325m Undated Subordinated Step-up Notes (XS0102493508)- USD500m Primary Capital Floating Rate Notes (Series 'A') (GB0006267073)- USD500m Primary Capital Floating Rate Notes (Series 'B') (GB0006267180)- USD500m Primary Capital FRNs (Series 'C') (LU0001547172)[/FONT]
[FONT="]In addition, Fitch has placed five dated subordinated (lower tier 2) bonds issued by RBS Group and one dated subordinated bond issued by RBS, which are all rated 'A+', on RWN.[/FONT]
[FONT="]The rating actions reflect a review of the securities' coupon deferral risk following a clarification by RBS Group on its contractual rights and technical deferral features in respect of these securities.[/FONT]
[FONT="]The three non-cumulative preference shares on RWE have 'must pay' features. However, coupon payments are still contingent on RBS Group having sufficient distributable reserves and not being in breach of the Financial Services Authority's (FSA) regulatory capital requirements. Fitch notes that the main risk to distributable reserves would be another substantial impairment charge against the carrying value of RBS Group's investments in its subsidiaries, like the 2008 write-down of its investment in the ABN AMRO acquisition vehicle. RBS Group created GBP14bn of distributable reserves at the time of its share-raising in 2008 and Fitch understands that a similar scheme could be used to create further distributable reserves when RBS Group issues new shares as part of its expected participation in the UK government's asset protection scheme (APS). RBS Group's participation in the APS is critical for its capital position. Assuming participation in the APS is confirmed by end-2009, Fitch believes RBS Group's capital levels to be sound. However, Fitch notes that the FSA has flexibility to set capital requirements of individual banks at levels considerably in excess of the minimum, and may well be under pressure from the European Commission to do so in order to adhere to the objective of "burden sharing".[/FONT]
[FONT="]Fitch will resolve the RWE on the three non-cumulative preference shares once there is confirmation of RBS Group's participation in the APS and the nature of any "burden sharing" imposed by the European Commission in assessing its approval of the state aid received by the group. The ratings could be upgraded should the 'must pay' features be sustained.[/FONT]
[FONT="]The RWE on the 14 upper tier 2 securities issued by RBS and one innovative tier 1 security by RBS Group reflects the fact that interest payments cannot be deferred if RBS Group pays a coupon on any class of its share capital. As RBS Group's share capital includes both ordinary and preference shares, the interest deferral risk for these securities is most immediately linked to the abovementioned non-cumulative preference shares with "must pay" features i.e. a payment on the non-cumulative preference shares effectively "pushes" the upper tier 2 and innovative tier 1 security coupons.[/FONT]
[FONT="]The five dated subordinated (lower tier 2) securities placed on RWN permit interest payments to be deferred, but only on a cumulative basis (and with interest accruing on deferred payments) and only for as long as RBS Group is in deferral on all coupons/dividends in respect of all of its shares, both ordinary and preference. Fitch believes their cumulative nature, with interest accruing on deferred payments, effectively make these instruments incapable of 'burden sharing' unless RBS Group never makes a dividend/coupon payment on any class of its shares again, which Fitch views as improbable.[/FONT]
[FONT="]Additionally, the European Commission has always maintained that it will balance any deferral requirements with needing to ensure a bank's refinancing capability. RBS Group and its subsidiaries are substantial issuers of debt and the non-payment of interest on these dated subordinated securities, even if technically permitted, would potentially be detrimental to the group's relationships with bondholders, particularly in the US, where the dated subordinated securities were issued. Such a non-payment would also be contrary to a core objective of the European Commission for banks to wean themselves off state aid as quickly as possible. The RWN in respect of these securities reflects the possibility of coupon deferral, but Fitch believes the risk to be very limited.[/FONT]
[FONT="]The RWN on the the dated subordinated security issued by RBS, rated 'A+', reflects the technical ability, as outlined in the underlying prospectus and pricing supplement, to defer coupons should the FSA require it. Given the disruption this could cause to the group's relationships with investors and the group's imminent re-capitalisation, Fitch deems it unlikely that the FSA would require this, but the RWN nonetheless reflects this risk.[/FONT]
[FONT="]The RWN on the dated subordinated securities will also be resolved once there is a definitive resolution of the issues surrounding the non-cumulative preference shares.[/FONT]
[FONT="]The ratings actions are as follows:[/FONT]
[FONT="]The Royal Bank of Scotland Group plc (RBS Group)Preference shares: 'B'; Rating Watch revised to RWE from RWN - USD300m non-cumulative preference shares, Series H (US7800978790)- USD1bn non-cumulative preference shares, Series 1 (US780097AE13)- GBP 200m non-cumulative preference shares, Series 1 (XS0121856859)[/FONT]
[FONT="]Innovative tier 1: 'B'; Rating Watch revised to RWE from RWN- USD1.2bn regulatory tier 1 securities (US780097AH44)[/FONT]
[FONT="]All other rated preference shares and tier 1 securities are rated 'B' and remain on RWN[/FONT]
[FONT="]Dated subordinated bonds: 'A+'; placed on RWN- USD350m subordinated bonds due 2018 (US780097AM39)- USD750m subordinated bonds due 2014 (US780097AN12)- USD1bn subordinated bonds due 2014 (US780097AL55)- USD300m subordinated bonds due 2011 (US780097AB73)- USD675m subordinated bonds due 2015 (US780097AP69)[/FONT]
[FONT="]All other subordinated bonds rated 'A+' are affirmed[/FONT]
[FONT="]The Royal Bank of Scotland plc (RBS)Upper tier 2 securities: 'B+'; Rating Watch revised to Evolving from Negative- GBP175m Undated Subordinated Notes (XS0116447599)- GBP400m Undated Subordinated Callable Step-Up Notes (XS0247645160)- GBP350m Fixed Rate Undated Subordinated Notes (XS0137784426)- EUR500m Undated Subordinated Notes (XS0195230635)- EUR1bn Undated Subordinated Notes (XS0195231526)- GBP500m Undated Subordinated Notes (XS0193721544)- GBP500m Undated Subordinated Notes (XS0164828385)- CAD700m Undated Subordinated Callable Step-Up Notes (CA780097AR28)- GBP200m Undated Subordinated Bonds (XS0045071932)- GBP600m Undated Subordinated Notes (XS0206633082)- GBP500m Undated Subordinated Notes (XS0144810529)- GBP900m Undated Subordinated Notes (XS0154144132)- GBP500m Undated Subordinated Notes (XS0138939854)- JPY25bn Unsubordinated Notes (XS0203781660[/FONT]
[FONT="]Dated subordinated bonds: 'A+'; placed on RWN- EUR1bn dated subordinated bond due 2021 (XS0201065496)[/FONT]
[FONT="]All other subordinated bonds rated 'A+' are affirmed[/FONT]
[FONT="]National Westminster Bank plc (NatWest)Upper tier 2 securities: 'B+'; Rating Watch revised to Evolving from Negative- EUR100m Undated Subordinated Notes (XS0102480786)- EUR400m Undated Subordinated Notes (XS0102480869)- GBP200m Undated Subordinated Step-Up Notes (XS0102493680)- GBP325m Undated Subordinated Step-up Notes (XS0102493508)- USD500m Primary Capital Floating Rate Notes (Series 'A') (GB0006267073)- USD500m Primary Capital Floating Rate Notes (Series 'B') (GB0006267180)- USD500m Primary Capital FRNs (Series 'C') (LU0001547172)[/FONT]
