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July 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Ulster Bank Limited's (UBL) Long-term Issuer Default Rating (IDR) at 'A-' and Short-term IDR at 'F1'. Fitch has downgraded UBL's wholly-owned subsidiary, Ulster Bank Ireland Limited's (UBIL) Long-term IDR to 'BBB+' from 'A-'and Short-term IDR to 'F2' from 'F1'. The Outlooks on the Long-term IDRs are Negative.
At the same time, Fitch has affirmed UBL's Viability Rating (VR) at 'ccc' and assigned a VR of 'ccc' to UBIL. A full list of rating actions is at the end of this rating action commentary.
UBL's and UBIL's VRs reflect the entities' weak asset quality and structural unprofitability, which affects the capital flexibility and potential long-term viability of the banks. The downgrade of UBIL's IDRs reflects Fitch's view that UBIL's strategic importance to Royal Bank of Scotland Group Plc (RBSG; A/Negative) is likely to diminish over the rating horizon and that sale risk may be higher as a result.
KEY RATING DRIVERS - IDRs AND SUPPORT RATINGS
UBL's and UBIL's IDRs and Support Ratings (SR) are based on support from parent RBSG. The ratings of RBSG are derived from the extremely high probability of support that it would receive from the UK authorities, if required. Fitch considers UBL and UBIL to be strategically important subsidiaries of RBSG due to their important role within the group and high reputational risk for the parent of a subsidiary default. The two-notch gap to 'BBB+' for UBIL takes into account Fitch's opinion that the Republic of Ireland business's role within the group may become less important to RBSG over the next three to five years and our view that the potential for disposal is higher than in the increasingly more integrated Northern Ireland operations, which are housed in UBL.
RATING SENSITIVITIES - IDRs AND SRs
UBL's and UBIL's SRs, Long-term IDRs and Long-term senior debt ratings are sensitive to Fitch's assumptions about the on-going availability of extraordinary sovereign support to RBSG. Changes in assumptions could be driven by a reduction in either the sovereign's ability (for example, triggered by a downgrade of the UK's sovereign rating) or propensity to provide such support. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for systemically important banks in the UK (and more broadly in the EU), as demonstrated by a series of legislative, regulatory and policy initiatives. We expect the EU's Bank Recovery and Resolution Directive (BRRD) to be implemented into national legislation later in 2014 or in 1H15. In Fitch's view, these regulatory developments will increase the likelihood of senior debt losses in banks if they fail solvability assessments.
Following this rating action, RBSG's rating is likely to be downgraded to its VR and Fitch would then notch the UBL and UBIL's ratings from RBSG's VR; we expect this to result in a downgrade of UBL's and UBIL's IDRs and SRs. UBL's and UBIL's SRs and Long-term IDRs are also sensitive to a change in RBSG's propensity to provide support to them.
KEY RATING DRIVERS- VRs
UBL's and UBIL's VRs of 'ccc' consider weak asset quality and continued increases in NPLs which are slowing but have begun to reduce in systemically important peers. In addition, the group has been loss-making for several years and has additional challenges over the next 24 months as the bank incurs costs relating to increased integration for UBL with RBSG and the restructuring and repositioning of UBIL. The lack of earnings potential compromises UBL and UBIL's capital flexibility and compromises the entities' long-term viability. On a positive note, a significant part of UBIL and UBL's 2013 loss related to additional impairments on assets that have been marked for accelerated sale as part of the RBS Capital Resolution programme, which improved provisioning levels and reduced the tail risk from deleveraging.
RATING SENSITIVITIES - VRs
UBL and UBIL's VRs could be upgraded once asset quality begins to stabilise, together with a sustainable return to profitability that would provide capital flexibility. Downside risk is limited in the near term as solvency is protected by a modest capital buffer and relatively healthy levels of provisioning on impaired loans.
The rating actions are as follows:
UBL
Long-term IDR: affirmed at 'A-'; Outlook Negative
Short-term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'ccc'
Support Rating: affirmed at '1'
UBIL
Long-term IDR: downgraded to 'BBB+' from 'A-'; Outlook Negative
Short-term IDR: downgraded to 'F2' from 'F1'
Viability Rating: assigned at 'ccc'
Support Rating: downgraded to '2' from '1'
