DBRS Confirms Royal Bank of Scotland at AAp and R-1(middle)p

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of The Royal Bank of Scotland Group plc (“RBS” or the “Group”) and its two main operating subsidiaries as indicated above.

The ratings of RBS remain supported by the Group’s overall business strength. Over the past several years, RBS has evolved into a highly diversified banking group by business, by type of revenue, and increasingly, by geography, all critical issues that help mitigate risk. The only significant areas of concentration are the Group’s exposure to business lending and in its somewhat heavy exposure to the corporate banking and financial markets business.

However, RBS has typically operated with a lower level of Tier 1 capital than most of its peers. The Group’s growth was partially accomplished through a series of acquisitions that left it with a substantial level of goodwill. As a result, the level of tangible common equity that backs Tier 1 capital has deteriorated over the past several years. A portion of the decline can also be attributed to accounting changes, particularly pension accounting, as well as reduced levels of retained internally generated capital between 2001 and 2003 due to acquisition-related costs, including the additional value shares dividend. Management plans to improve its capital from current levels and has no immediate plans for additional large acquisitions.

In August 2005, the Group announced an agreement to invest £900 million in a minority investment in the Bank of China, funded entirely by the sale of an existing minority interest investment. RBS began reporting under International Financial Reporting Standards (“IFRS”) in the first half of 2005. While the implementation of IFRS results in no change in the underlying fundamentals of the business, it does result in some changes in reported numbers. As a result, DBRS’s reported ratios for H1 2005 and pro forma H1 2004 are not strictly comparable to prior periods.

Note:
p - This rating is based on public information.