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Moody's Puts RBS Under Review

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Moody's Investors Service – a rating arm of Moody's Corporation (MCO - Free Report) – kept the long-term ratings on The Royal Bank of Scotland Group plc (RBS - Free Report) and its subsidiaries under review for downgrade. The rating agency cited the British government’s decision of a possible break-up of the bank as the reason behind its action.

Currently, The Royal Bank of Scotland – a subsidiary of The Royal Bank of Scotland Group plc – has a long-term debt and deposit rating of “A3” and a standalone bank financial strength rating of "D+", both of which have been placed under review.

Additionally, Moody’s placed the standalone credit assessments and all other long-term ratings of The Royal Bank of Scotland’s subsidiaries – National Westminster Bank (Natwest) plc and Royal Bank of Scotland NV – under review.

Concurrently, Moody's subjected the long-term debt and deposit ratings of Ulster Bank Limited and Ulster Bank Ireland Limited and the ratings of the banks' subordinated debt instruments to review. Ulster Bank’s short-term ratings are to be reviewed as well. Moody’s expectation of the break-up of The Royal Bank of Scotland by the government might affect the bank’s capability of offering support to these Northern Ireland institutions.

Reason Behind Downgrade

Moody’s stated that the revision of the ratings was due to the British government’s decision to evaluate the breaking up of The Royal Bank of Scotland, and moving off its problematic assets into a separate bank. The British government had bailed out The Royal Bank of Scotland for a sum of almost £45 billion in 2008, making it the costliest bank bailout in history. However, the British Treasury is struggling to reduce its 81% stake in the bank, with its shares trading for a lesser price than the government paid for them.

The rating agency believes that the government’s review of the troubled bank will create more uncertainty for bond holders. Additionally, according to Moody’s, the government decision to shed the high risk and/or impaired assets from the bank may involve losses for creditors.

Our Viewpoint

Initially, the British government was commended for its efforts in dealing with the financial crisis in 2007. The government bailed out as well as attained large stakes in The Royal Bank of Scotland and Lloyds Banking, as well as several other smaller banks.

However, almost 5 years after the bailout, the extensive practice of restructuring the troubled banks is putting the weak British economy under pressure. This is partly due to the government's decision in 2008 to take a passive approach to managing its stakes in the deeply troubled banks. Anticipating the banks’ quick return to their private ownerships, the government did not to intrude into their strategies.

Among such banks, one was The Royal Bank of Scotland, which continued for years since the economic crisis without restructuring its troubled and non-profitable units, forcing the government to contemplate a split. However, the bank’s low share price means that a sale would likely cause taxpayers losses worth billions of pounds.

However, we expect The Royal Bank of Scotland’s diversified business model and sound financial position to contribute to its overall growth in the future.

The Royal Bank of Scotland currently carry a Zacks Rank #3 (Hold). Some better performing foreign banks include Mitsubishi UFJ Financial Group, Inc. and Sumitomo Mitsui Financial Group Inc. (SMFG - Free Report) . Both the stocks carry a Zacks Rank #1 (Strong Buy).

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