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Fitch Ratings-London-14 July 2010: Fitch Ratings has upgraded The Royal Bank of Scotland Group's (RBS Group) and The Royal Bank of Scotland's (RBS) Individual Ratings to 'C/D' from 'D/E' to reflect RBS Group's progress with its extensive restructuring plans, improvements in risk management procedures, a franchise that has proven resilient to the group's problems in 2008-09 and its solid capitalisation in the face of a still challenging operating environment. Their other ratings have been affirmed at Long-term Issuer Default (IDR) 'AA-', Short-term IDR 'F1+', Support '1' and Support Rating Floor AA-'. The Outlooks on the Long-term IDRs are Stable. Various actions have been taken on certain hybrid securities. For a full list of ratings, please refer to the end of this rating action comment. "The restructuring is progressing well and as the economy recovers, the group's strong UK franchise and broad client and product diversification can drive improvements in profitability," says Cynthia Chan, Senior Director in Fitch's Financial Institutions team. "Nonetheless, re-shaping the group's balance sheet, running off more than GBP200bn of non-core assets and reducing reliance on wholesale funds is an undoubted challenge, the success of which is in part dependent on factors beyond the group's control". The Individual Ratings of RBSG and RBS therefore continue to reflect the significant execution challenges faced by management in achieving its strategic and financial goals. Political interference arising from 83% UK government ownership and the European Commission's state aid disposal and market share requirements complicate the task. Despite declining by 38% since end-2008, total third party assets in the 'non-core' division remained substantial at GBP213bn at end-Q110. The portfolio covers a broad range of assets, but includes concentrations of complex and illiquid assets, the optimal winding down of which requires considerable expertise and favourable market conditions. Another key challenge for RBS Group is to re-shape and improve the quality of its funding and to continue to reduce its reliance on wholesale funding. Although liquidity and funding has strengthened enormously since the height of the crisis (the loan/ deposit ratio improved to 131% at end-Q110 from 151% at end-2008 and the liquidity reserves increased by 83% to GBP165bn over the same period), RBS Group is still a heavy user of wholesale funding and needed to make use of high levels of state-supported funding in late 2008 and 2009. Like many other UK financial institutions, the group has sizeable maturities peaking in 2011-2012. Refinancing risk will be greatly mitigated if the run-off in non-core assets continues as planned. Fitch notes that despite the recent disruption due to the eurozone sovereign-debt crisis, RBS Group has been able to access both unsecured and secured funding markets, most recently with a EUR1.25bn senior unsecured 5 year issue last week. The affirmation of the Long- and Short-term IDRs, Support Rating Floors and Support Ratings reflects the extraordinary level of tangible support for the group from the UK government through various capital, asset protection and liquidity support measures. While Fitch believes government support remains very high for systemically important UK banks, there is growing political will in the UK - evidenced by the likes of the 'living wills' pilot scheme - to explore ways to reduce the implicit state support of systemically important banks in the country. This represents a potential threat for the group's IDRs, senior and dated subordinated (lower tier 2) debt ratings. The European Commission requires that RBS Group and its subsidiaries do not make discretionary payments of coupons or dividends on hybrid capital securities for a two-year period; these are rated 'CC' to reflect this non-performance. Tier 1 and upper tier 2 securities where Fitch believes payments cannot be prevented have been upgraded to 'BB-' from 'B+' in recognition of the improvement in the Individual Ratings. Ratings for all other hybrid securities and subordinated debt have been affirmed. The ratings of RBS Group's Irish subsidiaries are unaffected by today's rating actions. In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs. The ratings actions are as follows: The Royal Bank of Scotland Group plc (RBS Group)Long-term IDR: affirmed at 'AA-'; Outlook StableSenior unsecured debt: affirmed at 'AA-' Short-term IDR: affirmed at 'F1+'Commercial paper: affirmed at 'F1+'Individual rating: upgraded to 'C/D' from 'D/E'Support rating: affirmed at '1' Support Rating Floor: affirmed at 'AA-' The Royal Bank of Scotland plc (RBS)Long-term IDR: affirmed at 'AA-'; Outlook StableSenior unsecured debt: affirmed at 'AA-' Short-term IDR: affirmed at 'F1+'Commercial paper: affirmed at 'F1+';Individual rating: upgraded to 'C/D' from 'D/E'Support rating: affirmed at '1'Support Rating Floor: affirmed at 'AA-'Guaranteed senior long-term debt affirmed at 'AAA'Guaranteed senior short-term debt affirmed at 'F1+'Mortgage covered bonds are unaffected by today's action National Westminster Bank plc (NatWest)Long-term IDR: affirmed at 'AA-'; Outlook StableSenior unsecured debt: affirmed at 'AA-' Short-term IDR: affirmed at 'F1+'Support rating: affirmed at '1'Support Rating Floor: affirmed at 'AA-' Royal Bank of Scotland International LimitedLong-term IDR: affirmed at 'AA-'; Outlook StableShort-term IDR: affirmed at 'F1+' Royal Bank of Scotland NV (RBS NV)Long-term IDR: affirmed at 'AA-'; Outlook StableSenior unsecured debt: affirmed at 'AA-' Short-term IDR: affirmed at 'F1+'Commercial paper and short-term debt: affirmed at 'F1+'Support rating: affirmed at '1'Guaranteed senior long-term (AUD) debt affirmed at 'AAA'Guaranteed senior short-term (EUR) debt affirmed at 'F1+' RBS Holdings USA IncCommercial paper: affirmed at 'F1+' Citizens Financial Group, Inc Long-term IDR: affirmed at 'A+'; Outlook StableShort-term IDR: affirmed at 'F1'Support rating: affirmed at '1' Individual rating 'B/C' is unaffected by today's action RBS Citizens, NA Long-term IDR: affirmed at 'A+'; Outlook StableShort-term IDR: affirmed at 'F1'Long-term deposits: affirmed at 'AA-' Short-term deposits: affirmed at 'F1+'Senior unsecured debt: affirmed at 'A+'Subordinated debt: affirmed at 'A' Support rating: affirmed at '1' Individual rating 'B/C' is unaffected by today's action Citizens Bank of Pennsylvania: Long-term IDR: affirmed at 'A+'; Outlook StableShort-term IDR: affirmed at 'F1' Long-term deposits: affirmed at 'AA-' Short-term deposits: affirmed at 'F1+'Support rating: affirmed at '1' Individual rating 'B/C' is unaffected by today's action Actions on other tier 1, upper tier 2 and lower tier 2 debt securities are as follows: The Royal Bank of Scotland Group plc (RBS Group) Preference shares: upgraded to 'BB-' from 'B+'- USD300m non-cumulative preference shares, Series H (US7800978790)- USD1bn non-cumulative preference shares, Series 1 (US780097AE13)- GBP 200m non-cumulative preference shares, Series 1 (XS0121856859)Innovative tier 1: upgraded to 'BB-' from 'B+'- USD1.2bn regulatory tier 1 securities (US780097AH44)All other rated preference shares and tier 1 securities affirmed at 'CC'. Dated subordinated bonds: affirmed at 'A'- USD350m subordinated bonds due 2018 (US780097AM39)- USD750m subordinated bonds due 2014 (US780097AN12)- USD1bn subordinated bonds due 2014 (US780097AL55)- USD300m subordinated bonds due 2011 (US780097AB73)- USD675m subordinated bonds due 2015 (US780097AP69) The Royal Bank of Scotland plc (RBS) Upper tier 2 securities: upgraded to 'BB-' from 'B+'- GBP175m undated subordinated notes (XS0116447599)- GBP400m undated subordinated callable step-up notes (XS0247645160)- GBP350m fixed rate undated subordinated notes (XS0137784426)- EUR500m undated subordinated notes (XS0195230635)- EUR1bn undated subordinated notes (XS0195231526)- GBP500m undated subordinated notes (XS0193721544)- GBP500m undated subordinated notes (XS0164828385)- CAD700m undated subordinated callable step-up notes (CA780097AR28)- GBP200m undated subordinated bonds (XS0045071932)- GBP600m undated subordinated notes (XS0206633082)- GBP500m undated subordinated notes (XS0144810529)- GBP900m undated subordinated notes (XS0154144132)- GBP500m undated subordinated notes (XS0138939854) Dated subordinated bonds: affirmed at 'A'- EUR1bn dated subordinated bond due 2021 (XS0201065496)All other dated (lower tier 2) subordinated bonds affirmed at 'A+' National Westminster Bank plc (NatWest)Upper tier 2 securities: upgraded to 'BB-' from 'B+'- EUR100m undated subordinated notes (XS0102480786)- EUR400m undated subordinated notes (XS0102480869)- GBP200m undated subordinated step-up notes (XS0102493680)- GBP325m undated subordinated step-up notes (XS0102493508)- USD500m primary capital floating rate notes (Series 'A') (GB0006267073)- USD500m primary capital floating rate notes (Series 'B') (GB0006267180)- USD500m primary capital FRNs (Series 'C') (LU0001547172) Subordinated debt (lower tier 2) affirmed at 'A+' Royal Bank of Scotland NV (RBS NV)Subordinated debt: US00077TAA25 affirmed at 'A+'; removed from RWNAll other subordinated debt affirmed at 'A+' The dated subordinated security (US00077TAA25), although economically allocated to the new ABN AMRO Bank N.V. ('A+'/Stable), remains the legal obligation of RBS N.V until it can be transferred. Fitch has affirmed this security at 'A+' and removed it from Rating Watch Negative. Fitch does not rate all capital issued by RBS Group, RBS, NatWest and RBS Bank NV. (MORE TO FOLLOW) Dow Jones Newswires July 14, 2010 08:12 ET (12:12 GMT)