Frankfurt (standard & poor’s) oct. 12, 2015–standard & poor’s ratings Services said today that it lowered its long- and short-term ratings on Germany-based volkswagen bank gmbh to ‘a-/a-2′ from ‘a/a-1′. The outlook is
Negative.
We removed the ratings from creditwatch negative, where we had placed them on Sept. 24, 2015. The downgrade follows a similar rating action on the parent company volkswagen Ag (vw ag; a-/watch neg/a-2). We consider vw bank a core subsidiary of vw ag. However, as vw bank’s stand-alone credit profile (sacp) is already at the same Level as the rating on the parent, this does not translate into additional Support notches for vw bank.
We consider that vw bank’s ‘a-‘ sacp is underpinned by very strong Capitalization and a sound funding profile. As a monoline auto finance provider, vw bank’s business position is Concentrated, in our view, and it remains reliant on its parent in terms of Unit sales and brand recognition.
The current events at vw group could affect The group’s car sales in europe and therefore affect vw bank’s business Prospects and profitability. However, we consider that the bank holds a Substantial capital buffer to withstand slower growth and potentially Increased risk and refinancing costs.
Notwithstanding the above, we continue to forecast that vw bank will maintain Very strong capitalization by our metrics. We believe that vw bank’s Risk-adjusted capital (rac) ratio, our measure of capitalization, will remain Above our 15% threshold in the next 12-18 months compared with 18.4% as of Year-end 2014.
We expect vw bank will maintain decent asset quality. We believe that the Bank’s coverage of nonperforming loans is above that of other european auto Captive finance companies and the bank additionally holds a substantial risk Buffer for unexpected losses in peripheral european countries. We anticipate The bank’s cost of risk will remain stable at around 30-40 basis points in
- At vw bank, there is only a small portion of leasing business, mainly in
The french and italian markets. The risks related to decreasing residual Values would in our view have a minor impact on the bank’s financial profile. Vw bank’s sound funding profile benefits from an elevated level of customer Deposits. These stood at €25.1 billion or 65% of the total funding base as of June 30, 2015, and we assume they will stay at this level. While we consider
Direct bank customer deposits to be more price-sensitive and less sticky than Those of large retail networks, we observe that vw bank’s deposit base has Been stable over the past years despite downward adjustments in interest rates Paid to customers. Furthermore, we understand that the majority of the
Customer deposits are protected under the german deposit insurance scheme, and As such we anticipate the deposit base will remain less volatile. We therefore expect vw bank will maintain its sound funding and liquidity
Metrics, reflected in a standard & poor’s stable funding ratio of close to 100% and liquidity ratio (broad liquid assets to short-term wholesale funding) Of 1.1x as of june 30, 2015. In line with our expectation that vw bank will
Remain core to the group’s strategy, this supports our “average” funding and “adequate” liquidity assessment on vw bank.
Our ratings on vw bank are based on the bank’s ‘a-‘ anchor, its “weak”
Business position, “very strong” capital and earnings, “adequate” risk Position, “average” funding, and “adequate” liquidity, as our criteria define
These terms. The sacp is ‘a-‘.
The ratings on vw bank no longer include any additional parental support Because the ‘a-‘ sacp is already at the level of the parent rating. Should vwBank’s sacp fall below the parent rating, we could reapply additional notchesOf support to equalize the rating with that on vw ag, owing to vw bank’s core
Group status.
On the other hand, a negative rating action on vw ag would not automatically Lead to a downgrade of vw bank. The rating on the bank could potentially Diverge positively from that on vw ag if the bank’s sacp was higher than the Group credit profile. This is because we assess it as “insulated” in line with Our group rating methodology, reflecting vw bank’s regulatory status as a bank And its independent funding prospects from the group. Although we in general
View the captive’s default risk as indistinguishable from that of its parent, The presence of any regulatory restrictions regarding liquidity, capital, or Funding could prevent the subsidiary from supporting the group and, as such, We could rate the bank above the parent.
Although we consider the possibility as extremely remote, we could call into Question our view of vw bank as a “core” entity within the vw group if we saw Weaker commitment from vw ag to support its subsidiaries. This could happen if Vw ag were to relinquish its majority ownership in vw bank or if the Captive-finance operations were to cease to be pivotal to the vw group’s
Worldwide strategy.
The negative outlook on vw bank reflects potential risks to the bank’s Financial and funding profile arising from the events at the parent company vw
Ag. While we consider the bank’s financial profile to be stable, its business Prospects are reliant on the unit sales and reputation of the wider group That, over time, could potentially weaken its sacp.
Given that vw bank is a regulated entity, a negative rating action on vw ag Would not automatically lead to a downgrade of vw bank. There is also Potential for vw bank to have a higher rating than the parent given that we
Consider it an “insulated” subsidiary protected by regulatory restrictions and Able to stand on its own operationally in times of stress. We could revise the outlook to stable if we observed that vw bank’s operations And financial profile were not negatively affected by the events at parent
Group, and if the bank is able to maintain its granular and stable customer Deposit base.