Fitch hits RBS with debt downgrade as it warns of more losses

The Telegraph By  7:17PM BST 19 May 2015

Ratings agency cuts bank’s credit rating by two notches as it upgrades Lloyds and maintains ratings on Barclays and HSBC

A woman walks by an office of Royal Bank of Scotland (RBS) in the City of London

RBS is rated the lowest of the big four UK banks
Royal Bank of Scotland has been dealt a new blow as Fitch, one of the three major credit agencies, hit the taxpayer-owned bank with a double downgrade.

The ratings agency warned that the bank’s profits are under “significant pressure” as it cut its credit rating by two notches from “A” to “BBB+”.

It came as Fitch upgraded Lloyds, praising the bank for its financial health, and kept HSBC’s and Barclays’ ratings intact. The differences between the ratings suggests Fitch believes RBS is in far worse shape than the UK’s other major banks.

The agency, which grades the reliability of companies’ debt, cited lower government support for financial institutions. Under new rules, creditors will have to bail out banks if they fail, rather than the state.

However, it singled out RBS, which has not made a profit since it was bailed out in 2008 and remains 80pc taxpayer-owned. Almost seven years after it was rescued, the bank is still going through painful restructurings, shrinking its investment bank and carving out challenger bank Williams & Glyn (W&G) under European orders.

Fitch also warned about the impact of misconduct fines, including a mortgage-backed security (RMBS) settlement expected this year that could cost the bank up to $10bn.

“Profitability – the group’s main weakness – remains under significant pressure from high restructuring costs (reducing the scale and scope of its corporate and investment banking business; separating the W&G branches; preparing for the implementation of a UK ring-fenced bank, and implementing its transformation and simplification programme) and because of further large conduct and litigation costs (notably US RMBS-related) the bank faces,” Fitch said.

“These are likely to continue to generate large losses in 2015 and/or 2016, dependent on when they occur.”

In stark contrast, Lloyds was upgraded from “A” to “A+”, with the agency citing the bank’s improved financial strength.

“The group’s funding profile and liquidity remain healthy. Operating profitability has risen on the back of higher margins and low impairment charges,” Fitch said.

Lloyds was upgraded by the agency

Lloyds has recently been allowed to pay a dividend for the first time since it was bailed out during the crisis, and the Government has taken its stake below 20pc.

Barclays’ rating was kept at “A”, and HSBC’s at “AA-“, with all the ratings classed as “stable”, meaning they are unlikely to change soon.

In response, RBS said: “The rationale for downgrading these ratings is not RBS-specific. Instead it relates to Fitch’s review of sovereign support for banks globally.

“Fitch believes legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for senior creditors of UK banks, in line with developments at the EU level.”

Lloyds said: “Fitch’s upgrade of Lloyds Banking Group reflects the successful implementation of a three-year strategy to transform the group into a simple, low-risk and well-capitalised bank. This was further demonstrated by the group’s recent first-quarter results, which confirmed further improvements in underlying profitability and balance sheet strength, and also the resumption of dividend payments.

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