DBRS Downgrades Citizens Financial Group to A (high); Under Review with Negative Implications

DBRS has today downgraded the ratings of Citizens Financial Group (CFG or the Company) and its related bank subsidiaries, including CFG’s Issuer & Senior Debt rating to A (high) from AA. At the same time, DBRS has placed all ratings Under Review with Negative Implications.

The rating action follows the downgrade of CFG’s parent, the Royal Bank of Scotland Group plc (RBS –rated A (high). Currently, CFG has been assigned a support assessment of SA1, which implies strong and predictable support from RBS. Therefore, CFG’s ratings have moved in tandem with RBS’s ratings.

DBRS’s rating action on RBS followed the announcement that RBS expects to record a substantial loss of between GBP7 billion and GBP8 billion for the full year 2008. Not included in this loss is a material goodwill impairment of GBP15 billion to GBP20 billion, which the Company is expected to incur at the year end. DBRS views this significant loss as outsized. It illustrates the magnitude of the potential losses associated with the ill-timed ABN AMRO acquisition, the Company’s exposure to the capital markets and its exposure to the stressed U.S. and U.K. economies. Moreover, notwithstanding of the expected breakeven underlying performance, DBRS expects that the underlying performance after credit impairment losses from the Company’s core businesses will continue to deteriorate as the economic and operating environments weaken further, especially in the U.S. and U.K.

The ratings downgrade reflects DRBS’s view that the RBS franchise is under significant stress and its earnings potential is impaired. As discussed above, the Company’s earnings potential is threatened by the weakening economic and credit environment, while the severe and prolonged financial markets dislocation has not only impacted RBS through credit market write-downs, but has also impacted the Company through subdued activity levels, especially in its Global Banking and Markets division. Further write-downs remain a noteworthy risk, until markets stabilize. Moreover, the planned reduction in the Company’s balance sheet, while viewed positively in the longer term, will likely add near-term earnings volatility.

DBRS positively views RBS’s plans to replace the HM Treasury’s preference shares with ordinary shares. This will remove the sizeable annual dividend of GBP0.6 billion, thereby improving cash flow generation. RBS shareholders will be offered GBP5 billion of shares. The ordinary share offer is fully underwritten by the U.K. Government, as such, if shareholders fail to take up their rights, the government’s stake in the Company will increase to 70% from 58%. The capital restructure is expected to improve the quality of capital structure by increasing the Company’s core Tier 1 capital ratio by less than 1%, to an expected range of 6.9% to 7.4%.

DBRS recognizes the extent of government support, which confirms our view that RBS is perceived by the U.K. government as a systematically important institution and critically important to the functioning of U.K. capital markets. Accordingly, DBRS expects further timely support if needed, and the current ratings reflect a more than one notch uplift from the current intrinsic assessment. In evaluating the intrinsic assessment of RBS, the review will focus on the developing evolution and strength of the franchise, its ongoing earnings potential and its ability to withstand the difficult operating environment.

Citizens Financial Group, a commercial bank holding company, had assets of $163.8 billion at September 30, 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.