RBS Lifted to Positive by Moody's on Restructuring Progress

The Royal Bank of Scotland Group plc RBS and its subsidiary The Royal Bank of Scotland plc were upgraded to ‘Positive' from ‘Stable' by Moody's Investors Service, a rating arm of Moody's Corporation MCO. Moreover, the rating agency affirmed the subsidiary's A3 aided by long-term deposit and senior unsecured debt ratings. Further, the standalone baseline credit assessment BCA of ba1 for the bank has been maintained.

Moody's affirmed the long-term senior unsecured debt rating of Royal Bank of Scotland Group plc at Ba1. Further, for both the holding and subsidiary companies, Moody's has affirmed short-term rating of Non-Prime and Prime-2, respectively. Notably, the rating agency has affirmed several other ratings for the companies.

Why a Raised Outlook?

The raised outlook to positive has been driven by RBS' substantial progress made in its restructuring plan through several initiatives. These initiates include the full offloading of its US subsidiary – Citizens– and significant wind down of its legacy portfolio – RBS Capital Resolution.  In its press release, Moody's noted that the positive outlook reflects its expectations that RBS will continue to advance with its restructuring moves,  supporting its credit fundamentals, and that the simultaneous reduction in downside risks will improve the standalone credit profile of RBS.

Why BCA Affirmation?

Despite a notable progress in the restructuring plan, RBS faces several challenges in the short to near term that could pose a hindrance to the gradual execution of the complex restructuring process.   Moody's noted that these challenges could stem from litigation costs and pending investigations.  Further, restructuring costs will significantly weigh on the group's profitability. Additionally, RBS' large global capital markets business remains among other concerns.

However, Moody's also mentioned that these headwinds are being partly offset by strong retail and commercial banking earnings, progress in restructuring, improving capitalization and sound liquidity and funding positions.

Bottom line

The rating upgrades are valuable for the Edinburgh-based banking giant since these preserve investors' confidence in the stock and boost creditworthiness in the market.

RBS, which was bailed out with £45 billion by the British government in 2008, has been striving hard for growth with its several restructuring initiatives that include cost reduction measures, scaling back of global operations and increasing focus on core markets, along with improving capital ratios. The raised outlook certainly reflects that the company's efforts bore fruit. Notably, in the latest stress tests carried out by the Bank of England, though RBS failed to meet its individual capital guidance, the bank is not required to submit a revised capital plan because of the measures already taken by the bank since 2014 to boost the capital position.

Nevertheless, we remain cautious as the state owned bank battles with numerous lawsuits and investigation and subdued profitability.

Currently, RBS carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the foreign bank space include National Australia Bank Ltd. NABZY, BBVA Banco Francés S.A. BFR and Banco Macro S.A. BMA. While both National Australia Bank and BBVA Banco sport a Zacks Rank #1 (Strong Buy), Banco Macro carries a Zacks Rank #2 (Buy).

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