Update
RATINGS
The Royal Bank of Scotland International Ltd Domicile ST. HELIER,
Jersey
Long Term CRR A2
Outlook Not Assigned
Long Term Deposit A3
Outlook Stable
Please see the ratings section at the end of this report for more
information. The ratings and outlook shown reflect information as
of the publication date.
Contacts
Romy Van Rooij, CFA +44.20.7772.1638 Associate Analyst
[email protected]
The Royal Bank of Scotland International Ltd Update following
upgrade of long-term issuer rating to A3
Summary The A3 long-term deposit and issuer ratings of The Royal
Bank of Scotland International Ltd (RBSI), the non-ring-fenced bank
of NatWest Group plc (NWG, Baa1 positive, baa11) in the Crown
Dependencies and Gibraltar, reflect the bank's standalone
creditworthiness, expressed in an a3 Baseline Credit Assessment
(BCA). Our assessment of a very high probability of affiliate
support from NWG and low probability of support from the Government
of Jersey and the Government of the United Kingdom (Aa3 stable)
does not result in any uplift.
RBSI’s a3 BCA reflects its strong capital and liquidity, but also
concentration and potential reputational risks.
The outlook on RBSI's long-term deposit and issuer ratings is
stable.
On 4 August 2021, we upgraded RBSI's long-term issuer rating to A3
from Baa1.
Exhibit 1
1.6%
21.8%
Solvency Factors (LHS) Liquidity Factors (RHS)
The Royal Bank of Scotland International Limited (BCA: a3) Median
a3-rated banks
S o
lv e
Source: Moody's Investors Service
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
Credit strengths
» Dependence on deposits from financial institutions
Outlook The outlook on RBSI’s long-term deposit and issuer rating
is stable, reflecting Moody’s view that the bank’s capital and
liquidity will remain strong.
Factors that could lead to an upgrade RBSI's long-term deposit and
issuer ratings could be upgraded if there is an upgrade of the a3
BCA; or the introduction of an operational resolution regime (ORR)
in Jersey; or the issuance of a meaningful amount of loss-absorbing
liabilities to the group that would lead to an effective transfer
of losses in case of failure.
RBSI's BCA is constrained to one notch above the baa1 notional BCA
of its parent NWG, reflecting the common customers and use of
shared systems. RBSI's BCA could be upgraded if there is an
improvement in the bank's profitability, a reduction in asset risk
and an improvement in leverage, provided that also the notional BCA
of NWG is upgraded.
Factors that could lead to a downgrade RBSI's long-term deposit and
issuer ratings could be downgraded if the a3 BCA is
downgraded.
RBSI's BCA could be downgraded if the bank’s asset quality
deteriorates, profitability fails to improve, or NWG’s notional BCA
is downgraded.
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 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Key indicators
Exhibit 2
The Royal Bank of Scotland International Ltd (Consolidated
Financials) [1]
12-202 12-192 12-182 12-172 12-162 CAGR/Avg.3
Total Assets (GBP Million) 34,333.0 32,484.0 30,449.0 30,704.0
24,312.0 9.04
Total Assets (USD Million) 46,931.2 43,033.1 38,779.6 41,535.1
30,041.1 11.84
Tangible Common Equity (GBP Million) 1,589.0 1,831.0 2,013.0
2,234.0 2,022.0 (5.8)4
Tangible Common Equity (USD Million) 2,172.1 2,425.6 2,563.7
3,022.1 2,498.5 (3.4)4
Problem Loans / Gross Loans (%) 1.6 0.9 0.7 0.1 0.4 0.75
Tangible Common Equity / Risk Weighted Assets (%) 21.8 27.7 27.2
21.1 -- 24.46
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%)
12.2 6.5 4.6 0.3 1.3 5.05
Net Interest Margin (%) 1.1 1.5 1.4 1.1 1.3 1.35
PPI / Average RWA (%) 2.9 4.7 3.0 1.8 -- 3.16
Net Income / Tangible Assets (%) 0.5 1.2 0.6 0.6 1.2 0.85
Cost / Income Ratio (%) 56.0 40.0 41.9 47.7 35.3 44.25
Market Funds / Tangible Banking Assets (%) 2.9 1.1 7.6 1.4 1.7
2.95
Liquid Banking Assets / Tangible Banking Assets (%) 58.6 52.4 35.9
1.6 69.3 43.65
Gross Loans / Due to Customers (%) 42.8 46.9 48.7 30.0 33.3
40.45
[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
Further to the publication of our revised methodology in July 2021,
for issuers that have “high trigger” Additional Tier 1 instruments
outstanding, not all ratios included in this report reflect the
change in treatment of these instruments.
Profile The Royal Bank of Scotland International Ltd (RBSI) is a
Jersey-based non-ring-fenced bank of NatWest Group plc (NWG).
RBSI provides lending and ancillary services to funds in Jersey,
Guernsey and through wholesale branches in Luxembourg and London.
The bank also provides lending and commercial services to residents
in Jersey, Guernsey, the Isle of Man and Gibraltar, including under
The Isle of Man Bank trade name.
Exhibit 3
RBSI is a non-ring-fenced bank of NWG, based in Jersey NWG's
simplified structure
NatWest Holdings Limited
Ulster Bank Ireland DAC
International (Holdings) Limited
NatWest Markets N.V.
NatWest Group plc
Sources: Moody's Investors Service and NWG
3 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Detailed credit considerations RBSI is domiciled in Jersey, with a
large proportion of UK-based clients We consider RBSI’s Macro
Profile Strong+, in line with the Macro Profile of the UK.
Most of RBSI's assets are in the Crown Dependencies and Gibraltar,
but a significant portion of the bank's clients operate from the UK
and use RBSI as an offshore bank.
Low asset risk, but concentrated loan book and potential
operational and reputational risks We assign an a3 Asset Risk score
to RBSI, two notches below the Macro-Adjusted score of a1, to
reflect our expectation of a moderate increase in problem loans;
concentration risks; and potential reputational risks, which are
inherent to RBSI's business model.
A large portion of RBSI's loans and debt securities (44% as of
December 2020) relates to financial institutions. These exposures
carry low risk; nevertheless, they expose RBSI to concentration
risk. The second-largest exposure is to central and local
governments (27%), mortgages (12%), property (11%) and individuals
(2%). The remaining 4% is split among several sectors. Around 6% of
RBSI’s total credit risk exposure, which includes loans,
derivatives and other financial assets, derives from the transfer
of £0.6 billion assets from the Isle of Man Bank Limited in May
2019 and £0.6 billion from NatWest Markets Plc (A2 positive, ba1)
in December 2019.
Because of the nature of its loan book, RBSI's problem loans have
historically been low. As of December 2019, problem loans
represented 0.9% of RBSI's loan book (December 2018: 0.7%).
However, because of unexpected defaults of large exposures, the
ratio increased to 1.6% as of December 2020. We expect problem
loans to increase marginally in the next 12-18 months as a result
of the economic shock caused by the coronavirus pandemic.
As an offshore bank doing business with UK residents, RBSI is
exposed to conduct and reputational risks. However, RBSI has not
booked any conduct charges in the last seven years. In 2013, the
bank booked its share of the group charge related to the
remediation of interest-rate-hedging products.
Strong capital We assign a aa3 Capital score to RBSI, two notches
below the Macro-Adjusted score of aa1. The adjustment reflects our
expectation that the capital ratio will decline modestly, and its
weak leverage.
RBSI's risk-weighted capital ratios are strong. As of December
2020, RBSI reported an 18.6% Common Equity Tier 1 (CET1) capital
ratio (December 2019: 19.2%); this is equivalent to a tangible
common equity of 21.8% of its risk-weighted assets, according to
our metrics, which is also strong.
The bank's leverage is instead weak, as indicated by a tangible
common equity that was 4.6% of RBSI’s tangible assets as of 31
December 2020, driving a one-notch negative adjustment2. As of
December 2020, RBSI reported a 4.4% regulatory leverage ratio
(December 2019: 4.3%), calculated according to the guidance of the
Jersey Financial Services Commission. RBSI's leverage ratio is hurt
by the large stock of high-quality liquid assets, which are
included in the denominators. RBSI indicated that, if it were to
exclude the unencumbered central bank balances like, for example,
UK banks are allowed to do, the regulatory leverage ratio as of
December 2020 would have been a much higher 6.75%.
We expect RBSI to maintain strong capital ratios in the next 12-18
months. However, during the same period, we expect a moderate
decline in its capital ratios, reflecting lending growth and
potentially credit migration as a result of the economic shock
caused by the pandemic.
Sound profitability We assign a baa3 Profitability score to RBSI,
one notch below the Macro-Adjusted score of baa2, to incorporate
our forecasts that RBSI’s normalised return on tangible assets
post-pandemic will be around 0.5%.
We expect RBSI's profitability to improve from the low levels of
2020, which were negatively affected by pandemic-induced economic
shock. In the next 12-18 months, we expect RBSI’s business activity
to pick up further, leading to an improvement in revenue, and loan
loss charges to go back to the very low pre-pandemic levels.
4 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
In line with its business model, RBSI is highly dependent on the
net interest income. In 2020, the bank reported a net interest
income of £373 million, around 81% of RBSI's total revenue of £461
million for the year. A high 55% of the £88 million fee and
commission income was from lending and payment services. RBSI's
strong efficiency is currently under pressure, in line with its
weaker net interest income. According to our calculations, the
cost-to-income ratio was a weak 56% in 2020, up from a strong 40%
in 2019. An uncertain operating environment and the default of some
large borrowers led to a spike in impairment losses, to £107
million in 2020 from £2 million in 2019, driving a net profit of
£58 million in 2020 (2019: £293 million).
RBSI's 2020 profitability is not fully comparable like-for-like
with that in 2019, because in May 2019, loans of £0.6 billion
(around 6% of the total credit risk exposure as of December 2020)
from the Isle of Man Bank Limited and NatWest Markets Plc were
transferred to RBSI.
Dependence on deposits from financial institutions We assign a ba1
Funding Resources score, eight notches below the aa2 Macro-Adjusted
score, to incorporate the higher confidence sensitivity of deposits
from financial institutions.
RBSI is almost entirely funded via customer deposits, which
represented 97% of its liabilities as of December 2020. Amounts due
to other entities within NWG represented a further 1% of the bank's
liabilities.
However, RBSI's deposits are predominantly sourced from non-bank
financial institutions. Compared with deposits from local retail
and commercial customers, we consider the deposits from financial
institutions more confidence sensitive and potentially subject to
greater outflows in case of stress for RBSI.
We expect RBSI to remain predominantly funded by such wholesale
deposits and progressively issue unsecured debt to the group to
comply with the minimum requirement for own funds and eligible
liabilities regulation.
Strong liquidity We assign an a1 Liquid Resources score, two
notches below the aa2 Macro-Adjusted score. The assigned score
reflects our expectation that RBSI will maintain strong liquidity,
in line with the confidence-sensitive nature of its business, as
well as the fact that its liquidity is currently at its peak and
will gradually return to pre-2020 levels.
As of December 2020, RBSI had a large £13.5 billion stock of cash
and balances at central banks, representing 39% of its tangible
banking assets (December 2019: £10.6 billion stock representing 33%
of its tangible banking assets; December 2018: £10.9 billion, 36%).
The other liquid assets represented a further 19% of its tangible
banking assets.
Exhibit 4
RBSI has a large stock of liquid assets ... Asset composition as of
December 2020
Exhibit 5
… and funding is almost entirely via deposits, although largely
wholesale Liabilities and equity composition as of December
2020
Cash and due from central banks 39%
Debt securities 16%
Loans to banks 3%
Loans to customers 39%
Customer deposits 91%
Bank deposits 0%
Other liabilities 2%
Equity 6%
Bank deposits are 0.01% of RBSI's liabilities and equity. Sources:
Moody's Investors Service and RBSI
5 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
RBSI reported a good 137% liquidity coverage ratio as of December
2020, in line with that as of December 2019. The regulatory ratio
is negatively influenced by the lower stickiness of RBSI's deposit
base compared with traditional retail banks.
ESG considerations In line with our general view of the banking
sector, RBSI has low exposure to environmental risks and moderate
exposure to social risks. See our environmental risks heat map and
social risks heat map for further information.
RBSI has minimal exposure in terms of loans to environmentally
exposed business sectors. Therefore, this environmental risk is
unlikely to translate into a significant credit impact in the next
12-18 months.
Our assessment of moderate social risks for RBSI also takes into
account the bank's exposure to the pandemic-induced economic
shock.
Governance is highly relevant for RBSI, as it is to all banks.
Corporate governance weaknesses can lead to a deterioration in a
bank’s credit quality, while governance strengths can benefit its
credit profile. Governance risks are largely internal rather than
externally driven, and for RBSI, we do not have any particular
governance concern. Nonetheless, corporate governance remains a key
credit consideration and requires ongoing monitoring.
Support and structural considerations Affiliate support We expect a
very high probability of support from NWG, reflecting RBSI's
relatively small size compared with that of the rest of the group
and its high reputational risk. However, because NWG's notional BCA
is one notch below RBSI's BCA and there is a very high correlation
the correlation between the risk of failure of RBSI and NWG,
affiliate support does not result in any uplift.
Loss Given Failure (LGF) analysis RBSI is domiciled in Jersey, one
of the UK’s Crown Dependencies. Jersey passed a bank recovery and
resolution law in 2017. However, as the policy and legal framework
for a resolution authority have not yet been finalised, we do not
yet consider Jersey a jurisdiction with an operational resolution
regime (ORR).
Thus, we apply our basic Loss Given Failure (LGF) analysis, which
does not result in any uplift to RBSI's deposit and issuer
ratings.
Government support considerations Given the limited resources of
the Jersey government relative to RBSI's balance sheet and, more
broadly, to the country's banking sector, we believe there is a low
probability of government support from Jersey, which does not
result in any uplift.
We also consider a low probability of government support from the
UK, because we believe that the UK government has little appetite
to support creditors of an offshore bank.
Counterparty Risk (CR) Assessment RBSI's CR Assessments are
A3(cr)/Prime-2(cr) We consider Jersey a jurisdiction with a
non-ORR. For non-ORR countries, the starting point for the
long-term CR Assessment is one notch above the bank's Adjusted BCA,
to which we then typically add the same notches of government
support uplift as applied to the deposit and senior unsecured debt
ratings (none for RBSI).
Counterparty Risk Ratings (CRRs) RBSI's CRRs are A3/Prime-2 We
consider Jersey a jurisdiction with a non-ORR. For non-ORR
countries, the starting point for the long-term CRR is one notch
above the bank's Adjusted BCA, to which we then typically add the
same notches of government support uplift as applied to the deposit
and senior unsecured debt ratings (none for RBSI).
6 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Methodology and scorecard About Moody's scorecard Our scorecard is
designed to capture, express and explain in summary form our Rating
Committee's judgement. When read in conjunction with our research,
a fulsome presentation of our judgement is expressed. As a result,
the output of our scorecard may materially differ from that
suggested by raw data alone (though it has been calibrated to avoid
the frequent need for strong divergence). The scorecard output and
the individual scores are discussed in rating committees and may be
adjusted up or down to reflect conditions specific to each rated
entity.
Rating methodology and scorecard factors
Exhibit 6
Factor Historic Ratio
Assigned Score Key driver #1 Key driver #2
Solvency Asset Risk Problem Loans / Gross Loans 1.6% a1 ↓ a3 Sector
concentration Operational risk
Capital Tangible Common Equity / Risk Weighted Assets (Basel III -
transitional phase-in)
21.8% aa1 ↓ aa3 Expected trend Nominal leverage
Profitability Net Income / Tangible Assets 0.5% baa2 ↓ baa3
Expected trend
Combined Solvency Score a1 a3 Liquidity Funding Structure Market
Funds / Tangible Banking Assets 2.9% aa2 ↔ ba1 Deposit
quality
Liquid Resources Liquid Banking Assets / Tangible Banking Assets
58.6% aa2 ↓↓ a1 Expected trend
Combined Liquidity Score aa2 baa1 Financial Profile a3 Qualitative
Adjustments Adjustment
Business Diversification 0 Opacity and Complexity 0 Corporate
Behavior 0
Total Qualitative Adjustments 0 Sovereign or Affiliate constraint
a3 BCA Scorecard-indicated Outcome - Range a2 - baa1 Assigned BCA
a3 Affiliate Support notching 0 Adjusted BCA a3
Instrument Class Loss Given Failure notching
Additional notching
Foreign Currency
Rating Counterparty Risk Rating 1 0 a2 - A2 A2 Counterparty Risk
Assessment 1 0 a2 (cr) - A2(cr) Deposits 0 0 a3 - A3 A3 Senior
unsecured bank debt 0 0 a3 - A3 A3 [1] Where dashes are shown for a
particular factor (or sub-factor), the score is based on non-public
information. Source: Moody’s Investors Service
7 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Ratings
Category Moody's Rating THE ROYAL BANK OF SCOTLAND INTERNATIONAL
LTD
Outlook Stable Counterparty Risk Rating A2/P-1 Bank Deposits A3/P-2
Baseline Credit Assessment a3 Adjusted Baseline Credit Assessment
a3 Counterparty Risk Assessment A2(cr)/P-1(cr) Issuer Rating A3
Commercial Paper P-2
PARENT: NATWEST GROUP PLC
Outlook Positive Baseline Credit Assessment baa1 Adjusted Baseline
Credit Assessment baa1 Senior Unsecured Baa1 Subordinate Baa2 Jr
Subordinate Baa3 (hyb) Pref. Stock Non-cumulative Ba1 (hyb)
Commercial Paper P-2 Other Short Term -Dom Curr (P)P-2
Source: Moody's Investors Service
Endnotes 1 The bank ratings shown in this report are the bank’s
deposit rating, senior unsecured debt rating (where available) and
BCA.
2 We usually apply a one-notch negative adjustment for Capital for
banks with leverage ratios below 5%.
8 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
This document has been prepared for the use of Gabriella Dispenza
and is protected by law. It may not be copied, transferred or
disseminated unless authorized under a contract with Moody's or
otherwise authorized in writing by Moody's.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
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9 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3
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10 5 August 2021 The Royal Bank of Scotland International Ltd:
Update following upgrade of long-term issuer rating to A3