RBS credit-rating cut amid fresh writedown fears

Published on Friday 27 June 2008 21:56

A LEADING credit rating agency stripped Royal Bank of Scotland of its triple-A credit rating yesterday, as it emerged that the bank was poised to expand in China.

Moody's warned that the Edinburgh-based financial giant, despite its successful 12 billion rights issue, generally faced more volatile earnings, a weaker UK economy and the possibility of fresh writedowns.

The agency downgraded RBS one notch to "Aa1" status but said the outlook was stable, after a review that has been running since April when the bank announced 5.9bn of writedowns.

Moody's, which also cut the bank's financial strength rating to B from B+, said that even after the bumper rights issue – a record for a UK company – the bank's capital ratios were only in line with peers rated B on the financial strength scale.

Moody's Investor Services did not cite RBS's expected signing of a deal within the next two weeks to buy a near-20 per cent stake in Suzhou Trust Co as it expands in corporate banking and wealth management services in China. RBS already has a 4 per cent stake in Bank of China.

The agency added: "RBS still has large credit exposures to manage down and Moody's considers it possible the bank could experience further writedowns."

"In addition, as a leading retail and commercial bank in the UK, RBS is exposed to the worsening economic outlook for the UK."

Keith Hargreaves, banking analyst at broker Hargreaves Lansdown, said: "A credit rating downgrade matters, but it won't be taken too badly by RBS given the current difficulties of the whole banking sector."

Another analyst said: "I would not disagree with Moody's reasoning. It means RBS's cost of funds will rise. It is damaging."

RBS, whose shares eased 0.25p to 217.75p, would not confirm the looming further expansion in China. It is understood the investment in Suzhou is minor in financial terms, but seen by the bank's board as significant strategically.

Suzhou Trust, with assets valued at 6.7bn yuan (455 million), is controlled by Suzhou International Development Group, which is owned by the Beijing municipal government.

It is believed the opportunity has arisen because the trust plans to increase its capital from 300m yuan and is aiming to introduce international and local strategic investors.

Sources say the deal with Suzhou has not yet been signed, but is expected to go through in the next fortnight following approval from Chinese regulators.

Suzhou Trust, a mid-sized trust and investment firm based in Suzhou, a manufacturing and tourism centre in east China, will issue new shares to RBS in a private placement, industry sources said.

It is believed RBS sees the stake as an "enabler" to get into areas currently denied it by Chinese regulations, such as real estate finance, structured finance and asset management.

A foreign institution can hold no more than 20 per cent of a Chinese trust company , according to Chinese rules

FACT BOX

CREDIT rating agencies judge the financial strength of companies, and how safe they are considered to lend funds.

The market is dominated by three players: Standard & Poor's, Fitch and Moody's.

They have been bearish on the banking sector since the collapse of Northern Rock, as banks have only been prepared to lend to each other at punitive rates. But the agencies themselves have been panned by regulators and politicians for not spotting the financial risks banks were running.