RBS rating unaffected by write-downs

Standard & Poor’s Ratings Services said that its ratings on The Royal Bank of Scotland Group PLC (RBSG; AA-/Negative/A-1+) and related entities are unaffected by statement from the Bank that it may write down up to GBP 1.25 bln because of exposure to bad debts in the US sub-prime loans market.

RBSG expects to write down about 950 million relating to exposures to U.S. subprime mortgage markets and 250 million on their leveraged finance portfolio. These amounts are partially offset by a reduction of 250 million in the carrying value of its own debt carried at fair value. While these are large amounts in absolute terms, S&P take comfort from the announcement, which highlighted the benefits of RBSG’s diverse business profile and some financial flexibility.

First, the write-offs are not out of line with peers, and S&P consider them to be manageable. Second, RBSG stated that gains on realization of noncore assets more than offset these write-offs, and indeed that generally sound operating performance has continued across its business lines. Finally, with regard to RBSG’s recently acquired ABN AMRO businesses, RBSG stated that having completed the validation of its plan, it expects to deliver transaction benefits somewhat greater than expected and that ABN AMRO earnings performance is in line with previous guidance. ABN AMRO’s write-down in income relating to U.S.-mortgage related assets total about 300 million in the second half of 2007. These write-downs will not affect RBSG’s earnings as they will be dealt with as part of the acquisition accounting adjustments.

Of more importance to the ratings on RBSG through 2008 will be our assessment of the prospects for capitalization, progress with plan to achieve stated cost and revenue synergies, the degree of integration and operational risk, and–importantly given current market conditions–that the enlarged Global Banking and Markets business can demonstrate that its diverse operations will prove resilient.