Moody’s Downgrades Royal Bank of Scotland Ratings

LONDON - The credit rating agency Moody’s Investors Service downgraded the Royal Bank of Scotland’s long-term debt ratings on Thursday.

The agency, a unit of Moody’s Corporation, placed R.B.S. on review last month after the British lender said it would set aside nearly 3 billion pounds, or about $5 billion, to cover potential litigation claims related to mortgage-backed securities and other products sold before the financial crisis.

Last month, the bank announced an £8.2 billion annual loss and said it could be three to five more years before it recovered. The lender is seeking to reshape itself into a customer-centric, British-focused bank after years of aggressive international ambitions.

On Thursday, Moody’s cut the bank holding company’s long-term credit rating a notch to Baa2, a medium-grade rating that is subject to moderate credit risk.

“Over a longer-term horizon, RBS’s restructuring plan should be beneficial for creditors if executed according to plan,” said Andrea Usai, a Moody’s vice president and senior credit officer.

“However, the plan is large and complex, carrying significant execution risk in the short to medium term, happening at a time when the bank has limited financial flexibility to manage unforeseen events, which could arise either from the plan or from other sources, such as further litigation or conduct costs,” Ms. Usai said.

Bailed out in 2008, the bank is 81 percent owned by the British government.

Last month, Ross McEwan, the chief executive of R.B.S., said the lender needed to reshape itself as “a smaller, simpler and smarter bank.” That will include shrinking the investment bank, selling assets and changing its culture.

“The capital plan we announced in November outlined a number of concrete actions to place the bank on a sure footing,” an R.B.S. spokesman said on Thursday. “We are pleased to note that Moody’s has confirmed that our restructuring plan will be a positive development in the medium to long term and will deliver a more efficient, lower-risk UK-focused bank.”

Moody’s kept the bank on a negative outlook given the challenges to executing Mr. McEwan’s vision.

“The rating agency considers that significant headwinds could materialize in the short to medium term, challenging the execution of the overall complex group restructuring, such as the crystallization of unexpected conduct and litigation costs and high-profile pending investigations,” Moody’s said on Thursday.