RBS Citizens Financial Group Ratings Affirmed; Outlook Remains Negative; Stand-Alone Credit Profile Lowered To 'a-'

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1 Research Update: RBS Citizens Financial Group Ratings Affirmed; Outlook Remains Negative; Stand-Alone Credit Profile Lowered To 'a-' Primary Credit Analyst: Barbara Duberstein, New York (1) ; Secondary Contact: E.Robert Hansen, CFA, New York (1) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List MAY 7,

2 Research Update: RBS Citizens Financial Group Ratings Affirmed; Outlook Remains Negative; Stand-Alone Credit Overview We believe that RBS Citizens Financial Group's (Citizens) business and financial strategies are in transition in light of its plans to separate from its parent, The Royal Bank of Scotland PLC (RBS; A-/Negative/A-2), by the end of 2016 and become a fully publicly owned company. As a result, we are lowering Citizens' stand-alone credit profile (SACP) to 'a-' from 'a'. Moreover, the 'a-' SACP better aligns Citizens' overall credit profile with that of peers, in our view. We are affirming our 'BBB+/A-2' issuer credit ratings on Citizens and our 'A-/A-2' issuer credit ratings on its operating companies, where the ratings were previously because of the linkage between the ratings on Citizens and those on its parent. The ratings outlook on Citizens remains negative, reflecting our negative outlook on RBS. Rating Action On May 7, 2014, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' long- and short-term issuer credit ratings on RBS Citizens Financial Group Inc. In addition, we affirmed our 'A-/A-2' long- and short-term issuer credit ratings on Citizens' bank subsidiaries, RBS Citizens N.A. and Citizens Bank of Pennsylvania. The outlook remains negative. Rationale Standard & Poor's believes that Citizens' business and financial strategies are in transition in light of plans for Citizens to separate from The Royal Bank of Scotland PLC (RBS) and become a fully publicly owned company. Based on that, we lowered Citizens' stand-alone credit profile (SACP) to 'a-' from 'a'. In addition, the 'a-' SACP is, in our view, a better indication of Citizens' stand-alone creditworthiness relative to other large U.S. regional bank peers'. The lower SACP did not lead us to lower our ratings on Citizens because the ratings are capped at the level of the ratings on its parent, RBS. Previously, the ratings were a notch lower than the SACP indicated because of the cap. We believe that RBS is progressing on its plans to sell Citizens through an IPO and a series of follow-up offerings, starting in fourth-quarter MAY 7,

3 Research Update: RBS Citizens Financial Group Ratings Affirmed; Outlook Remains Negative; Stand-Alone Credit Assuming normal market conditions, Citizens might become less than 50%-owned by RBS in 2015 and fully separated from RBS by the end of 2016 or earlier. We consider that this transition adds some risk to Citizens' business and financial profiles and that management's strategies may be slightly in flux. In our view, management will likely focus on improving Citizens' currently low return on common equity over the next two years. For example, management may seek to accelerate loan growth to boost earnings growth. At the same time, we expect Citizens to continue to return a substantial amount of capital to RBS. As a result of these somewhat elevated strategic risks, we revised our assessment of Citizens' business position to "adequate" from "strong" (as our criteria describe the terms). Additionally, Citizens faces some other near-term challenges, in our view. In March 2014, the Federal Reserve objected to the company's capital plan under the Fed's Comprehensive Capital Analysis and Review (CCAR). Although Citizens' capital ratios well exceeded the Fed's minimum ratios in the stress tests, the Fed objected to the company's capital plan for qualitative reasons, related to Citizens' capital planning process. We recognize that Citizens is new to the CCAR capital planning process, and we expect that Citizens will address these process-related issues in its resubmitted CCAR capital plans and over time. We expect that Citizens' asset quality will remain good, aided by the improvement in its local economies and its continued focus on lending to prime customers. However, we are watchful of the company's large exposure to home equity loans and lines (at approximately 25% of total loans), which is a high concentration relative to peers. A substantial amount of these loans will revert from interest-only to fully amortizing in the next few years, resulting in higher monthly payment obligations that could cause an increase in delinquencies. Partly offsetting this risk, the portfolio was originated mainly within the states where Citizens has branches and has somewhat conservative underwriting standards, such as fairly low loan-to-value ratios and relatively high FICO scores. Citizens' capital ratios were quite strong at year-end 2013, with a 13.5% Tier 1 ratio, a 10.7% tangible common equity ratio, and an 11.5% risk-adjusted capital (RAC) ratio, based on our measurement. Although we expect Citizens' capital ratios to decline in 2014 and 2015, mainly because of capital returns to RBS, we anticipate that capital ratios will remain relatively strong, including a RAC ratio of above 10%, over the next two years. Our ratings on Citizens also take into account the company's solid market positions and valuable franchise as a major U.S. regional bank, with about $122 billion in assets, operating in the economically diverse New England and Mid-Atlantic markets. Citizens' funding profile benefits from its sizable retail deposit base. MAY 7,

4 Research Update: RBS Citizens Financial Group Ratings Affirmed; Outlook Remains Negative; Stand-Alone Credit Outlook The negative outlook on Citizens mirrors the outlook on its parent. Under our group rating methodology, our ratings on Citizens are currently capped by our ratings on RBS, and, therefore, we could downgrade Citizens if we were to downgrade RBS, since they currently are rated at the same level. As Citizens' IPO plans progress, we expect that we will view our ratings on Citizens independently from those on RBS in the event that, in our determination, RBS no longer has control over Citizens. This would likely be at the time that RBS owns less than 50% of Citizens, which could occur as early as At that time, we would likely affirm our long-term rating on Citizens' operating banks at 'A-' (equivalent to its SACP of 'a-') and affirm the long-term rating on the holding company at 'BBB+.' Otherwise, we expect that Citizens' asset quality will remain relatively good and that earnings will continue to benefit from low loan loss provisions over the next two years. The SACP assumes that capital ratios will decline, but that management is committed to maintaining strong capital ratios, including a projected RAC ratio of at least 10%. Ratings Score Snapshot To From Issuer Credit Rating A-/Negative/A-2 A-/Negative/A-2 Bank Holding Company Rating BBB+/Negative/A-2 BBB+/Negative/A-2 SACP a- a Anchor bbb+ bbb+ Business Position Adequate (0) Strong (+1) Capital and Earnings Strong (+1) Strong (+1) Risk Position Adequate (0) Adequate (0) Funding and Liquidity Average Average and Adequate (0) and Adequate (0) Support 0 0 GRE Support 0 0 Group Support 0 0 Sovereign Support 0 0 Additional Factors MAY 7,

5 Research Update: RBS Citizens Financial Group Ratings Affirmed; Outlook Remains Negative; Stand-Alone Credit Related Criteria And Research Related Criteria Group Rating Methodology, Nov. 19, 2013 Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Ratings List Ratings Affirmed RBS Citizens Financial Group Inc. Issuer Credit Rating Subordinated BBB+/Negative/A-2 BBB Citizens Bank of Pennsylvania RBS Citizens N.A. Issuer Credit Rating A-/Negative/A-2 Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. MAY 7,

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