RBS Shares Hit As Moody’s Puts U.K. on Negative Watch

February 15th, 2012 by Trefis Team
RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

The RBS Group (NYSE:RBS) saw its shares lose more than 5% of their value over trading on Tuesday, as investors reacted to rating agency Moody’s decision to change the outlook for the United Kingdom’s Aaa rating to negative. ((Moody’s adjusts ratings of 9 European sovereigns to capture downside risks, Moody’s Press Releases, Feb 13 2012)) Investors were already on the defensive against European bank stocks as Greece appears to be delaying its second bailout plan. The 82%-state-owned banking group fell further out of preference with investors as a downgrade in the country’s rating in the near future only spells more trouble for RBS. The outlook for the Bank of England has already been downgraded to negative from stable by Moody’s. Competitors Deutsche Bank (NYSE:DB) and Credit Suisse (NYSE:CS) also saw their share prices decline by nearly 3%.

We have a $9 price estimate for RBS’s stock, which is around its current market price.

See our full analysis for RBS here

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Late on Monday, Moody’s announced that it has downgraded the debt ratings of 6 European nations (Italy, Malta, Portugal, Slovakia, Slovenia and Spain) and has changed the outlooks on coveted Aaa ratings of Austria, France and the United Kingdom to negative.

The following excerpt from Moody’s press release sums up its reasons for placing the U.K.’s Aaa rating on negative watch:

The primary driver… is the weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years. These challenges, reflecting the combined effect of a commodity price driven hit to real incomes, the confidence shock from the euro area and a reassessment of the lasting effects of the financial crisis on potential output, were already evident in the government’s Autumn Statement.

RBS bore the brunt of wavering investment sentiments largely because the British government is a majority stakeholder in the banking group. If the country’s debt rating is downgraded in the near future, the bank would find sources of funds drying up – making it all the more difficult to raise capital to sustain its operations.

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