Various U.K. Bank Ratings Affirmed; Outlooks Revised To ... · PDF filedepend on our holistic...

Various U.K. Bank Ratings Affirmed; OutlooksRevised To Stable Or Positive On Balance SheetStrengths, But Risks Remain

Primary Credit Analyst:

Osman Sattar, FCA, London (44) 20-7176-7198; [email protected]

Secondary Contacts:

Richard Barnes, London (44) 20-7176-7227; [email protected]

Giles Edwards, London (44) 20-7176-7014; [email protected]

Nigel Greenwood, London (44) 20-7176-1066; [email protected]

Joseph Godsmark, London (44) 20-7176-7062; [email protected]

Sadat Preteni, London (44) 20-7176-7560; [email protected]

OVERVIEW• Economic growth in the U.K. has decelerated in the aftermath of theBrexit referendum; S&P Global Ratings expects growth will slow further,averaging 1.2% a year in 2017-2019, compared to an average of 2.1% over2015-2016.

• Negotiations between the U.K. and the EU on Brexit remain difficult andprotracted, as we expected, with attendant downside risks in the case ofa disorderly outcome. An orderly Brexit with a transitional arrangementis still our base case.

• However, in our view, the U.K.'s large and diversified banks are showingincreased resilience, seen in solid underlying post-provision earnings,more disciplined underwriting, the effective completion of the run-off oflegacy non-core assets, and substantial progress toward end-stateregulatory capital and loss-absorbing capacity requirements.

• In light of this, we see the industry as now better positioned to dealwith uncertainties--and potential turbulence--in the run-up to the U.K.'sexit from the EU in March 2019.

• We are therefore revising our trend on economic risk for the U.K. bankingsector to stable from negative. A disorderly Brexit, or the substantially

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increased likelihood it could happen, could prompt us to consider anegative action, including lowering the BICRA economic risk score to '5'and subsequently revising down to 'bbb' the anchor we use for domesticbanks.

• We are revising to stable, and two specific cases to positive, ourlargely negative outlooks on the majority of large U.K. domestic banks,as described below, while affirming their ratings.

LONDON (S&P Global Ratings) Nov. 15, 2017--S&P Global Ratings said today thatit has affirmed the ratings and revised mostly to stable, and in some specificcases to positive, most of the mainly negative outlooks on various large anddiversified U.K. banks, as summarized below. Where we have revised outlooks tostable from negative, or maintained existing stable outlooks, it reflects ourview of the institutions' improved resilience and strengthened balance sheets,which diminishes the risk that an economic downturn in the U.K. wouldmaterially weaken their creditworthiness over our two-year outlook horizon.

• Barclays, CYBG, HSBC, and Nationwide: We revised to stable from negativethe outlooks on Barclays PLC (including its core U.K. bank subsidiaries);CYBG PLC (including its core subsidiary Clydesdale Bank PLC); HSBCHoldings PLC (including its core subsidiary HSBC Bank PLC and certainother related entities); and Nationwide Building Society. We affirmed thelong- and short-term issuer credit ratings (ICRs) on these institutions.

• Lloyds: We revised to stable from negative the outlook on non-operatingholding company (NOHC) Lloyds Banking Group PLC, and revised to positivefrom negative the outlooks on its bank subsidiaries--Lloyds Bank PLC;Bank of Scotland PLC; Lloyds Bank Corporate Markets PLC; and Lloyds BankInternational Ltd. We affirmed the long- and short-term ICRs on theseinstitutions. The positive outlooks reflect Lloyds' rapid progress inbuilding up its additional loss-absorbing capacity (ALAC) buffer. Thisacceleration means that by end-2018 our ratings on Lloyds' banksubsidiaries will likely merit an additional notch of uplift inrecognition of the protection the ALAC buffer provides for thesubsidiaries' senior creditors in resolution. An upgrade would alsodepend on our holistic assessment of the Lloyds group in comparison withinternational peers.

• RBS: Our outlook on The Royal Bank of Scotland Group PLC, the NOHC of thegroup, remains stable, and we have revised to positive from stable theoutlook on its subsidiaries that will sit inside the ring-fenced part ofthe group--Adam & Company PLC; National Westminster Bank PLC; Ulster BankIreland DAC and Ulster Bank Ltd. We have also revised to stable fromnegative our outlook on The Royal Bank of Scotland PLC (RBS PLC) andassociated entities. We affirmed the long- and short-term ICRs on allthese institutions. The stable outlook on RBS PLC and associated entities(compared to our positive outlooks on the group's future ring-fencedoperating bank entities) primarily reflects our view that, as a futurenon-ring-fenced bank of the group, RBS PLC's business will involvehigher-risk corporate and investment banking activities, in which it hasa weaker track record compared to the businesses in the ring-fenced part



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Various U.K. Bank Ratings Affirmed; Outlooks Revised To Stable Or Positive On Balance Sheet Strengths, ButRisks Remain

of the group.• Santander UK: Our outlook on Santander UK Group Holdings PLC is stillstable. We revised to stable from negative the outlook on its core banksubsidiary Santander UK PLC, and affirmed the long- and short-term ICRson both institutions.

Table 1 shows a summary of today's key rating actions. As shown, these consistof revisions to outlooks, some unchanged outlooks, and affirmations of theICRs on the entities listed. In addition, we have also affirmed the issuecredit ratings, if any, on instruments issued by these entities.

Our existing ratings and outlooks on the other rated U.K. banks--AIB Group(UK) PLC, FCE Bank PLC, and Standard Chartered PLC--are unaffected by today'sactions.

Table 1

Summary Of U.K. Bank Rating Actions

Entity Issuer credit rating Outlook

Barclays

Barclays PLC* Affirmed BBB/A-2 Revised to Stable from Negative

Barclays Bank PLC Affirmed A/A-1 Revised to Stable from Negative

Barclays Bank UK PLC Affirmed A(prelim)/A-1(prelim) Revised to Stable from Negative

Barclays Services Ltd. Affirmed A/A-1 Revised to Stable from Negative

Barclays Bank Ireland PLC Affirmed A/A-1 Revised to Stable from Negative

Barclays Capital Inc. Affirmed A/A-1 Revised to Stable from Negative

CYBG

CYBG PLC* Affirmed BBB-/A-3 Revised to Stable from Negative

Clydesdale Bank PLC Affirmed BBB+/A-2 Revised to Stable from Negative

HSBC

HSBC Holdings PLC* Affirmed A/A-1 Revised to Stable from Negative

HSBC Bank PLC Affirmed AA-/A-1+ Revised to Stable from Negative

Lloyds

Lloyds Banking Group PLC* Affirmed BBB+/A-2 Revised to Stable from Negative

HBOS PLC* Affirmed BBB+/A-2 Revised to Stable from Negative

Lloyds Bank PLC Affirmed A/A-1 Revised to Positive from Negative

Bank of Scotland PLC Affirmed A/A-1 Revised to Positive from Negative

Lloyds Bank Corporate Markets PLC Affirmed A- (prelim)/A-2 (prelim) Revised to Positive from Negative

Lloyds Bank International Ltd. Affirmed A- (prelim)/A-2 (prelim) Revised to Positive from Negative

Nationwide

Nationwide Building Society Affirmed A/A-1 Revised to Stable from Negative

RBS

The Royal Bank of Scotland Group PLC* Affirmed BBB-/A-3 Maintained at Stable

Adam & Company PLC Affirmed BBB+(prelim)/A-2(prelim) Revised to Positive from Stable

National Westminster Bank PLC Affirmed BBB+/A-2 Revised to Positive from Stable



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Table 1

Summary Of U.K. Bank Rating Actions (cont.)

Entity Issuer credit rating Outlook

Ulster Bank Ltd. Affirmed BBB+/A-2 Revised to Positive from Stable

Ulster Bank Ireland DAC Affirmed BBB/A-2 Revised to Positive from Stable

The Royal Bank of Scotland PLC Affirmed BBB+/A-2 Revised to Stable from Negative

Royal Bank of Scotland N.V. Affirmed BBB+/A-2 Revised to Stable from Negative

RBS Securities Inc. Affirmed BBB+/A-2 Revised to Stable from Negative

Santander UK

Santander UK Group Holdings PLC* Affirmed BBB/A-2 Maintained at Stable

Santander UK PLC* Affirmed A/A-1 Revised to Stable from Negative

*Non-operating holding company. The table does not list every affected rated entity in each group. For a fuller list, see Ratings List below.

ECONOMIC RISKS FOR THE U.K. BANKING INDUSTRY

We have revised our economic risk trend for the U.K., as it affects itsdomestic banking sector, to stable from negative. To be clear, this is not anindication that we view the U.K. economy as being on a firmer path. In fact,we do not expect the economic backdrop for the U.K.'s domestic banking sectorto improve significantly in the next two years. In 2018, we anticipate thatthe economy will slow further, growing by 0.9% compared to our expectation of1.4% in 2017 as the travails of Brexit negotiations affect consumer confidenceand business investment. That said, the downside risks we highlighted in theimmediate aftermath of the Brexit vote in June 2016--a significant correctionin asset prices, elevated credit losses, or flights of foreign capital--havenot yet materialized, nor do we believe they will in the next 12 months underour base-case scenario. In our view, in light of the steady strengthening ofU.K. banks' balance sheets over the past decade, and the reduction of pocketsof risks/legacy assets at the large and diversified banks, the sector as awhole is now much more resilient to a tougher operating environment. Webelieve, though, that longer-term risks remain for the economy and bankingsector.

An orderly Brexit with a transitional arrangement is still our base case.However, the risk of a disorderly Brexit has increased. Sufficient progresshas not been made after six rounds of talks for negotiations to move toward afuture relationship, including trade. The size of the withdrawal bill hasemerged as a thorny issue though progress on other settlement issues--such asthe border between Northern Ireland and the Republic of Ireland, and therights of EU citizens living in the UK--has also been slow. We believe thatfurther delays in discussing the framework for a future relationship andtransitional arrangements increase the likelihood of a disorderly Brexit. Ifsuch an alternative scenario materializes, or becomes likely, we could take anegative action on the BICRA economic risk score and we would also review theindustry risk score, in particular looking at funding conditions for banks. Alowering of the BICRA economic risk score to '5' would entail us revising down



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the anchor we use for domestic banks in the U.K. to 'bbb' from 'bbb+'.

At '4', our assessment of economic risk to the U.K. banking sector remainsweaker than many comparable developed economies. For example, Denmark, France,The Netherlands, and the U.S. have stronger economic risk assessments (see "Banking Industry Country Risk Assessment Update: November 2017," published onNov. 10, 2017). Downside sensitivities for the U.K., in our opinion, relateprincipally to the risk, or perceived risk by investors and business, of adisorderly Brexit with no transitional deal agreed between the U.K. and theEU. In that scenario, which is not our central scenario, a loss of confidenceamong consumers and businesses would likely ensue. This could feed through tonet capital outflows from the U.K., significant asset price declines, higherunemployment, increased funding costs, and economic contraction, leading toelevated credit losses and contractions in revenues and earnings for thedomestic banking sector. If we see such a scenario looming, we may revise ourtrend on economic risk to negative or lower our assessment to '5'.

Credit losses are still very low, averaging just 13 basis points (bps) ofloans in the first half of 2017, compared to a still-low 19 bps in 2016. Wehad assumed that credit losses would rise to 28 bps in 2017 and 38 bps in2018, but this now seems less likely. That said, fast-growing consumer creditrepresents a pocket of risk, which we capture in our assessment of high creditrisk in the economy. On balance we expect that credit losses will remain wellbelow the long-term 30-year average of around 70 bps into 2018, given benign(albeit somewhat stagnant) economic conditions and a still-accommodativemonetary policy. The latter has recently kept U.K. households' debt-servicingcosts and banks' loss rates at particularly low levels. Similarly, ourforecasts for unemployment--a key driver for U.K. credit losses--remain low,at 4.5% for 2017 (the current rate is 4.3%), rising to 5.0% by 2019-2020. Thepost-financial-crisis high was 8.5%, in late 2011.

House price growth has undoubtedly slowed since the Brexit vote and turnednegative in London recently. We actually welcome this mild correction becausehouse-price inflation was becoming a concern. Still-low interest rates,pent-up demand, and structural undersupply will likely continue to supportproperty prices, in our view. Recent estate agents' data indicates no upwardshift in the number of properties on their books, nor a lengthening of sellingtimes. Our economists forecast nominal house price growth of 2.5% in 2017 (theaverage rate so far this year is running at 4%-5%, based on ONS data). We thenforecast a 1% decline in 2018, growth of 3% in 2019, and 5% in 2020.Commercial real estate (CRE) price growth remains in positive territory. CREprices are more volatile compared to house prices, but trends in vacancy ratessuggest relatively modest declines in demand to date. There is some evidencethat the fall in sterling has attracted foreign buyers back into the market.Savills has reported that CRE transactions in central London for the ninemonths to Sept. 30, 2017, amounted to £14.2 billion, with buyers from over 27countries, and that 2017 CRE volumes are on track to "easily exceed" £20billion, possibly beating the 2014 record of £21.6 billion.



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Net inflows of foreign direct investment (FDI) have declined so far this year.FDI flows can be volatile, and 2016 inflows included significant large one-offcorporate acquisitions, namely the £79 billion takeover of SABMiller byABInBev and the £24 billion takeover of ARM by SoftBank. The stock of inwardFDI at June 2017 was £1.5 trillion, compared to £1.4 trillion a year earlier(based on ONS data). We forecast that net FDI to GDP will be 1.0% in 2017 andin 2018, rising to 1.5% in 2019 and 2020.

U.K. BANKING INDUSTRY RISKS

We view the U.K. banking industry risk trend as stable. The domestic reformagenda is well advanced and banks have increasing clarity on their futureregulatory environment, more so than in many continental European countries.The ring-fencing of retail and SME deposits, effective from January 2019, maygive rise to operational risk in implementation but we believe that banks arewell-placed to manage this risk and will meet the 2019 deadline. We assumethat past changes in regulatory structures will better support marketdiscipline, constrain risk appetites, curb adventurous management strategies,encourage a better conduct and compliance agenda and, over time, still enablethe banking industry to yield adequate profitability.

Banking regulation and supervision has improved substantially since thefinancial crisis. We have seen this in the extensive reorganization of theregulatory infrastructure to better co-ordinate bank supervision withmacro-prudential risk considerations and a clear move away from the previouslight-touch regulatory philosophy. This has also led to the buildup ofstronger capital buffers.

In many instances, statutory profitability remains constrained by past conductand litigation failings. We assume this will remain the case in the near term.Today, however, net interest margins are supportive of earnings despiteincreased competition from a range of small lenders and new market entrants,and we expect cost-cutting and digital initiatives to bear fruit. The recentannouncement by South African Bank, First Rand, that it has made an offer toacquire U.K. "challenger bank" Aldermore Bank PLC is one indicator of theongoing attractiveness of the U.K. domestic banking market despiteBrexit-related risks.

The capital and debt markets volatility that followed the Brexit vote did notmaterially affect banks' access to, and cost of, wholesale funding. Ourbase-case scenario is that banks will continue to be able to access suchfunding. The current funding and liquidity profiles of U.K. banks are broadlyadequate, in our view. We see limited downside to our industry riskassessment, though implicit in our assessment is the expectation that theindustry will soon be able to demonstrate better statutory profitability and areturn to earnings above the cost of capital.

We have also published the following related articles:• Explaining Our Banking Industry Country Risk Assessment For The U.K.,



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Nov. 15, 2017• Banking Industry Country Risk Assessment: U.K., Nov. 15, 2017

The following paragraphs provide more detail behind our rating actions on eachbank.

BARCLAYS PLC

The stable outlook reflects our view that Barclays' statutory earningsperformance will steadily improve, and that its asset quality metrics willremain resilient over our two-year outlook horizon.

We could consider lowering the ratings if we saw Barclays' earnings recoveryfalter, if our confidence in the predictability of its management and strategywaned, or if we believed its capitalization no longer fully captured emergingasset quality and other risks relative to other large global banks.

An upgrade appears unlikely in the near term while Barclays builds statutoryearnings to be more in line with other large global banks. If our assessmentof its capital and earnings strengthens more than we currently assume, and weremain confident that asset quality and other risks will be relativelycontained, then we could raise the unsupported group credit profile (UGCP) andtherefore the ratings.

BARCLAYS BANK PLC/BARCLAYS BANK UK PLC

The stable outlook on both legal entities reflects that on Barclays PLC.

Given that we already uplift the ratings on the entities by two notches, toreflect our view of additional loss-absorbing capacity (ALAC), a higher ratingwould be predicated upon an uplift of the UGCP as described above. We couldconsider lowering the ratings if we revised down the UGCP, if our view oftheir group status weakens, or if we expect ALAC to reduce below our two-notchthreshold.

CYBG PLC

The stable outlook on CYBG PLC reflects our stable outlook on the unsupportedgroup credit profile (GCP). Consequently, we could raise or lower the ratingson CYBG if we revised the unsupported GCP upward or downward, as explainedbelow. The group's additional loss-absorbing capacity (ALAC) buffers onlybenefit the ratings on the operating company, Clydesdale Bank PLC(Clydesdale), because we do not include notches for ALAC support in theratings on nonoperating holding companies. This is because we do not believethat their senior obligations would continue to receive full and timelypayment in a resolution scenario.

Clydesdale Bank PLC



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The stable outlook on Clydesdale reflects our expectation that itscapitalization will be maintained at a level commensurate with our strongcapital and earnings assessment, and that its ALAC buffers will remain above5% for one notch of ALAC uplift over our two-year outlook horizon.

We could raise the ratings if we observed additional issuance of debtinstruments designed to absorb losses, whether on a going-concern ornonviability basis, such that we were confident the bank would merit anadditional notch of ALAC support over the coming 18-24 months. However, wewould only revise the GCP--which includes ALAC support--upward if we alsoconsidered that this view of relative creditworthiness was merited incomparison with global peers.

We could lower the ratings on Clydesdale if we observed that the bank'soperating performance and risk appetite deviated materially from currentmanagement expectations such that asset quality metrics sharply deteriorated;if there were potential conduct issues not covered by the mitigation packagewith former parent National Australia Bank (NAB), which weighed onprofitability; or if risks relating to the operational separation from NABwere not being managed adequately. We could also lower the rating if thebank's ALAC buffers dropped below 5%, contrary to our expectation.

HSBC HOLDINGS PLC

The stable outlook reflects our expectation that HSBC will maintain a robustbalance sheet and performance level over our two-year horizon. Although weidentify a negative economic risk trend in Hong Kong and expect slowereconomic growth in the U.K., we view HSBC's highly diversified businessposition and strong financial profile as significant mitigants.

HSBC has strengthened its performance and new business activity as it nearsthe completion of its restructuring program, and we expect that it willmaintain this momentum over our outlook horizon. Our base-case financialprojection assumes that revenue growth will outpace costs, credit losses willincrease moderately from the current very low level, and some furtherlitigation charges will be required. We also assume that HSBC will be releasedfrom its U.S. deferred prosecution agreement (DPA) in late 2017 or 2018.

Downside scenario

We could lower the ratings if we consider that economic conditions andprospects in HSBC's major markets could materially weaken its revenues orasset quality. This could call into question our generally favorable views ofthe stability and diversification of its business position and risk position.We could also take a negative rating action if litigation and regulatoryissues, including the DPA, result in material franchise or reputationaldamage. In addition, we could lower the ratings if our RAC ratio weakenssignificantly due to HSBC returning a large amount of the equity that is



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currently surplus to group regulatory requirements.

A one-notch lowering of our sovereign rating on the U.K. would notautomatically affect the ratings on HSBC Holdings PLC. However, we wouldassess whether the drivers of any such downgrade also had implications for ourview of economic risks in the U.K. banking sector and for our assessment ofHSBC's risk position.

Upside scenario

We do not view a positive rating action as likely over our rating horizon.This reflects our view that the current, already high 'a+' unsupported groupcredit profile is appropriately positioned relative to peers.

LLOYDS BANKING GROUP PLC

The positive outlook on our ratings on Lloyds' banking subsidiaries reflectsour updated view that Lloyds' performance should remain robust, even if itsoperating environment weakens moderately. We expect that Lloyds' statutoryprofitability will further improve through end-2019, that it will maintain anS&P Global Ratings risk-adjusted capital (RAC) ratio of 7.8%-8.3%. We alsoanticipate that total credit growth will be lower than the U.K. industry, withno significant step-up in risk appetite. It is important to note that we nowexpect that Lloyds could build its additional loss-absorbing capacity (ALAC)buffer above 8% by end-2018, and that it could rise higher still during 2019.

Upside scenario

We could raise the ratings on Lloyds' banking subsidiaries if Lloyds buildsits ALAC buffer sustainably beyond 8%. However, before doing so, we wouldcompare Lloyds with other highly rated peers in Europe and beyond to ensureits core operating subsidiaries merit an 'A+' rating.

Downside scenario

We would most likely revise the outlook to stable if Lloyds' ALAC ramp-upstalls. A revision could also be prompted by concerns that Lloyds' riskappetite has substantially increased, or if its performance appears likely tosignificantly undershoot our current expectations, for example due to asignificant weakening of asset quality.

Holding company outlook

The outlook on Lloyds Banking Group PLC, the non-operating holding company(NOHC) of the group, is stable. This reflects our view that Lloyds' intrinsiccreditworthiness is unlikely to change in the coming two years and the factthat we do not expect ALAC uplift to accrue to the holding company (as itssenior debt would likely be substantially or completely bailed-in by the Bankof England in resolution).



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We consider an upgrade to be a remote prospect at this time.A negative rating action would most likely stem from concerns that Lloyds'risk appetite has substantially increased, or if its performance appearslikely to significantly undershoot our current expectations, for example dueto a significant weakening of asset quality.

If we were to lower our sovereign rating on the U.K. by one notch, it wouldnot automatically affect the ratings on Lloyds. However, we would assesswhether the drivers of any such downgrade also had implications for our viewof economic risks in the U.K. banking sector and for our assessment ofLloyds's risk position, for example if we envisaged a marked deterioration inasset quality.

NATIONWIDE BUILDING SOCIETY

The stable outlook on Nationwide Building Society (Nationwide) reflects ourview of its stable intrinsic creditworthiness, supported by its relatively lowrisk appetite, strong asset quality, and predictable internal capitalgeneration. We believe these factors should support resilient balance sheetmetrics.

We could lower the ratings over the coming 18-24 months if we removed the onenotch of uplift for additional loss-absorbing capacity (ALAC). This couldoccur if Nationwide is unable to reach and maintain an ALAC buffer of at least5% of S&P Global Ratings risk-weighted assets over the coming two years.

An upgrade is unlikely over our two-year outlook horizon. Over time,Nationwide's business stability, relatively strong management and strategy,and disciplined risk management could support a positive rating action if webecome more confident that they sufficiently mitigate risks arising from itsconcentrated business model to support a stronger rating outcome. In thisscenario, we could potentially revise our business position or risk positionassessment to strong from adequate.

THE ROYAL BANK OF SCOTLAND GROUP PLC

The positive outlook on National Westminster Bank PLC and other groupsubsidiaries that will sit inside the ring-fence reflects our view that thegroup's progress with its restructuring will continue to support gradualimprovements in its underlying operating and financial performance, and itsearnings capacity, over the coming 18-24 months.

We could raise the group credit profile (GCP) over the coming two years byremoving the one-notch negative adjustment that we currently incorporate inthe issuer credit rating of the group's operating subsidiaries. This primarilyreflects our expectation that--post settlement of its U.S. RMBSlitigation--the continued improvement in operating and financial performancemay lead us to no longer regard RBS as a relative underperformer in terms of



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statutory profits compared with similarly rated peers.

We could revise the outlook back to stable if an economic slowdown led todeterioration in asset quality and material uncertainty remained around thegroup's exposure to residual conduct and litigation risk. We could also revisethe outlook to stable if additional restructuring further delayed a return tosatisfactory statutory profitability, contrary to our base case expectation.

The outlooks on RBSG's operating subsidiaries incorporate our expectation thatthe bank will maintain an additional loss-absorbing capacity (ALAC) buffer ofmore than 8.5%.

ROYAL BANK OF SCOTLAND PLC AND ASSOCIATED ENTITIES

The outlook on the Royal Bank of Scotland PLC, Royal Bank of Scotland N.V.,and RBS Securities Inc. is stable. It is likely that we will rate theseentities, which will carry out the group's corporate and investment bankingactivities and sit outside the ring-fence, one notch below the mainring-fenced operating banks. The stable outlook balances this expectationagainst the likely improvement in our assessment of RBS' GCP over the coming18-24 months.

THE ROYAL BANK OF SCOTLAND GROUP PLC

The outlook on the Royal Bank of Scotland Group PLC (RBSG; the nonoperatingholding company [NOHC]) is stable, reflecting our stable assessment of theunsupported GCP. The possible removal of the one-notch negative adjustmentcurrently applied to the ratings of RBSG's subsidiaries would not affect therating on the NOHC.

We could raise the ratings on RBSG if its overall risk exposure, including tolitigation risk, is in line with its main U.K. peers, or if residuallitigation costs were smaller than we expected and supported a risk-adjustedcapital (RAC) ratio likely to remain sustainably above 10%, although thelatter is not our base case expectation. A downgrade of RBSG would most likelyfollow a downgrade of the unsupported GCP. Although unlikely at this stage,this could occur for instance if a sharp deterioration in the U.K. environmentwas to severely hamper the group's ability to return to satisfactorysustainable profitability, which could negatively impact our assessment of itsbusiness position.

SANTANDER UK GROUP HOLDINGS PLC

The stable outlook on Santander UK Group Holdings PLC, the U.K. non-operatingholding company (NOHC), reflects our view that the potential for support fromits parent, Banco Santander, to the Santander UK group (Santander UK) wouldmaintain the ratings on the U.K. NOHC at their current level over our two-yearoutlook horizon. This would be the case even if we were to revise down ourassessment of Santander UK's intrinsic creditworthiness. This takes into



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consideration Banco Santander's higher unsupported group credit profile (GCP)of 'a-', our opinion that Santander UK is a core subsidiary of BancoSantander, and the fact that we don't include any additional loss-absorbingcapacity (ALAC) support in the 'BBB' rating on the U.K. NOHC.

A lowering of the ratings on Santander UK Group Holdings would most likelyresult from a lowering of our ratings on Banco Santander by two notches, whichis a remote prospect. Any prospect of a higher rating is predicated upon usrevising upward Santander UK's 'bbb+' unsupported GCP, though this is notimminent, or if we choose to factor group support into its ratings.

SANTANDER UK PLC

The stable outlook reflects our view that Santander UK's unsupported groupcredit profile (GCP) will not change because we expect the bank will continueto steadily grow its market position in both U.K. retail banking and U.K.business and commercial banking, and grow capitalization, by our measures. Italso assumes that its additional loss-absorbing capacity buffer will remain aratings support and will not dip below our 8% threshold.

We could lower the ratings if we revised down the unsupported GCP. At thistime, we see limited downward pressures on the unsupported GCP.

We could raise the ratings if we revised up the unsupported GCP. This couldalso arise if we consider that Santander UK is making sustainable progress tomaterially improve the diversification of its revenue streams whilemaintaining predictable earnings performance.

We consider that Santander UK's ring-fencing plans, which it expects toconsummate during 2018, have no ratings impact.

BICRA SCORE SNAPSHOT*

U.K. To From

BICRA Group 3 3

Economic risk 4 4Economic resilience Low risk Low riskEconomic imbalances Intermediate risk Intermediate riskCredit risk in the economy High risk High risk

Industry risk 3 3Institutional framework Intermediate risk Intermediate riskCompetitive dynamics Intermediate risk Intermediate riskSystemwide funding Very Low risk Very Low risk

TrendsEconomic risk trend Stable Negative



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Industry risk trend Stable Stable

*Banking Industry Country Risk Assessment (BICRA) economic risk and industryrisk scores are on a scale from 1 (lowest risk) to 10 (highest risk). For moredetails on our BICRA scores on banking industries across the globe, please see"Banking Industry Country Risk Assessment Update" published monthly onRatingsDirect.

RELATED CRITERIA

• Criteria - Financial Institutions - General: Risk-Adjusted CapitalFramework Methodology, July 20, 2017

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

• General Criteria: Guarantee Criteria, Oct. 21, 2016• Criteria - Financial Institutions - Banks: Bank Rating Methodology AndAssumptions: Additional Loss-Absorbing Capacity, April 27, 2015

• Criteria - Financial Institutions - Banks: Bank Hybrid Capital AndNondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29,2015

• General Criteria: Principles For Rating Debt Issues Based On ImputedPromises, Dec. 19, 2014

• General Criteria: Group Rating Methodology, Nov. 19, 2013• Criteria - Financial Institutions - Banks: Assessing Bank BranchCreditworthiness, Oct. 14, 2013

• Criteria - Financial Institutions - Banks: Quantitative Metrics ForRating Banks Globally: Methodology And Assumptions, July 17, 2013

• Criteria - Financial Institutions - Banks: Banking Industry Country RiskAssessment Methodology And Assumptions, Nov. 9, 2011

• Criteria - Financial Institutions - Banks: Banks: Rating Methodology AndAssumptions, Nov. 9, 2011

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009• Criteria - Financial Institutions - Banks: Commercial Paper I: Banks,March 23, 2004

RELATED RESEARCH• Banking Industry Country Risk Assessment: U.K., Nov. 15, 2017• Explaining Our Banking Industry Country Risk Assessment For The U.K.,Nov. 15, 2017

• Banking Industry Country Risk Assessment Update: November 2017, Nov. 10,2017

• Research Update: Ratings On The United Kingdom Affirmed At 'AA/A-1+';Outlook Remains Negative, Oct. 27, 2017

• Fast-Growing U.K. Consumer Credit Should Raise Red Flags For Lenders,Oct. 24, 2017

• Reflecting Ring-Fencing In U.K. Bank Ratings: An Update, Oct. 19, 2017• U.K. Banks Deliver Solid First-Half Earnings, But Their Quest ContinuesFor Consistent Double-Digit Returns, Aug. 8, 2017



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• Low Lending Rates Continue To Fuel Europe's Housing Market Recovery, Aug.1, 2017

• The U.K. Economy Is Slowing On Real Pay Squeeze And Brexit Uncertainty,July 11, 2017

• Comparative Statistics: Top 25 U.K. Banks, July 10, 2017• Which Way Now: The U.K.'s "Challenger Banks" Reach A Fork In The Road,July 10, 2017

• U.K. Banks Start To Emerge From Their Past Misdemeanors, June 7, 2017• U.K. Bank Credit Losses In 2017 Are Nothing To Be Afraid Of, March 23,2017

• Europe's Housing Markets Continue To Recover Amid Extended QE, Feb. 15,2017

• Stress Test Results Highlight U.K. Banks' Enhanced Resilience, Dec. 1,2016

• S&P To Publish Economic And Industry Risk Trends For Banks, March 12,2013

Ratings List

* * * * * * * * * * * * * * * * Barclays PLC * * * * * * * * * * * * * * *

Ratings Affirmed; Outlook ActionTo From

Barclays PLCIssuer Credit Rating BBB/Stable/A-2 BBB/Negative/A-2

Barclays Bank Ireland PLCBarclays Services Ltd.Barclays Capital Inc.Barclays Bank plc (Milan Branch)Barclays Bank plc (Madrid Branch)Barclays Bank UK PLC*Barclays Bank PLCIssuer Credit Rating A/Stable/A-1 A/Negative/A-1

* * * * * * * * * * * * * * * * * CYBG PLC * * * * * * * * * * * * * * * *


CYBG PLCIssuer Credit Rating BBB-/Stable/A-3 BBB-/Negative/A-3

Clydesdale Bank PLCIssuer Credit Rating BBB+/Stable/A-2 BBB+/Negative/A-2



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* * * * * * * * * * * * * * HSBC Holdings PLC * * * * * * * * * * * * * *


HSBC Holdings PLCHSBC USA Inc.HSBC Finance Corp.Issuer Credit Rating A/Stable/A-1 A/Negative/A-1

HSBC Bank CanadaHSBC Securities (USA) Inc.HSBC FranceHSBC Bank USA N.A.HSBC Bank PLCIssuer Credit Rating AA-/Stable/A-1+ AA-/Negative/A-1+

* * * * * * * * * * * * * Lloyds Banking Group PLC * * * * * * * * * * * *


Lloyds Banking Group PLCHBOS PLCIssuer Credit Rating BBB+/Stable/A-2 BBB+/Negative/A-2

Bank of Scotland PLCLloyds Bank PLCIssuer Credit Rating A/Positive/A-1 A/Negative/A-1

Lloyds Bank Corporate Markets PLC*Lloyds Bank International Ltd.*Issuer Credit Rating A-/Positive/A-2 A-/Negative/A-2

* * * * * * * * * * * * Nationwide Building Society * * * * * * * * * * *


Nationwide Building SocietyIssuer Credit Rating A/Stable/A-1 A/Negative/A-1

* * * * * * * * ** * * Santander UK Group Holdings PLC * * * * * * * * * *


Santander UK PLCIssuer Credit Rating A/Stable/A-1 A/Negative/A-1



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Ratings Affirmed

Santander UK Group Holdings PLCIssuer Credit Rating BBB/Stable/A-2

* * * * * * * * * * The Royal Bank of Scotland Group PLC * * * * * * * * *


Adam & Co. PLC*Ulster Bank Ltd.National Westminster Bank PLCIssuer Credit Rating BBB+/Positive/A-2 BBB+/Stable/A-2

RBS Securities Inc.The Royal Bank of Scotland PLCThe Royal Bank of Scotland N.V.Issuer Credit Rating BBB+/Stable/A-2 BBB+/Negative/A-2

Ulster Bank Ireland DACIssuer Credit Rating BBB/Positive/A-2 BBB/Stable/A-2

Ratings Affirmed

The Royal Bank of Scotland Group PLCIssuer Credit Rating BBB-/Stable/A-3

*Preliminary rating.

Additional Contact:

Financial Institutions Ratings Europe; [email protected]

Certain terms used in this report, particularly certain adjectives used toexpress our view on rating relevant factors, have specific meanings ascribedto them in our criteria, and should therefore be read in conjunction with suchcriteria. Please see Ratings Criteria at www.standardandpoors.com for furtherinformation. Complete ratings information is available to subscribers ofRatingsDirect at www.capitaliq.com. All ratings affected by this rating actioncan be found on the S&P Global Ratings' public website atwww.standardandpoors.com. Use the Ratings search box located in the leftcolumn. Alternatively, call one of the following S&P Global Ratings numbers:Client Support Europe (44) 20-7176-7176; London Press Office (44)20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm(46) 8-440-5914; or Moscow 7 (495) 783-4009.



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