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FINANCIAL INSTITUTIONS
ISSUER COMMENT17 February 2020
RATINGS
The Royal Bank of Scotland Group plcDomicile United Kingdom
Long Term Debt Baa2
Type Senior Unsecured - FgnCurr
Outlook Positive
NatWest Markets PlcDomicile United Kingdom
Long Term Debt Baa2
Type Senior Unsecured - FgnCurr
Outlook Positive
Long Term Deposit Baa2
Type LT Bank Deposits - FgnCurr
Outlook Positive
Source: Moody's Investors Service
Analyst Contacts
Alessandro Roccati +44.20.7772.1603Senior Vice [email protected]
Maxwell Price +44.20.7772.1778Associate [email protected]
Laurie Mayers +44.20.7772.5582Associate Managing [email protected]
Nick Hill [email protected]
» Contacts continued on last page
NatWest Markets PlcDownsizing and refocusing plan will bring short-term lossesand long-term benefits
On 14 February 2019, the Royal Bank of Scotland Group plc (RBSG, LT senior unsecured Baa2positive) announced a plan to restructure, refocus and scale back its investment bankingsubsidiary, NatWest Markets Plc (NWM; LT senior unsecured Baa2 positive). If successfullyexecuted, the plan will improve NWM’s credit profile by returning it to modest levels ofprofitability and reducing its reliance on institutional client revenues. However, execution riskwill be elevated, and we expect NWM to report net losses during the next two-three years.
Following the global financial crisis of 2008, NWM relinquished its global ambitions. Thefirm exited capital-consumptive businesses, began to clear trades centrally, shrank itsworkforce and reduced the compensation of remaining employees. However, the reorganizedcompany lacked the scale to be a full-service provider, while remaining too big to effectivelypursue profitable niches. In the meantime, the industry outlook deteriorated due to reducedcustomer investment, more limited economic growth prospects, and rising regulatoryburdens. A reduced industry revenue pool coupled with NWM's high cost structure stronglydecreased the likelihood of the business achieving its return targets.
With the latest restructuring, NWM has resolved to become a focused player offeringspecialized services to corporate clients and a a more targeted group of institutional clients.Within the three generic strategy options that we believe are available to capital marketplayers – size/cost leadership, differentiation, and focus – NWM has chosen a focusedstrategy complementary to the franchises of its ring-fenced sister banks.
If appropriately executed, NWM’s strategy will be credit positive in the long term as it willlead to: 1) increased albeit still modest profitability, compared with NWM’s recent largereported losses; 2) increased reliance on NWM’s core corporate client revenues, which will beless volatile; and 3) a strong capital position, with management targeting a Common EquityTier 1 (CET1) ratio of above 15% over the period.
Restructuring plan detailNWM aims to narrow its product range and refocus its customer base through two broadinitiatives:
» Focus on currencies and financing activities, reduction in institutional rates: NWMwill reduce the sale of interest rate products to institutional clients, but will retain itscorporate rates business. It will retain its foreign exchange (FX) business, which is lesscapital intensive, and stands to benefit from recent digitalisation investments. Currently,FX, financing and interest rate products each contribute around one third of revenues.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
» Focus on corporate clients, reduction of institutional clients. At present, NWM generates two thirds of its revenues frombusiness with financial institutions, and one third from corporate customers. We estimate that when the restructuring is complete,corporate clients will account for the majority of revenues, with financial institutions making up the remainder.
Financial impactNWM’s reduced footprint will lead to lower revenues, costs and risk weighted assets (RWAs).
NWM aims to cut its segment1 RWAs by £ 18 billion to c.£20 billion (from £38 billion at end-2019) over the medium term. When therestructuring is complete, NWM’s RWAs will account for c.10% of the RBS group total, down from around 20% currently. This profilewill position the capital markets business of the group more in line with other European, more domestically focused.
NWM has said that its exit, restructuring and disposal costs will be around £0.6 billion in 2020 (£0.4 billion disposal losses throughincome and £0.2 billion through costs). We expect NWM to report losses in the 2020-22 interim period, and to achieve a break-evenend-state.
NWM aims for a CET1 ratio of above 15% (its CET1 ratio was 17.3% at end-2019), a leverage ratio of at least 4%, and an MREL ratio ofat least 30% as it plans to issue £3-5 billion of term senior unsecured instruments in 2020.
Recent operating performance has been weakNWM has consistently reported losses in recent years. In 2019, the company made a loss before tax of £230 million, down from a lossof £1.3 billion a year earlier and a loss of £2.4 billion in 2015. The company’s losses have been declining in line with the reduction of itsRWAs, which fell to £35 billion in 2019 from £82 billion in 2015.
Exhibit 1
NWM reported losses in recent years due to weak revenue and high operating costs
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
2015 2016 2017 2018 2019
GB
P b
illion
Loss before tax
0
10
20
30
40
50
60
70
80
90
2015 2016 2017 2018 2019 target
GB
P b
illion
RWA (core and non-core)
Core Non-core Core + non-core
Note: in 2015 and 2016 we use the NatWest markets division as a proxy for NatWest MarketsSource: Moody’s on Company data
Reported revenue fell 16% year on year to £719 million in 2019. Core revenues (excluding legacy negative revenues) declined 19% to£1.0 billion, driven by lower income from interest rate products, which were down by around one third. Operating costs halved to £1billion. However, NWM’s cost to income ratio has remained well above 100% in the last five years.
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 onwww.moodys.com for the most updated credit rating action information and rating history.
2 17 February 2020 NatWest Markets Plc: Downsizing and refocusing plan will bring short-term losses and long-term benefits
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 2
Revenue are negatively impacted by losses on legacy assets, which have substantially decreased in recent years
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2015 2016 2017 2018 2019
GB
P b
illion
Revenue and operating costsRevenue Costs
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2015 2016 2017 2018 2019
Revenue (core and non-core)
Core revenue Non core revenue
Note: in 2015 and 2016 we use the NatWest markets division as a proxy for NatWest MarketsSource: Moody’s on Company data
Moody’s related publicationsCredit Opinion
» The Royal Bank of Scotland Group plc
» National Westminster Bank Plc
» NatWest Markets Plc
Rating Methodology
» Banks
Endnotes1 The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity or group. For 2019, NatWest Markets Plc entity includes
NatWest Markets N.V. from the 29 November 2019 only, whereas the NatWest Markets franchise excludes the Central items & other segment. Forperiods prior to Q4 2019, NatWest Markets N.V. was also excluded from the NatWest Markets Plc entity.
3 17 February 2020 NatWest Markets Plc: Downsizing and refocusing plan will bring short-term losses and long-term benefits
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
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4 17 February 2020 NatWest Markets Plc: Downsizing and refocusing plan will bring short-term losses and long-term benefits
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Analyst Contacts
Maxwell Price +44.20.7772.1778Associate [email protected]
Alessandro Roccati +44.20.7772.1603Senior Vice [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
5 17 February 2020 NatWest Markets Plc: Downsizing and refocusing plan will bring short-term losses and long-term benefits