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FINANCIAL INSTITUTIONS

CREDIT OPINION23 July 2019

Update

RATINGS

National Westminster Bank PlcDomicile United Kingdom

Long Term CRR Aa3

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt (P)A2

Type Senior Unsec. Shelf -Fgn Curr

Outlook Not Assigned

Long Term Deposit A1

Type LT Bank Deposits - FgnCurr

Outlook Positive

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

Analyst Contacts

Alessandro Roccati +44.20.7772.1603Senior Vice [email protected]

Maxwell Price +44.20.7772.1778Associate [email protected]

Laurie Mayers +44.20.7772.5582Associate Managing [email protected]

Nick Hill [email protected]

National Westminster Bank PlcSemi-annual update 2019

SummaryThe long term issuer ratings of National Westminster Bank Plc (NWB), The Royal Bank ofScotland plc (RBS; previously Adam & Company PLC) and Ulster Bank Limited (UBL) are A2and their long-term deposit ratings are A1 with a positive outlook; their corresponding short-term debt and deposit ratings are Prime-1. We align the ratings of UBL with those of NWBbecause of the high level of integration between the two banks.

The BCAs of baa1 for NWB, UBL and RBS, the ring-fenced entities of the The RoyalBank of Scotland Group plc (Baa2 positive), reflect: (1) moderate asset risk, with legacyexposures mitigated by predominantly retail and small business lending activities; (2) robustcapitalisation and leverage is modest; (3) good and stable profits from the retail and businessbanking activities, underpinned by the banks’ strong franchises; and (4) strong funding profileand ample liquidity of the ring-fenced sub-group.

We view that, following the implementation of UK ring-fencing on 1 January 2019, the creditprofile of NWB, UBL and RBS has strengthened, as they are now solely responsible for retail,SME and corporate lending activities in the UK, and have a largely deposit-based fundingprofile. We expect the better asset profile of the ring-fenced banking entities to result inmore predictable and less volatile earnings relative to the group’s non-ring-fenced bankingentities.

Exhibit 1

Rating Scorecard - Key Financial Ratios

1.5% 24.5%

0.4%

15.3% 29.3%

0%

5%

10%

15%

20%

25%

30%

35%

0%

5%

10%

15%

20%

25%

30%

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 BankingAssets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

National Westminster Bank plc (BCA: baa1) Median baa1-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Financial Metrics

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBM_1184370

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Capitalisation is high

» High level of retail and corporate deposit funding and sound liquidity

» High volume of deposits resulting in two notches of loss-given-failure uplift

» Moderate probability of government support resulting in one notch uplift incorporated in senior ratings

Credit challenges

» Good level of profitability, though could come under pressure due to Brexit related uncertainties, competition in the mortgagemarket and new competitors

» Credit risk has largely improved but remains vulnerable to Brexit uncertainties

» Ongoing restructuring represents a tail risk

Rating outlookThe outlooks on the senior ratings of NWB, UBL and RBS are positive. The positive outlook reflects our expectation that fundamentalswill improve over the next eighteen months as the banks substantially complete their restructuring, enabling them to generate morestable and sustainable earnings.

Factors that could lead to an upgrade

» The baa1 BCAs of NWB, UBL and RBS could be upgraded if the banks were to substantially complete their restructuring, their assetrisk profiles were to improve, and/or if profitability were to improve significantly. An upgrade of NWB’s long-term senior unsecureddebt and deposit ratings and UBL’s and RBS's long-term deposit ratings could also result from a higher-than-expected stock of morejunior bail-in-able liabilities at the ring-fenced sub-group that would provide greater protection for the bank’s junior depositors.

Factors that could lead to a downgrade

» The baa1 BCAs of NWB, UBL and RBS could be downgraded in the event of: (1) a deterioration in operating conditions in the UK,beyond our current expectations, leading to higher asset risk and lower profitability; (2) a decline in capitalisation; (3) a materialweakening of the sub-group’s liquidity profile; or (4) a weakening of the intra-group capital and liquidity support mechanisms.The ratings could also be downgraded due to a reduction in the stock of bail-in-able liabilities that would reduce the degree ofprotection for senior creditors.

Key Indicators

Exhibit 2

National Westminster Bank Plc (Consolidated Financials) [1]12-182 12-172 12-162 12-152 12-142 CAGR/Avg.3

Total Assets (GBP Billion) 309.9 339.0 314.1 300.9 307.2 0.24

Total Assets (USD Billion) 394.7 458.6 388.2 443.5 479.0 (4.7)4

Tangible Common Equity (GBP Billion) 18.6 15.8 14.8 13.9 14.2 6.94

Tangible Common Equity (USD Billion) 23.6 21.3 18.3 20.4 22.1 1.74

Problem Loans / Gross Loans (%) 1.5 0.9 1.1 4.4 10.6 3.75

Tangible Common Equity / Risk Weighted Assets (%) 24.6 27.8 23.0 22.4 20.8 23.76

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 14.8 10.4 12.0 39.7 67.2 28.85

Net Interest Margin (%) 1.8 1.8 1.6 1.5 1.3 1.65

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 23 July 2019 National Westminster Bank Plc: Semi-annual update 2019


PPI / Average RWA (%) 4.6 4.7 2.0 -2.5 1.4 2.06

Net Income / Tangible Assets (%) 0.4 0.8 1.9 -0.5 1.8 0.95

Cost / Income Ratio (%) 63.8 61.2 78.3 126.5 83.0 82.65

Market Funds / Tangible Banking Assets (%) 15.3 19.8 12.3 12.6 13.4 14.75

Liquid Banking Assets / Tangible Banking Assets (%) 29.3 11.6 35.6 41.1 43.4 32.25

Gross Loans / Due to Customers (%) 86.4 85.4 76.9 76.4 76.9 80.45

[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 presented.Source: Moody's Investors Service; Company Filings

ProfileThe ring-fenced bank sub-group includes NWB, UBL, RBS, and Coutts & Company (unrated). Together these carry out most of itsPersonal & Business Banking and Commercial & Private Banking activities across England, Scotland and Wales. Ulster Bank Ireland DAC(UBI DAC; long-term deposits Baa1 stable) carries out retail & commercial banking activities in the Republic of Ireland (A2 stable).

Other group entities: NatWest Markets Plc (NWM; previously The Royal Bank of Scotland plc) retains RBSG's capital market activities.RBS International (RBSI; Baa1 positive) focuses on institutional banking, mostly through lending and ancillary activities to funds andlending and commercial activities to residents in Jersey, Guernsey, the Isle of Man and Gibraltar.

Exhibit 3

Pre and post ring-fencing simplified legal entities group structure

Source: Moody’s Investors Service on Company data



Detailed credit considerationsCredit risk has largely improved but remains vulnerable to Brexit uncertaintiesThe main risk for NWB is credit risk from its £204 billion loan book at end-2018. Asset quality has remained stable in recent years: theproblem loans / gross loans ratio was 1.5% at end-2018.

NWB's operating environment is heavily influenced by the UK and its Macro Profile is currently Strong+. The bank benefits fromoperating in a wealthy and developed country with a very high degree of economic, institutional and government financial strength aswell as a low susceptibility to event risk. The main risks to the system now stem from the economic uncertainty resulting from Brexitand the high level of indebtedness of UK households, which are sensitive to changes in interest rates.

Our assigned Asset Risk score of a3 reflects the strong improvement NWB has achieved in credit quality due to the reduction in non-performing loans and legacy assets and in sector and concentration risks.

Ongoing restructuring represents a tail riskNWB, RBS and UBL are currently undergoing a structural reorganization of their business model. The banks budget growth in mortgagelending and selected business segments, higher efficiency through both higher revenues and lower costs, and improved capitalefficiency.

We reflect the complexity of these entities' multi-year restructuring program, the high level of operational risk associated with theexecution of its restructuring in a one-notch negative adjustment for Corporate Behaviour, in the qualitative section of the BCAscorecards of NWB, RBS and UBL.

Capitalization is highNWB has one of the highest capital ratios among domestic and international peers: at end-2018, it reported a UK PrudentialRegulation Authority (PRA) transitional basis Common Equity Tier 1 (CET1) ratio of 17.4% and a Tier 1 leverage ratio of 5.2%,comfortably above the UK Prudential Regulation Authority's current 3% requirement. Our calculated Tangible Common Equity ratiowas 24.6% at the same time.

We expect the CET1 capital will moderately decrease. Our assigned capital score of a1 reflects the above trend.

Good level of profitability could come under pressure due to Brexit and new competitorsRetail, commercial and large corporate banking provide good levels of underlying profitability. In 2018 NWB reported a net income of£2.7 billion, compared with a net income of £2.1 billion in 2017, mainly driven by lower losses from discontinued operations (£3 millionin 2018 vs £635 million in 2017). NWB provisioned £125 million for payment protection insurance (PPI) claims, bringing the cumulativecharge to £3.2 billion, of which £2.5 billion in redress and £0.3 billion in administrative expenses had been paid by end-2018. Weexpect PPI claims and provisions to be modest in 2019.

Exhibit 4

NatWest Bank reported solid operating profits in 2018

£ billion

Income 9.5

Costs 5.6

Loan Loss impairments 0.4

Operating income/loss 3.5

Net income 2.7

Source: Moody's Investors Service on Company Data

The current good level of profitability of NWB could come under pressure due to intense competition in the mortgage market,uncertainty leading up to Brexit and new digitally-enabled entrants. NWB’s push to leverage new digital and cloud-based solutionsshould result in improved IT resilience, increased automation in retail and business loans, and higher use of mobile banking for personal,business and commercial customers.



We expect that Brexit will pressure NWB’s revenues, cost of credit and profitability metrics due to heightened uncertainty overthe UK’s future trade relationship with the EU, leading to lower economic growth, reduced demand for credit, a modest increase inunemployment, downward pressure on property prices and potentially higher and more volatile wholesale funding costs.

The assigned baa2 profitability score, reflects the good profitability level of the bank, with a Moody's adjusted return on tangible assets1

of 0.5% as at 2018.

High level of retail and corporate deposit funding and sound liquidityIn line with other similar ring-fenced entities, NWB has a large and stable retail deposit base: its loans-to-deposits ratio was 86% atend-2018. In addition, the bank borrowed £14 billion of funding under the Bank of England’s Term Funding Scheme at end-2018 whichwill have to be replaced over the next few years with either deposit or secured funding, at a potentially higher cost.

NWB manages liquidity for the ring-fenced banks (RFBs) sub-group: we refer to RFBs’ sub-group funding and liquidity position for thecalculation of our ratios. We reflect the solid funding and liquidity positions in a funding score of a2 and a liquid resources score ofbaa1 and an overall combined liquidity score of a3. The sub-group of ring-fenced banks reported an LCR of 153% and NSFR of 144% atend-2018.

Support and structural considerationsAffiliate supportWe incorporate a “Very High” level of support from the ring-fenced holding company NatWest Holdings Limited, resulting in zeronotch of affiliate support, and leading to an adjusted BCA of baa1 (from a BCA of baa1).

High volume of deposits results in two notches of loss-given-failure upliftWe apply our advanced Loss Given Failure (LGF) analysis to NWB, UBL and RBS as a combined group because of capital supportagreement among these entities and because they are all domiciled in the UK, which we consider as an operational resolution regime,following the implementation of the EU Bank Recovery and Resolution Directive (BRRD). Our standard assumptions 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 deposit book, (4) a 25% run-off in junior wholesale deposits, (5) a 5%run-off in preferred deposits, and (6) a 25% probability of deposits being preferred to senior unsecured debt.

For NWB, UBL and RBS, our LGF analysis results in a two-notch uplift for deposits and a one-notch uplift for senior unsecured debtfrom the banks’s adjusted BCA. For junior debt our LGF analysis shows a high level of loss-given-failure, given the small volume of debtand limited protection from more subordinated instruments and residual equity.

Government supportGiven NWB's significance for the UK market, we believe there is a moderate probability of government support for the seniorunsecured debt and deposits of the banks in the ring-fenced sub-group, resulting in a one-notch uplift. For other junior securities, wecontinue to apply a low government support assumption resulting in no uplift.



Rating methodology and scorecard factors

Exhibit 5

National Westminster Bank PlcMacro FactorsWeighted Macro Profile Strong + 100%

Factor HistoricRatio

InitialScore

ExpectedTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 1.5% aa3 ↓↓ a3 Sector concentration

CapitalTangible Common Equity / Risk Weighted Assets(Basel III - transitional phase-in)

24.6% aa1 ↓ a1 Access to capital Nominal leverage

ProfitabilityNet Income / Tangible Assets 0.4% ba1 ↑ baa2 Expected trend

Combined Solvency Score a1 a3LiquidityFunding StructureMarket Funds / Tangible Banking Assets 15.3% a3 ↓↓ a2

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 29.3% a3 ↓ baa1

Combined Liquidity Score a3 a3Financial Profile a3Qualitative Adjustments Adjustment

Business Diversification 0Opacity and Complexity 0Corporate Behavior -1

Total Qualitative Adjustments -1Sovereign or Affiliate constraint Aa2Scorecard Calculated BCA range a3 - baa2Assigned BCA baa1Affiliate Support notching 0Adjusted BCA baa1

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 Rating - - - - - - - 3 0 a1Counterparty Risk Assessment - - - - - - - 3 0 a1(cr)Deposits - - - - - - - 2 0 a2Senior unsecured bank debt - - - - - - - 1 0 a3Dated subordinated bank debt - - - - - - - -1 0 baa2Junior subordinated bank debt - - - - - - - -1 -1 baa3Cumulative bank preference shares - - - - - - - -1 -1 baa3Non-cumulative bank preference shares - - - - - - - -1 -2 ba1

Instrument Class Loss GivenFailure notching

Additionalnotching

Preliminary RatingAssessment

GovernmentSupport notching

Local Currency rating ForeignCurrency

ratingCounterparty Risk Rating 3 0 a1 1 Aa3 Aa3Counterparty Risk Assessment 3 0 a1(cr) 1 Aa3(cr)Deposits 2 0 a2 1 A1 A1Senior unsecured bank debt 1 0 a3 1 (P)A2Dated subordinated bank debt -1 0 baa2 0 Baa2 (P)Baa2Junior subordinated bank debt -1 -1 baa3 0 Baa3 (hyb) Baa3 (hyb)Cumulative bank preference shares -1 -1 baa3 0 (P)Baa3



Non-cumulative bank preference shares -1 -2 ba1 0 Ba1 (hyb)[1]Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody’s Investors Service

Ratings

Exhibit 6Category Moody's RatingNATIONAL WESTMINSTER BANK PLC

Outlook PositiveCounterparty Risk Rating Aa3/P-1Bank Deposits A1/P-1Baseline Credit Assessment baa1Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment Aa3(cr)/P-1(cr)Issuer Rating A2Senior Unsecured Shelf (P)A2Subordinate -Dom Curr Baa2Jr Subordinate Baa3 (hyb)Pref. Stock Non-cumulative -Dom Curr Ba1 (hyb)Preference Shelf (P)Baa3Commercial Paper P-1

ULT PARENT: THE ROYAL BANK OF SCOTLANDGROUP PLC

Outlook PositiveBaseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa2Senior Unsecured Baa2Subordinate Baa3Jr Subordinate Ba1 (hyb)Pref. Stock Non-cumulative Ba2 (hyb)Pref. Shelf Non-cumulative (P)Ba2Commercial Paper P-2Other Short Term (P)P-2

Source: Moody's Investors Service

Endnotes1 Moody's adjusted return on tangible assets, includes the standard adjustment made for defined benefit pension plans



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