FINANCIAL INSTITUTIONS

ISSUER COMMENT3 August 2018

Contacts

Alessandro Roccati +44.20.7772.1603Senior Vice Presidentalessandro.roccati@moodys.com

Aleksander Blacha +44.20.7772.5282Associate Analystaleksander.blacha@moodys.com

Laurie Mayers +44.20.7772.5582Associate Managing Directorlaurie.mayers@moodys.com

Nick Hill +33.1.5330.1029MD-Bankingnick.hill@moodys.com

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 plc2Q18 results: strong capitalisation amid volatile revenues andcosts

In 2Q 20181, The Royal Bank of Scotland Group plc (RBSG, LT senior unsecured Baa2 positive)reported a net profit of £96 million relative to a profit of £680 million the year before. Thiscorresponds to an annualised after-tax return on risk-weighted assets (RWAs) of 19 basispoints (bps), compared to 124 bps a year earlier, and an annualised after tax return on equityof 0.9% (2Q17: 6.5%). This result was affected by £0.8 billion net litigation charges. Capitalremained strong, despite £2 billion pensions contribution and the impact of the settlementwith the United States Department of Justice (DoJ ).

Lower revenues with operating costs affected by DoJ settlement. Revenues adjustedfor the sale of the stake in Vocalink in 2Q 2017 declined by 4%, due to lower trading incomeand lower net interest income, which was negatively affected by the cost of carrying thegroup's large liquidity buffer. Operating costs increased 14% due to the £0.8 billion net costrelated to RMBS, as an additional £1.0 billion of provisions relating to the group's proposedsettlement with United States Department of Justice (DoJ) was partially offset by a £0.2billion provision release due to the outcome of the Nomura RMBS litigation. Underlyingoperating costs (net of restructuring and litigation costs) decreased by 2% year-on-year.Restructuring costs were £141 million in 2Q 2018, below the £300m run rate (managementbudgets to incur £2.5 billion in restructuring expenses in 2018-2019).

Capitalisation is strong. A reduction in risk weighted assets (RWA) combined with quarterlyprofits despite the negative impact of the pension contribution (around -80 bps) and thesettlement with the DoJ (around -50 bps), resulted in a Common Equity Tier 1 (CET1)ratio of 16.1%, down from 16.4% the previous quarter. The group announced an intentionto declare an interim dividend of £0.02 per share and provided a future target of a 40%payout of attributable profits. RBSG also indicated that it will consider additional ways todistribute capital to shareholders from 2019. We expect the group to maintain a high level ofcapitalisation in the coming quarters, due to a further targeted reduction in RWA combinedwith profit generation. Starting from 2019, we expect capital ratios to decrease, due todividend payments and other distributions but to remain above the group’s 2020 target of aCommon Equity Tier 1 in excess of 13%.

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 1

Common Equity Tier 1 (CET1) ratio and Tier 1 Leverage Ratio relative to UK peers, end-June 2018

16.1%

14.5%

13.0% 12.7%

11.8%

6.0%5.2%

4.9% 4.4% 4.0%

0%

3%

6%

9%

12%

15%

18%

Royal Bank of Scotland Lloyds Barclays Santander UK HSBC Bank plc

CET1 Ratio Tier 1 (UK) Leverage ratio Median UK peers CET1 ratio (13.0%) Median UK peers leverage ratio (4.9%)

Note: Leverage ratio is the UK leverage ratio, with exception of HSBC Bank plc for which CRD IV leverage ratio is provided. Data for HSBC Bank plc as of year-end 2017. CET1 ratio for Lloydsis a pro-forma ratio that takes into account of the planned dividend distribution, and incorporates the interim dividends from insurance and the sale of Lloyds' Irish mortgage portfolio.Sources: Company data, Moody's Investors Service

Credit risk improved: IFRS 9 Stage 3 financial assets excluding balances at central banks declined to £9.7 billion at end-June 2018(equal to 3.0% of customer loans), from £11.3 billion at 1 January 2018 (equal to 3.5% of customer loans).

Payment protection insurance provisions cover residual costs for the year. RBSG booked no payment protection insurance (PPI)provisions in the first half of 2018. Outstanding PPI provisions stand at £745 million and the quarterly number of claims is in line withmanagement expectations.

The group's funding and liquidity position remains strong. RBSG reported a Basel III Liquidity Coverage ratio of 167% and a NetStable Funding Ratio of 140% at end-June 2018. Liquid resources of £198 billion were well in excess of the £75 billion of wholesalefunding. While positive for bondholders, the increase in liquid resources during H1 2018 had a negative 11 bp impact on the group’s netinterest margin.

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 3 August 2018 The Royal Bank of Scotland Group plc: 2Q18 results: strong capitalisation amid volatile revenues and costs

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Results by divisions

Exhibit 2

Reported quarterly pre-tax profits by business line

(1,500)

(1,000)

(500)

-

500

1,000

1,500

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018

£ m

illio

n

UK PBB Ulster Bank Commercial Banking Natwest Markets Other

Note: Note: “UK PBB” denotes UK Personal & Business Banking. “Other” includes results for Private Banking, RBS International and Central items & otherSource: Company data

The UK Personal & Business Banking (UK PBB) division, one of the group’s key credit strengths, reported an operating profit of£734 million, broadly stable. Significantly lower operating costs offset a moderate decline in revenues driven by a 7 bps decrease in thenet interest margin to 2.81%, and an increase in loan loss charges to 0.2% of loans annualised (from 0.1%).

The Ulster Bank Republic of Ireland (UBI) division generated an operating profit of £76 million, compared to a loss of £16 million.The improvement was driven by a growth in revenues, a decline in operating costs and release of loan loss provisions.

The Commercial Banking (CB) division’s operating profit was £515 million, a 27% increase, reflecting higher disposal gains and loweroperating costs. Revenues increased 17% due to asset disposal and fair value gains of £115 million; underlying revenues showed thatnon-interest income growth offset a decline in net interest income (the net interest margin declined by 7 bps to 1.66%). Operatingexpenses decreased by 9%, mostly due to a reduction in headcount.

NatWest Markets recorded an operating loss of £51 million compared to an operating loss of £78 million, reflecting a decline inrestructuring costs and litigation expenses. Revenues decreased 33%, due to a weak performance in all sub-segments: rates (-39%)currencies (-30%) and financing (-14%). The results highlight the challenges smaller capital markets operators face in a competitiveand volatile environment.

Ratings ConsiderationsWe rate the holding company RBSG's long-term debt Baa2. The outlook on the rating is positive, reflecting our view that during thenext eighteen months the group will largely complete its complex multi-year restructuring exercise and will generate more stable andsustainable earnings.

Endnotes1 All figures in this report relate to 2Q 2018 and comparisons are made to 2Q 2017, unless otherwise indicated. RBSG adjusted basis excludes litigation and

conduct charges, restructuring charges, fair value changes in own debt, gains/losses on redemptions of own debt, disposal gains/losses and other items.

3 3 August 2018 The Royal Bank of Scotland Group plc: 2Q18 results: strong capitalisation amid volatile revenues and costs

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDITRISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THERELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITYMAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGSDO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’SOPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVEMODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’SPUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOTPROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THESUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATIONAND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FORPURCHASE, HOLDING, OR SALE.

MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FORRETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACTYOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW,AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTEDOR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANYPERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.

CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSESAND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.

All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as wellas other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information ituses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s publications.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for anyindirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use anysuch information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses ordamages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of aparticular credit rating assigned by MOODY’S.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatorylosses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for theavoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents,representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCHRATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.

Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (includingcorporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating,agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintainpolicies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO andrated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually atwww.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s InvestorsService Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intendedto be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, yourepresent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly orindirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion asto the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be recklessand inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or otherprofessional adviser.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1136517

4 3 August 2018 The Royal Bank of Scotland Group plc: 2Q18 results: strong capitalisation amid volatile revenues and costs

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

5 3 August 2018 The Royal Bank of Scotland Group plc: 2Q18 results: strong capitalisation amid volatile revenues and costs