Moody’s Investor Service is considering cutting the debt and deposit ratings of the Royal Bank of Scotland, it said in a release today.

“Moody’s rating action follows the publication of a recent trading update, in which RBS’s management indicated that the group’s year-end 2013 results (scheduled to be published on 27 February 2014) would be materially impacted by additional provisions for pending litigations and conduct-related costs. As a result, the bank will report a weaker than previously anticipated regulatory capital position at end-December 2013, weakening its standalone credit profile,” the Moody’s report said.

Cutting the deposit rating typically means the banks incur increased costs for their debt, as investors demand higher interest rates to compensate for this perceived increased risk.

Legacy portfolio issues

“Last November, following the conclusion of the UK government review on the possible merit of a breakup of the group, RBS’s management announced that over a three-year period it would pursue (1) the accelerated wind-down of its legacy asset portfolio, which includes poor quality assets, such as Irish and UK commercial real-estate loans; and (2) the sale of its US retail and commercial banking business,” the Moody’s statement said.

Credit fundementals

The release said that:

During the review, Moody’s will assess whether the bank’s weakened credit fundamentals remain compatible with the current rating levels, taking into account:

(1) the risks and challenges associated with the execution of its recovery plan;

(2) the pending litigations and regulatory reviews that could lead to larger-than-expected financial losses, before RBS can offset them (at least partially) through other capital-accretive management actions; and

(3) other additional remedial actions that RBS management could decide to pursue, such as further asset disposals, following the review of the bank’s core operations.