Credit Rating Initiation: Royal Bank of Scotland - Toronto Star

Morningstar is initiating credit coverage of Royal Bank of Scotland RBS with an issuer rating of BBB+. Through acquisitions, Royal Bank of Scotland has become a global bank, with operations in 50 countries. RBS is primarily a business bank, and is dominated by its global banking and markets division, which has historically generated about 40% of profits. In 2009, RBS formed a noncore division, holding about 10% of assets, which largely will be run off by 2013. The firm generates more than 65% of its profits in the United Kingdom, and owns Ulster Bank in Ireland and Citizens Bank in the United States. In the wake of the 2008 bailout, RBS has essentially been a government-run bank, with the U.K. government holding a majority of its shares. RBS's elevated level of nonperforming loans is mostly due to its Irish loan book, where the company has taken heavy property losses. RBS's exposure to the sovereign debt of troubled European governments like Portugal, Italy, Ireland, Greece, and Spain (PIIGS) is manageable, at about 23% of core Tier 1 capital.

In our Stress Test analysis, we assigned an above average underwriting rating for RBS's loans and securities. RBS received a score of very good in the Stress Test, as it only lost a minimal amount of capital under our stress-case assumptions. RBS achieved a poor Solvency Score due to its mediocre capital levels, lower reserves, recent poor earnings, and a higher balance of nonperforming loans. We awarded RBS a fair Business Risk score, as its size and business line diversification was hindered by the lack of an economic moat. These factors led to a rating of BBB+.