ltd the royal bank of scotland international
TRANSCRIPT
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.
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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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REPORT NUMBER 1292742
9 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.
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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
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
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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
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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
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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
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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
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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
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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
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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