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FINANCIAL INSTITUTIONS

CREDIT OPINION5 October 2017

Update

RATINGS

The Royal Bank of Scotland Group plcDomicile United Kingdom

Long Term Debt Baa3

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit Not Assigned

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Alessandro Roccati 44-20-7772-1603Senior Vice [email protected]

Daniel Forssen,CFA 44-20-7772-1553Associate [email protected]

Laurie Mayers 44-20-7772-5582Associate [email protected]

Nick Hill [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

The Royal Bank of Scotland Group plcPost rating action update

Summary Rating RationaleThis credit opinion refers to the Royal Bank of Scotland Group plc (RBSG), which is the groupholding company. However, our analysis focuses on Royal Bank of Scotland plc (RBS), themain operating entity, accounting for the vast majority of the group's total assets.

On 27 September, we changed the outlooks to negative from stable on the long-termdeposits and senior unsecured debt of RBS’s main operating bank, The Royal Bank ofScotland plc (RBS plc) and changed the outlook to positive from stable on the long-termdeposit rating and issuer rating of RBS's subsidiary National Westminster Bank PLC (NatWestBank). We maintained the stable outlook on the long-term senior unsecured debt of holdingcompany, The Royal Bank of Scotland Group plc (RBSG).

The change in the outlooks reflects our view on the likely direction of these subsidiaries'ratings, following the implementation of forthcoming ring-fencing regulations. The outlookchange is not driven by fundamental credit pressures deriving from the exit of the UK fromthe European Union (”Brexit”) or from our recent reduction in the UK macro profile to Strong+ from Very Strong-, as we consider that the group benefits from sustainable earnings fromcore retail and corporate businesses, which will help the group to mitigate downward creditpressures on revenues, asset risk and profitability arising from the expected weakening ofthe UK operating environment in the period leading up to Brexit. These businesses alsoprovide substantial shock absorbers relative to the remaining capital markets businesswhich will be operated under the name NatWest Markets under the future group structure.“Ring-fencing” will come into effect on 1 January 2019 and we expect RBS will complete itsmaterial restructuring by the end of 2018.

Concurrently, we affirmed all ratings of RBSG and those of RBS plc, and NatWest Bank.

RBSG's long-term senior unsecured debt ratings are rated Baa3 and the long-term depositratings of the operating companies The Royal Bank of Scotland plc (RBS plc) and NationalWestminster Bank plc (NatWest Bank plc) are rated A2. The short-term ratings of RBSG arerated Prime-3 and the short-term deposit ratings of RBS plc and NatWest Bank plc are ratedPrime-1. The senior unsecured debt ratings of RBS plc and NatWest Bank plc’s issuer ratingare rated A3 and RBS plc’s corresponding short-term debt ratings are rated Prime-2.

RBS's baa3 BCA reflects the group’s (1) strong capital and litigation reserves levels whichshould allow the bank to absorb the resolution of pending RMBS litigations withoutdetriment to the bank’s overall solvency, (2) sustainable earnings from core retail andcorporate businesses, which will help to mitigate downward credit pressures due to theweakening UK operating environment in the period leading up to Brexit and provide

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substantial shock absorbers relative to the remaining capital markets business, (3) substantially reduced non-core assets and reducedexposure to more volatile and complex capital markets risks and earnings and improved risk framework and governance.

The stable outlook on RBSG’s ratings reflects the rating agency’s view that towards the end of the next twelve to eighteen months thebank will be more advanced in its complex restructuring exercise, have reduced non-core operations to a small residual and will beginto generate more stable and sustainable earnings.

Exhibit 1

Rating Scorecard - Key Financial Ratios1

5.0%

17.0%

-0.15%

21.6%

36.0%

0.78%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

RBS (BCA: baa3) Median baa3-rated banks

So

lve

ncy F

acto

rsL

iqu

idity

Fa

cto

rs

Baa3 BCA refers to the BCA of RBS Group's main operating entity The Royal Bank of Scotland plc. Data up to end-2016Source: Moody's Financial Metrics

Credit Strengths

» RBS's capitalisation continues to improve as deleveraging progresses but remains vulnerable to short-term shocks

» Sizeable “shock-absorbers” provided by retail and commercial banking activities are eroded by ongoing conduct, litigation andrestructuring costs

» Liquidity and funding are currently sound

» Large volume of deposits resulting in deposit ratings benefiting from an extremely low loss-given-failure rate and three-notch upliftfrom the BCA

» Moderate probability of government support resulting in a one-notch uplift incorporated in RBS's deposit and senior unsecureddebt ratings

Credit Challenges

» RBS's ambitious and complex overall restructuring is well advanced but continues to pose short-term risks to bondholders

» Credit risk, despite large improvements, is weaker than peers and capital markets activities remain sizeable

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 5 October 2017 The Royal Bank of Scotland Group plc: Post rating action update


Rating OutlookRBSG’s senior unsecured debt ratings carry a stable outlook. The stable outlook reflects our expectation that fundamentals will stabiliseover the next twelve to eighteen months as the non-core unit (£27 billion risk-weighted assets at end-June 2017) will further wind-down and RBS substantially completes its restructuring exercise enabling the group to generate more stable and sustainable earnings.

The implementation of ring-fencing regulations will likely lead to (1) downgrades in the baseline credit assessments (BCAs), both long-term and short-term deposit ratings, long-term debt ratings, and subordinated debt ratings of RBS plc , and to (2) upgrades in the BCAand ratings of NatWest Bank.

Factors that Could Lead to an Upgrade

» An upgrade of RBSG's ratings could occur if the bank were to return to sustainable profitability in line with that of peers, generatecapital organically and successfully complete its multi-year restructuring exercise.

» An upgrade of RBS plc's baa3 BCA is highly unlikely, given our view that the bank will have a significantly weaker credit profile as itwill become the entity of the group retaining capital markets and wholesale activities.

Factors that Could Lead to a Downgrade

» The ratings of RBSG and RBS plc could be downgraded if the group's restructuring and de-risking strategy fails to deliverimprovements in its credit fundamentals, weakening its capital, profitability and operational efficiency levels and raising its assetrisk. A significant deterioration in the operating environment beyond our base case expectations, and/or regulatory and litigationcharges that are substantially higher than those we currently expect, may also result in a downgrade of the BCAs.

» The ratings could also be downgraded as a result of a sizeable reduction in the outstanding liabilities that could be bailed in,resulting in a higher loss-given-failure for senior creditors and hence a lower rating.

» A weakening of RBS plc’s credit profile, which could occur as a result of changes to its asset and liability mix under RBS’s proposedring-fencing structure, could lead to a downgrade of RBS plc’s BCA and all ratings.

Key Indicators

Exhibit 2

The Royal Bank of Scotland Group plc (Consolidated Financials) [1]6-172 12-162 12-152 12-142 12-132 CAGR/Avg.3

Total Assets (GBP billion) 585 552 547 692 787 -8.14

Total Assets (EUR billion) 666 647 742 892 946 -9.54

Total Assets (USD billion) 760 682 807 1,079 1,303 -14.34

Tangible Common Equity (GBP billion) 40 39 43 43 43 -1.94

Tangible Common Equity (EUR billion) 45 45 59 55 51 -3.44

Tangible Common Equity (USD billion) 52 48 64 67 71 -8.54

Problem Loans / Gross Loans (%) - 3.3 4.1 7.6 8.9 6.05

Tangible Common Equity / Risk Weighted Assets (%) 18.5 17.0 17.8 12.0 11.1 15.36

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) - 23.9 24.1 41.8 54.7 36.15

Net Interest Margin (%) 1.5 1.3 1.4 1.2 1.0 1.35

PPI / Average RWA (%) 1.6 -2.5 -0.8 0.3 0.0 -0.36

Net Income / Tangible Assets (%) 0.4 0.0 -0.3 0.2 -0.9 -0.15

Cost / Income Ratio (%) 73.2 158.2 122.1 92.6 99.7 109.25

Market Funds / Tangible Banking Assets (%) 25.2 21.6 21.3 25.8 34.1 25.65

Liquid Banking Assets / Tangible Banking Assets (%) 38.8 36.0 38.5 35.2 39.4 37.65



Gross Loans / Due to Customers (%) - 91.0 89.2 96.7 100.4 94.35

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] May include rounding differences due to scaleof reported amounts [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presentedSource: Moody's Financial Metrics

Detailed Rating ConsiderationsAmbitious and complex restructuring is well advanced but continues to pose short-term risks to bondholders

RBS has continued to advance the complex restructuring of its operations, which comprises a number of initiatives that will changeits business mix, reduce its risk profile, and improve operational efficiency levels. The group is implementing a multi-year restructuringprogramme of all of its core operations, consisting of : (1) leveraging on its core Personal and Business Banking and Commercial andPrivate Banking businesses in UK and in Ireland; (2) downsizing its investment banking operations by reducing the corresponding risk-weighted assets (RWAs) to £35-40 billion by 2019; reducing legacy assets in the Capital Resolution division to £15-20 billion (excludingthe disposal of Alawwal Bank) by 2017.

We view this initiative as positive for the bank's creditors because, if executed according to plan, it will: (1) reduce the group's overallrisk profile and simplify its operations; (2) make the bank more efficient and restore its profitability; (3) materially strengthen itssolvency; and (4) further improve the bank's asset-risk profile.

In September 2017, the European Commission announced that it has agreed to an alternative plan presented by the UK HM Treasurywhich means RBS will no longer be obligated to divest its Williams & Glyn (W&G) subsidiary, a process which, so far, has cost RBSaround £2 billion. RBS will thus be able to retain a profitable business. W&G generated £345 million of pre-tax profit in 2016 at areturn on allocated equity of 16%.

Management targets a return on tangible equity of above 12%, a cost to income ratio of below 50% and a common equity Tier 1 of13% by 2020. These targets would be achieved through: (1) resolving legacy issues and expensing one-off costs (mostly expensed in2017); (2) preserving net interest income through an increase in lending volumes; (3) achieving significant further cost reductions; (4)achieving a gross £20 billion RWA reduction in the core bank by end Q4 2018 (pre any offsetting volume growth).

The implementation of ring-fencing in the UK will lead to many structural changes and have credit implications for RBSG’s ratedsubsidiaries

RBS plc will transfer most of its Personal & Business Banking and Commercial & Private Banking operations to a ring-fenced bankingsubgroup (under an intermediate holding company, NatWest Holdings Ltd, expected to become a direct subsidiary of RBSG inmid-2018), which will account for around 80% of group risk-weighted assets. The ring-fenced bank sub-group will include NatWestBank, Ulster Bank Ireland DAC (LT deposits Baa2 positive, ba1 BCA), Ulster Bank Limited (LT deposits A2 positive, baa3 BCA), Adam &Company PLC (unrated) and Coutts & Company (unrated).

The group's capital market activities will remain with RBS plc.

At the same time as the legal transfer of assets and liabilities, RBS plc will be renamed NatWest Markets Plc (NatWest Markets), andAdam & Company PLC will be renamed The Royal Bank of Scotland plc (RBS plc).

RBS International (RBSI), a subsidiary of RBSG, will retain mostly retail and commercial activities in the UK's Crown Dependencies. RBSNV, currently a subsidiary of RBSG, will likely become the entity conducting wholesale activities in the European Union outside the UK.

We currently align the ratings of NatWest Bank and RBS NV with those of the current RBS plc (to be renamed NatWest Markets).Under ring-fencing, NatWest Markets will have a significantly weaker credit profile as it will become the entity of the group retainingcapital markets and wholesale activities. As such, it will be largely market funded, have a sizeable trading and repo book, and willprovide broker-dealer capabilities. RBS NV will also show a weaker credit profile, because of its largely wholesale activities. Conversely,NatWest Bank will have a stronger credit profile as it will retain mostly retail and SME activities, and have a more deposit-basedfunding profile.


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During the outlook period we will assess the prospective credit profiles of the new and modified group entities and the expected lossfor each instrument class at each entity under its advanced Loss Given Failure analysis, once there is greater clarity on the financialsand liability structures of these entities.

Credit risk, despite significant improvements, is weaker than peers and capital markets activities remain sizeable

RBS's operating environment is heavily influenced by the UK and its Macro Profile is currently Strong+. UK banks benefit from operatingin a wealthy and developed country with a very high degree of economic, institutional and government financial strength as well as alow susceptibility to event risk. The main risks to the system now stem from the economic uncertainty resulting from the UK’s decisionto leave the European Union (EU) and the high level of indebtedness of UK households, which are sensitive to changes in interest rates.UK banks are largely funded by deposits and banks' funding structures have remained relatively stable in the past few years, with slightincreases in capital as well as declines in short-term funding.

RBS's credit risk profile has reduced materially as a result of the disposal of non-performing assets in the non-core unit (CapitalResolution): problem loans (RBS's internal definition) as a proportion of gross loans decreased to 2.8% at end-June 2017 from 3.1%at end-2016 and relative to 6.8% at end-2014 (Exhibit 3). In 2016, RBS continued to make good progress in reducing its non-corelending exposures in the Republic of Ireland (A3 positive). We expect this positive trend to continue as the bank progresses towards thecompletion of the noncore run-off.

Exhibit 3

Credit quality is steadily improvingRBS: quarterly NPL ratio (RBS definition Risk Elements In Lending (REIL) / gross loans)

4.8%4.5%

3.9%3.6% 3.5%

3.8%

3.1%2.9% 2.8%

3.2% 3.2% 3.0%3.2%

3.0% 3.1%

2.5% 2.4% 2.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

Group Risk Elements in Lending (REIL) % Gross Loans Core divisions Risk Elements in Lending (REIL) % Gross Loans

Source: RBS Group's Annual Report and Interim Management Statements

Despite this improvement, however, RBS's credit risk remains negatively affected by its exposures held in Capital Resolution, its non-core division (see Exhibit 4). If achieved as planned, we expect the wind-down of the division to deliver further material reduction incredit risk.



Exhibit 4

Reduction of asset risk has been rapid and across different asset classesRBS: non-core legacy asset portfolio (Capital Resolution, CR), funded assets breakdown

20.7 22.419.2

17.115.8 14

11.6 ~15-20

6.9 7.3

7.97.9

7.97.8

7.4

0

10

20

30

40

50

60

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 end-2017 target excl.

Alawwal

£ b

illiio

n

Portfolio and GTS Shipping Markets Other Operational Risk Alawwal Bank

Source: RBS's Annual Report and Interim Management Statements.

RBS retains a decreased but still large presence in global capital markets reflecting the group’s objective of maintaining investmentbanking activities to support its corporate clients, despite the ongoing reduction of the bank's capital markets operations. RWAallocated to investment banking operations (including Capital Resolution’s 'Market' RWAs) were £43 billion at end-2016 (around onefifth of group total, falling from around one fourth of group total end-2015). The bank targets £35-40 billion RWAs by 2019 accountingfor the run-off in Capital Resolution (£11.6 billion of market RWAs at end-June 2017).

Further reduction in capital markets would be positive for the group credit profile because revenues from these activities are inherentlyvolatile, as they largely depend on market conditions. The high degree of volatility of capital markets revenues and inherent althoughdecreasing risks carried by this type of activity as well as the complexity of RBS’s multi-year restructuring program currently constrainsthe credit profile of RBS and are reflected in a one-notch negative adjustment for opacity and complexity, in the qualitative section ofour BCA scorecard.

Our assigned Asset Risk score of baa3 reflects both the good improvement RBS has achieved in credit quality but also takes intoaccount the still high level of operational risk associated with the execution of its restructuring, including structural reform, as well asmarket, counterparty and operational risk that is carried by capital markets activities.

RBS’s capitalisation continues to improve as deleveraging progresses but remains vulnerable to short-term shocks

RBS shows one of the highest capital ratios among domestic and international peers: it reported a fully-applied Common EquityTier 1 (CET1) ratio of 14.8% at end-June 2017. Management targets a CET1 ratio of more than 13% after the settlement of largepending litigations and the remaining budgeted restructuring costs. We believe that this target is achievable, although capital remainsvulnerable to short-term shocks, such as additional charges which may occur as RBS resolves it US retail-mortgage security (RMBS)litigation with the US Department of Justice which may cause the bank to temporarily dip below this target. In July 2017, HSBC settledits RMBS litigation with the US Federal Housing Financing Agency (FHFA) for $5.5 billion (£4.2 billion) at an incremental cost of £151million over existing provisions. RBS has £2.9 billion of remaining RMBS provisions available for the DOJ RMBS litigation and otherRMBS matters.

Longer-term, RBS’s capital position will benefit from a lower amount of capital allocated to capital markets, the active workout ofthe legacy Capital Resolution asset portfolio, and additional improvements in asset risk. Regulatory inflation due to proposed Basel IIIchanges and the impact of low for longer rates on its pension liabilities and assets will, however, offset some of the benefits.

RBS reported a leverage ratio of 5.1% at end-June 2017, which is well above the UK Prudential Regulation Authority's current 3%requirement.



Exhibit 5

Capital has improved substantially while leverage remains adequateRBS’s reported and targeted CET1 ratio (end-point) and Basel III leverage ratio

15.5%

14.6%14.5%

15.0%

13.4%14.1%

14.8%

5.6% 5.3% 5.2% 5.6%5.1% 5.0% 5.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

CET1 ratio, end-point* Leverage ratio, end-point*

DAS retirement and pension deficit

payment*

£3.1 billion RMBS provision increase

**RBS retired the UK government's dividend access share (DAS) and made a final payment to address an actuarial deficit in its pension plan in the first quarter of 2016 (both actionsnegatively impacted the CET1 ratio). The deconsolidation of Citizens in October 2015 led to circa 350 basis point improvement in the CET1 and leverage ratios of 60 basis points and circa350 basis points, respectively.Source: RBS’s quarterly Interim Management Statements, Moody's

The group expects to be required to meet a CET1 requirement of 10.6% (4.5% plus a 2.1% Pillar 2A add-on and a combined buffer of4.0% at 1 January 2019), excluding any Sectoral Buffer which the PRA might implement over time.

RBS expects its total loss absorbing capital requirement (MREL) to be around 27.8% of RWAs (including capital buffers) on 1 January2022 (end-state). The group MREL estimates are based on illustrative 2022 RWAs of £215 billion. It will need to at least issue around£16.5 billion of MREL-eligible holding company senior unsecured debt by 1 January 2022 to meet the end-state requirement (assumingend-June 2017 RWAs), as it replaces legacy capital securities. To date in 2017, RBS has issued a further £3.6 billion of MREL-eligiblesenior debt.

We assign a capital score of a3, reflecting the potential volatility that the group's capital ratios could still experience and our viewthat RBS's financial flexibility to absorb unexpected losses through the issuance of new equity is somewhat constrained by its quasi-ownership by the UK government (Aa2 stable).

Sizeable “shock absorbers” provided by retail and commercial bank activities continue to be eroded by ongoing conduct,litigation and restructuring charges

RBS maintains a leading position in the UK financial services market, where it mainly operates under the RBS and the NatWest brands.The group also has a relatively small but profitable UK-based wealth management business (Coutts, unrated).

Retail and commercial activities continue to provide good underlying shock absorbers against the potential earnings volatilitystemming from the bank's capital markets activities, litigation settlements, restructuring costs and the operational risk and costsrelated to regulatory investigations and IT breakdowns (Exhibit 6).

In H1 2017, RBS reported a pre-tax profit of £1.95 billion up from a loss of £274 million a year earlier. Higher revenues, notably fromcapital markets activities and lower non-core losses, cost reductions, lower litigation and conduct costs and lower credit impairmentssupported results and improved capitalisation. Since end-2016, RBS achieved a further £7.9 billion RWA reduction in Capital Resolutionto £26.6 billion.

We expect RBS's profitability to continue to be negatively impacted by elevated restructuring costs. Management has budgeted £2billion of restructuring charges between 2017 and 2019 (excluding any W&G related charges) and £2.0 billion of asset disposal lossesfor 2015-2019 as a result of further restructuring in investment banking. In 2017, RBS expects £1.0 billion of the restructuring chargesand the majority of the remaining disposal losses (£0.8 billion) to be incurred.

RBS has made substantial progress in resolving or setting aside capital for legacy litigation matters including litigations with theUS Department of Justice (DOJ) for the mis-selling of US residential mortgage backed securities (RMBS) between 2004 and 2007.



RMBS litigation provision reserves were £2.9 billion ($3.7 billion) at end-June 2017 (after the FHFA settlement). We estimate thatexisting provisions would be sufficient to cover a median scenario settlement ($3.5 billion) with the US DOJ and that a high-end RMBSsettlement would lead to a £4.2 billion ($5.3 billion) net additional litigation charge, which would decrease RBS’ CET1 ratio by around200 basis point2.

RBS expects to return to profitability in 2018, as it plans to resolve the majority of its legacy matters in 2017 and has announcedfurther cost initiatives. The banks plans to reduce its cost base by a further £2 billion by 2020 (£750 million in 2017), after havingachieved £3.1 billion of cost savings between 2014 and 2016.

We expect that the vote in favour of the UK leaving the EU will result in heightened uncertainty over the UK’s future trade relationshipwith the EU, leading to lower economic growth, reduced demand for credit, a modest increase in unemployment, downward pressureon property prices and potentially higher and more volatile wholesale funding costs. These drivers will pressure revenues, cost of creditand profitability metrics for all banks in the system, although some are more resilient to these strains. The need for the UK to negotiatenew “passporting” agreements with its EU partners, will also potentially lead to additional ongoing costs for UK-domiciled banks whichoperate across EU jurisdictions unless the final agreements replicate current conditions.

We assign a b3 score for Profitability, reflecting ongoing profitability pressures.

Liquidity and funding are currently sound

In our view, RBS has sound liquidity and funding positions, as reflected in the a3 Combined Liquidity Score. However, in line withother capital market participants, the bank has large, albeit reducing, wholesale (secured and unsecured) funding requirements, whichincrease the institution's sensitivity to market confidence.

In recent quarters, RBS continued to reduce its reliance on wholesale funding with a funded balance sheet of £589 billion at end-June2017 (£552 billion at end-2016). In addition, the group's wholesale funding stock of £88 billion at end-June 2017 was more than fullycovered by the liquidity buffer of £178 billion at the same reporting date, indicating a much stronger liquidity position than many ofits European peers. At end-June 2017, RBS reported a Basel III Net Stable Funding Ratio (NSFR) of 123% and a Liquidity Coverage Ratio(LCR) of 145%.

Our assigned BCA of baa3 incorporates a one-notch negative (qualitative) adjustment for Opacity and Complexity, from the firm'sbaa2 Financial Profile.

Notching ConsiderationsLoss Given FailureWe apply our advanced Loss Given Failure (LGF) analysis to RBSG because it is domiciled in the UK, which we consider as anoperational resolution regime, following the implementation of the EU Bank Resolution and Recovery Directive (BRRD). Our standardassumptions, which are applied to RBSG, assume: (1) residual tangible common equity at failure of 3% of tangible banking assets,(2) losses post-failure of 8% of tangible banking assets, (3) junior wholesale deposits accounting for 26% of the bank's total depositbook, (4) a 25% run-off in junior wholesale deposits, (5) a 5% run-off in preferred deposits, and (6) a 25% probability of deposits beingpreferred to senior unsecured debt. Our LGF analysis is based on end-2016 data.

For the holding company RBSG's senior unsecured debt, our LGF analysis shows a moderate loss-given-failure resulting from thecombination of its own volume and the amount of debt subordinated to it. This results in no notching uplift from RBS's baa3 BCA.

RBS's deposits are likely to face extremely low loss-given-failure under our LGF analysis, due to the loss absorption provided bysubordinated debt and, potentially, by senior unsecured debt should deposits be treated preferentially in a resolution, as well as thevolume of deposits themselves. This results in three notches of support above RBS’s baa3 BCA.

For RBS's senior unsecured debt, our LGF analysis suggests a two-notch uplift from the bank’s adjusted BCA: the volume of lossabsorbing debt supporting senior debt under Advanced LGF analysis has reduced faster than our original estimates and is now belowthe level consistent with the prior notching.



For junior securities issued by RBS our initial LGF analysis confirms a high level loss-given-failure, given the small volume of debtand limited protection from more subordinated instruments and residual equity. We also incorporate additional notching for juniorsubordinated and preference share instruments reflecting coupon suspension risk ahead of failure. The resulting PRAs are set out below.

Government SupportWe expect a moderate probability of government support for RBS's junior deposits and operating company senior unsecured debt,resulting in a one-notch uplift.

For RBSG's senior unsecured debt, we consider the probability of government support from the UK government (Aa2 stable) to be lowand therefore we no longer include uplift for systemic support. This is because government support would only be likely to be providedto the operating entity, to be able to maintain its critical functions and mitigate risks to financial stability, from its failure.

For other junior securities, we continue to apply a low government support assumption, and, as such, the ratings for these instrumentsdo not include any related uplift.



Rating Methodology and Scorecard Factors

Exhibit 6

The Royal Bank of Scotland Group plcMacro FactorsWeighted Macro Profile Strong + 100%

Factor HistoricRatio

MacroAdjusted

Score

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 5.0% baa1 ↑ baa3 Operational risk Quality of assets

CapitalTCE / RWA 18.5% aa2 ↓ ↓ a3 Access to capital Risk-weighted

capitalisationProfitabilityNet Income / Tangible Assets 0.1% b3 ↓ ↓ b3 Expected trend

Combined Solvency Score baa1 baa3LiquidityFunding StructureMarket Funds / Tangible Banking Assets 21.6% baa1 ← → baa1 Expected trend Deposit quality

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 36.0% a1 ↓ a2 Expected trend

Combined Liquidity Score a3 a3Financial Profile baa2

Business Diversification 0Opacity and Complexity -1Corporate Behavior 0

Total Qualitative Adjustments -1Sovereign or Affiliate constraint: Aa2Scorecard Calculated BCA range baa2-ba1Assigned BCA baa3Affiliate Support notching --Adjusted BCA baa3

Balance Sheet in-scope(GBP million)

% in-scope at-failure(GBP million)

% at-failure

Other liabilities 166,273 31.5% 197,310 37.4%Deposits 304,285 57.7% 273,248 51.8%

Preferred deposits 225,171 42.7% 213,912 40.5%Junior Deposits 79,114 15.0% 59,336 11.2%

Senior unsecured bank debt 11,859 2.2% 11,859 2.2%Dated subordinated bank debt 7,926 1.5% 7,926 1.5%Junior subordinated bank debt 1,125 0.2% 1,125 0.2%Preference shares (bank) 354 0.1% 354 0.1%Senior unsecured holding company debt 6,832 1.3% 6,832 1.3%Dated subordinated holding company debt 8,830 1.7% 8,830 1.7%Junior subordinated holding company debt 836 0.2% 836 0.2%Preference shares (holding company) 3,567 0.7% 3,567 0.7%Equity 15,832 3.0% 15,832 3.0%Total Tangible Banking Assets 527,718 100% 527,718 100%



De Jure waterfall De Facto waterfall NotchingDebt classInstrumentvolume +

subordination

Sub-ordination

Instrumentvolume +

subordination

Sub-ordination

De Jure De FactoLGF

NotchingGuidance

vs.Adjusted

BCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment 22.1% 22.1% 22.1% 22.1% 3 3 3 3 0 a3 (cr)Deposits 22.1% 8.6% 22.1% 10.8% 3 3 3 3 0 a3Senior unsecured bank debt 22.1% 8.6% 10.8% 8.6% 3 1 2 2 0 baa1Senior unsecured holding company debt 8.6% 7.3% 8.6% 7.3% 0 0 0 0 0 baa3Dated subordinated bank debt 7.3% 4.1% 7.3% 4.1% -1 -1 -1 -1 0 ba1Dated subordinated holding companydebt

7.3% 4.1% 7.3% 4.1% -1 -1 -1 -1 0 ba1

Junior subordinated bank debt 4.1% 3.7% 4.1% 3.7% -1 -1 -1 -1 -1 ba2 (hyb)Junior subordinated holding companydebt

4.1% 3.7% 4.1% 3.7% -1 -1 -1 -1 -1 ba2 (hyb)

Holding company cumulative preferenceshares

3.7% 3.0% 3.7% 3.0% -1 -1 -1 -1 -1 ba2 (hyb)

Holding company non-cumulativepreference shares

3.7% 3.0% 3.7% 3.0% -1 -1 -1 -1 -2 ba3 (hyb)

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 3 0 a3 (cr) -- A2 (cr) --Deposits 3 0 a3 -- A2 A2Senior unsecured bank debt 2 0 baa1 -- A3 A3Senior unsecured holding company debt 0 0 baa3 -- (P)Baa3 Baa3Dated subordinated bank debt -1 0 ba1 -- (P)Ba1 Ba1Dated subordinated holding companydebt

-1 0 ba1 -- (P)Ba1 Ba1

Junior subordinated bank debt -1 -1 ba2 (hyb) -- Ba2 (hyb) --Junior subordinated holding companydebt

-1 -1 ba2 (hyb) -- (P)Ba2 (hyb) Ba2 (hyb)

Holding company cumulative preferenceshares

-1 -1 ba2 (hyb) -- -- Ba2 (hyb)

Holding company non-cumulativepreference shares

-1 -2 ba3 (hyb) -- Ba3 (hyb) Ba3 (hyb)

Source: Moody's Financial Metrics

Ratings

Exhibit 7Category Moody's RatingTHE ROYAL BANK OF SCOTLAND GROUP PLC

Outlook StableSenior Unsecured Baa3Subordinate Ba2Jr Subordinate Ba2 (hyb)Pref. Stock Ba2 (hyb)Pref. Stock Non-cumulative Ba3 (hyb)Preference Shelf (P)Ba3Commercial Paper P-3Other Short Term (P)P-3

THE ROYAL BANK OF SCOTLAND PLC

Outlook NegativeBank Deposits A2/P-1Baseline Credit Assessment baa3Adjusted Baseline Credit Assessment baa3Counterparty Risk Assessment A2(cr)/P-1(cr)



Senior Unsecured A3Subordinate Ba2Jr Subordinate -Dom Curr Ba2 (hyb)Commercial Paper P-2Other Short Term (P)P-2

ROYAL BANK OF SCOTLAND N.V.

Outlook NegativeBank Deposits A2/P-1Baseline Credit Assessment baa3Adjusted Baseline Credit Assessment baa3Counterparty Risk Assessment A2(cr)/P-1(cr)Issuer Rating A3Senior Unsecured A3Subordinate Ba1Jr Subordinate MTN -Dom Curr (P)Ba2Commercial Paper P-2Other Short Term (P)P-2

Source: Moody's Investors Service

Endnotes1 Scorecard ratios are derived as follows: latest reported period (TCE/RWA), latest annual period (Market Funds/Tangible Banking Assets, Liquid Banking

Assets/Tangible Banking Assets), worse of [average of the last three years and latest interim period, latest period annual or interim]: (Problem Loans/GrossLoans, Net Income/Tangible Assets). Scorecard ratio data is shown through end-2016.

2 For further information and details on our estimation method, refer to “Royal Bank of Scotland’s Provision for US RMBS Settlements Is Credit Negative”,published 30 January 2017.


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_194202


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