Volvofinans Bank AB. Update to credit analysis. Rating Scorecard - Key Financial Ratio. Capital: Tangible Common Equity/Risk-Weighted Assets

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1 CREDIT OPINION 4 October 218 Volvofinans Bank AB Update to credit analysis Update Summary Volvofinans Bank AB s (Volvofinans) long-term deposit rating of A is derived from (1) the bank s baseline credit assessment (BCA) of baa2 and (2) the results from our Advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes in resolution, leading to two notches of uplift for Volvofinans deposit rating. Volvofinans short-term deposit rating is Prime-2. The long-term and shortterm counterparty risk (CR) assessment of Volvofinans is A2(cr)/Prime(cr). RATINGS Volvofinans Bank AB Domicile Sweden Long Term CRR A2 Type LT Counterparty Risk Rating - Fgn Curr Outlook Not Assigned Long Term Debt Not Assigned Long Term Deposit A Type LT Bank Deposits - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts The assigned subordinated debt rating of Baa reflects the BCA of baa2 and a negative notch due to the higher expected loss on this type of instrument. Volvofinans' BCA of baa2 reflects the bank's solid financial fundamentals, including its consistently strong asset quality, solid capitalisation, stable profitability and its relatively high share of deposit funding compared to peers. In addition, although the bank is inherently concentrated on the auto sector, notably in relation to the operations of Volvo Car AB (Volvo; long-term corporate family rating Ba1, stable), Moody's considers that Volvofinans benefits from a degree of strategic, operational and financial independence that makes its credit profile less correlated to its auto manufacturing parent than typically observed with other auto banks, because of its 5/5 joint ownership by Volvo and the Volvo Dealers, with the selling a wide range of car brands outside the Volvo name, adding an element of diversification. As such, Volvofinans' BCA of baa2 is positioned two notches above Volvo's Ba1 corporate family rating. Niclas Boheman AVP-Analyst niclas.boheman@moodys.com Exhibit 1 Jakob Oktay Associate Analyst jakob.oktay@moodys.com 2% 5% 18% 45% 16% 4% 14% 5% 12% % 1% 25% 8% 2% 6% 15% CLIENT SERVICES Americas Asia Pacific Japan EMEA Solvency Factors Sean Marion MD-Financial Institutions sean.marion@moodys.com Volvofinans (BCA: baa2) Median baa2-rated banks 4% 2% 1%.% 18.8% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Source: Moody's Financial Metrics.9% Profitability: Net Income/ Tangible Assets 4.7% 9.7% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 5% % Liquidity Factors (RHS) Liquidity Factors Jean-Francois Tremblay Associate Managing Director jean-francois.tremblay@moodys.com Rating Scorecard - Key Financial Ratio

2 Credit strengths» Established market presence and franchise in Sweden» Stable asset quality and low level of non-performing loans, supported by a recourse agreement with the Volvo dealers» High regulatory capital ratios» Stable profitability» Significant deposit funding base Credit challenges» Highly concentrated loan book in the car sector» High reliance on market funding Rating outlook The outlook on Volvofinans' deposit rating is stable. This reflects our expectation that the financial fundamentals of the bank will remain in line with its current ratings over the next 12 to 18 months. Factors that could lead to an upgrade Factors that could lead to an upgrade include: (1) if Volvo Car AB was upgraded; and (2) the bank strengthened its profitability without accumulating more credit risk whilst simultaneously maintaining solid capital and reducing its reliance on market funding. Factors that could lead to a downgrade Factors that could lead to a downgrade include: (1) a deterioration of asset quality which could, for instance, result from increased unsecured consumer lending, (2) a deterioration in profitability, () a materially increased use of short-term wholesale funding and/or, (4) a substantial reduction in the volume of deposits relative to the bank's tangible banking assets, resulting in higher loss severity for deposits in the event of the bank's failure. Furthermore, notwithstanding the fact that Volvofinans is better ring-fenced from its industrial parent than certain peers, a downgrade of Volvo's rating could cause a downgrade of Volvofinans' ratings if we assess that a deterioration of Volvo's creditworthiness would likely have spillover impacts on the bank's financing volumes, profitability and/or ability to fund itself in the wholesale markets. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2 4 October 218

3 Key indicators Exhibit 2 Volvofinans Bank AB (Unconsolidated Financials) [1] Total Assets (SEK million) Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (SEK million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) ,96 4,29 4,914, ,649 4,15 4,965, ,474,72,95, ,1,494,796, CAGR/Avg. 29,299,9,74, [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [] May include rounding differences due to scale of reported amounts [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel III periods presented Source: Moody's Financial Metrics Profile Volvofinans, established in 1959, offers financial services to private and corporate customers who purchase or lease vehicles, mainly through Volvo dealers in Sweden. In addition to car and truck financing (69% and 9% of lending, respectively), the bank provides fleet financing solutions (18% of lending) and credit card services (5% of lending). The bank's car-orientated franchise is underpinned by its widely recognised brand name and a leading market share in the car-financing segment in Sweden. Detailed credit considerations The financial data in the following sections are sourced from Volvofinans' financial statements unless otherwise stated. Established market presence and franchise in Sweden The bank's business model is built upon a relationship with Volvo car- and truck-dealers who act as a distribution network for the bank. At end-217, the Swedish network of Volvo dealers comprised 54 dealerships and 24 sales outlets. During 217, Volvofinans financed around 5% of sales of new cars by Volvo dealers in Sweden and of new Volvo trucks (excluding sales through Volvo Truck Centre). Volvo Cars sold over 75, cars in the Swedish market in 217, with its passenger car sales increasing by 16.5% and the brand accounting for 22% of market share in H The Volvofinans bank franchise has been strengthened in recent years because Volvo dealers have been selling other car brands, in addition to Volvo and Renault, since 27. Despite the association with the Volvo name and brand, a material proportion of the earnings of the bank stem from sales of non-volvo cars. Volvofinans is 5/5 jointly owned by Swedish Volvo dealers and the car manufacturer Volvo, following the sale of Sixth AP Fund s shares back to Volvo in August 216. Asset quality is good although the bank's loan book is highly concentrated in the auto sector Volvofinans' problem loans ratio is consistently below 1% and this is very low considering that the bank is almost exclusively focused on vehicle-related financing. We expect loan losses to remain at current low levels supported by the low interest environment which benefits the non-guaranteed part of the lending activities, namely the consumer finance business (Volvo Card) and the fleet finance business. 4 October 218

4 The bank mitigates credit risks through recourse agreements that oblige the originating dealerships to cover the losses that arise from financing. In addition, Volvo dealers are also obliged to buy back problem loans from the bank. These recourse agreements benefit approximately 75% of the lending book ( sales finance cars and sales finance trucks ). This means that in reality the bank will recognise a loss only if (1) the end customer suspends payments, (2) the dealership is unable to service the missed customer payments, and () the market value of the vehicle is less than the residual value of the loan. As a result of this guarantee, Volvofinans exhibited loan losses that are much lower than peers in recent years and the bank recorded loan loss charges equivalent to only basis points of gross outstanding loans as of June 218. Given its business model, Volvofinans concentration on the auto sector is very high compared with sector concentrations of other Swedish banks. In addition, the bank's distribution network consists of a relatively small number of dealers. Hence the bank's financial performance is to a greater extent correlated with the performance of the Swedish auto industry than many other Swedish banks. Although the bank's credit card business adds some diversification, card lending volumes remain low at around 5% of total lending as of H1 218, and form the bank's main source of loan losses, as these loans are not backed by collateral. Nonetheless, overall we consider car financing to be significantly more risky compared to, for example, residential mortgage lending. To reflect this we introduce a negative adjustment to the asset risk score in the scorecard. High capital position which we see as adequate given the risk profile of the bank As of June 218 Volvofinans reported a 17.59% Common Equity Tier 1 ratio (CET1) and 19.6% total capital ratio (on a fully loaded basis), a reduction from 19.98% at year-end 217 for both CET1 and total capital ratio. Although the CET1 has dropped by more than 2% due to an extra dividend, capital levels are well above the regulatory requirements of CET1 of 1.5% and total capital adequacy ratio of 14.7% The issuance of a SEK4 million Tier 2 instrument during the second quarter 218 enabled the bank to pay an extra dividend payment of SEK 479 million while keeping the headroom above capital requirements at a good level. The dividend resulted in lower tangible common equity over risk weighted assets (TCE/RWA) at 18.8%, down from 21.4% at year-end 217, lowering the macro adjusted capital score to aa2 from aa1 in the scorecard. Volvofinans retains a strong leverage ratio, with tangible common equity to total assets at 8.41%, down from 9.66% at year-end 217, which compares favourably with the large Swedish banks where the ratio is much lower, with ranges of 4% to 6%. The assigned capital score remains at a1, reflecting the adequate capitalisation given the risk profile of the bank. Exhibit Capitalisation and minimum CET1 requirement as of June 218 CET1 Minimum capital requirement Capital conservation buffer Countercyclical capital buffer 25% 21.9% 21.8% 21.% 2.6% 2% 17.6% 15% 1% 2% 2.5% 5% 4.5% % YE 214 YE 215 YE 216 YE 217 Jun8 Source: Company reports and Moody's Investors Service The bulk of the bank's equity is located in an untaxed reserve on the balance sheet. This balance sheet entry increases as a result of accelerated depreciation that, in turn, reduces the bank's tax bill. Untaxed reserves essentially consist of profits that have not yet been taxed. In Moody's adjusted capital, we deduct taxes from the untaxed reserves and treat the net balance as equity. 4 4 October 218

5 Profitability is stable Volvofinans has a track-record of stable financial performance, which in our view is a reflection of the leading market presence of Volvo cars in Sweden and their status as a household name. The bank's diversified product offering related to owning and using cars, as well as the credit card and truck financing products, also contributes positively to profitability. In addition, profitability has been supported by strong car financing volumes while net interest margins remain relatively insensitive to the low interest environment. Net income as a proportion of tangible assets has remained strong in recent years, reaching.78% during 217 a slight decline from.8% in 216. During the first half of 218 the same ratio was 1.5%. Volvofinans' earnings structure benefits from very low credit losses, with one of the lowest ratios of loan loss provisions to preprovision income among the rated Swedish banks, which is supported by the loan recourse agreements with the Volvo dealers. However, in return for bearing the credit risk arising from lending, Volvo dealers receive a proportion of income, reducing the overall profitability of the bank. Nevertheless, the bank maintains good efficiency, as illustrated by a Moody's adjusted cost-to-income ratio of 44% in 217 and 46% in 216. Wholesale funding remains high, although the deposit base is growing Volvofinans remains dependent on wholesale funding because although the volumes of deposits is growing, lending is growing at a faster pace. Gross loans to deposits have increased in recent years to 219% at year-end 217 from 22% at year-end 216 and 191% at year-end 215. The bank's deposit base accounted for 44% of total liabilities as of June 218 (see Exhibit ). Volvofinans does not offer as a wide range of financial services as larger Swedish banks and that could prompt some customers to switch their deposits away from Volvofinans. However, Volvofinans has not suffered from significant deposit outflows to-date and it is probable that the customer base is more loyal than for other online banking platforms, due to loyalty to the Volvo brand. Exhibit 4 Volvofinans remains dependent on wholesale funding Funding sources % total liabilities (June 218) Credit Institutions 5% Other Liabilities 7% Deposits 44% Issued Securities 44% Source: Volvofinans reports, Moody's Investors Service. As a small Swedish bank, we believe Volvofinans debt investor base is considerably more limited than at larger Swedish banks that issue debt in multiple currencies, geographies and to a diverse investor base. The lack of such a deep investor community places Volvofinans at a disadvantage to those banks if markets were to dry up. Funding risk is mitigated because the bank maintains a liquidity portfolio which is of high quality. Volvofinans can also draw on a total of SEK4. billion (compared to SEK16.7 billion of issued debt at 217) from credit facilities with well-known institutions. In addition, much of the bank's lending is car-related and has a shorter-term nature compared with banks that focus on mortgage lending, for example. Monoline business model and concentration of exposures towards consumer and auto finance constrain BCA We adjust Volvofinans Bank's baa1 financial profile downward by one notch, to reflect the bank s concentration of exposures towards consumer and auto finance in Sweden, thus considered a monoline and rendering it exposed to the cycles within the auto industry, similarly to other auto banks. 5 4 October 218

6 Support and structural considerations Loss given failure We apply our advance loss-given-failure analysis on Volvofinans as the bank is subject to the EU Bank Recovery and Resolution Directive (BRRD), which we consider to be an Operational Resolution Regime. For this analysis we assume that equity and losses stand at % and 8%, respectively, of tangible banking assets in a failure scenario. We also assume a 25% run-off of junior wholesale deposits and a 5% run-off in preferred deposits. Moreover, we assign a 25% probability to junior deposits being preferred to senior unsecured debt. These are in line with our standard assumptions. We believe that Volvofinans's deposits are likely to face very low loss-given-failure, due to the loss absorption provided by unsecured debt (should deposits be treated preferentially in a resolution). In addition, the bank has a large deposit base, meaning that any losses would be spread over a large base, thus translating into very low losses for the individual depositor. The bank's long-term deposit ratings consequently receive a two-notch uplift to A. The subordinated debt's loss absorbing features in the case of failure, being subordinated to senior obligations, indicates a negative one notch from the adjusted BCA according to Moody's Advanced LGF, resulting in a Baa rating. Government support Volvofinans's ratings do not benefit from government support. Counterparty Risk Ratings (CRR) Counterparty Risk Ratings are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions. The CRR for Bank Volvofinans is positioned at A2/Prime Counterparty risk assessment CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than the likelihood of default and the expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. Volvofinans' CR assessment is positioned at A2(cr/P(cr) reflecting the high volumes of subordinated liabilities, indicating a three notch uplift above the adjusted BCA. About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 6 4 October 218

7 Rating methodology and scorecard factors Exhibit 5 Volvofinans Bank AB Macro Factors Weighted Macro Profile Strong + Factor Historic Ratio Initial Score Expected Trend Assigned Score Key driver #1 Solvency Asset Risk Problem Loans / Gross Loans.% aa1 a1 Sector concentration Capital TCE / RWA 18.8% aa2 a1 Stress capital resilience Profitability Net Income / Tangible Assets.9% baa1 baa1 Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 4.7% Liquid Resources Liquid Banking Assets / Tangible Banking Assets 9.7% b1 ba2 Deposit quality ba2 ba2 Stock of liquid assets ba ba2 baa1 Aaa baa1-baa baa2 baa2 Balance Sheet in-scope (SEK million) 8,1 17,192 12,722 4,47 16,7 4 1,18 4,941 % in-scope 4 October 218 Key driver #2 a2 aa Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 7 1% 19.% 9.1% 29.% 1.2% 8.%.9%.% 1% at-failure (SEK million) 1,84 15,48 12,86,52 16,7 4 1,18 4,941 % at-failure 22.9% 5.1% 27.5% 7.6% 8.%.9%.% 1%

8 Debt class Counterparty Risk Rating Counterparty Risk Assessment Deposits Dated subordinated bank debt Instrument class Counterparty Risk Rating Counterparty Risk Assessment Deposits Dated subordinated bank debt De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA a2 a2 (cr).9% 41.9% a.9%.%.9%.% baa Loss Given Failure notching 2 Additional Preliminary Rating Notching Assessment a2 a2 (cr) a baa Government Support notching Local Currency Rating A2 A2 (cr) A Baa Foreign Currency Rating A2 -A -- [1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. Source: Moody's Financial Metrics Ratings Exhibit 6 Category VOLVOFINANS BANK AB Outlook Counterparty Risk Rating Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Subordinate -Dom Curr Moody's Rating Stable A2/P A/P-2 baa2 baa2 A2(cr)/P(cr) Baa Source: Moody's Investors Service 8 4 October 218

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10 CLIENT SERVICES 1 Americas Asia Pacific Japan EMEA October 218