Santander Consumer Bank AS

Transcription

1 CREDIT OPINION 9 May 17 Santander Consumer Bank AS Semiannual update Update Summary Rating Rationale RATINGS Santander Consumer Bank AS Domicile Norway Long Term Debt Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit 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. Analyst Contacts Guillaume Lucien-5-5 Baugas VP-Senior Analyst guillaume.lucien-baugas@moodys.com Effie Tsotsani Analyst effie.tsotsani@moodys.com Jean-Francois Tremblay Associate Managing Director jean-francois.tremblay@moodys.com Sean Marion MD-Financial Institutions sean.marion@moodys.com Santander Consumer Bank AS's (SCB) deposit and issuer ratings of /Prime- reflect (1) the bank's baseline credit assessment (BCA) of baa; () our assumption of a high probability of affiliate support from its parent Santander Consumer Finance S.A. (Santander CF; deposits and debt / stable; BCA baa), leading to an adjusted BCA of baa; () a two-notch uplift from our Advanced Loss Given Failure (LGF) analysis. SCB's Counterparty Risk (CR) assessment is A(cr)/Prime(cr). SCB's standalone BCA of baa reflects its strong positioning as one of the Nordics leading consumer finance lenders as well as its overall sound credit-risk profile, with strong capitalisation and resilient profitability. The bank's standalone BCA also reflects its high, albeit declining, reliance on wholesale funding and the restrictions of its monoline focus. SCB is the fully-owned subsidiary of Santander CF operating in the Nordic region of Europe. SCB provides secured auto financing (around 7% of lending at end-march 17) and unsecured consumer loans and credit cards (around %) in Norway, where the bank is headquartered, Sweden, Denmark and Finland. The bank also collects online retail deposits in these countries, apart from Finland. In 14, it acquired GE Money Bank AB, with a business focus on unsecured consumer loans and credit cards in the Nordic countries. Exhibit 1 Rating Scorecard - Key Financial Ratios Santander Consumer Bank AS (BCA: baa) 18% 16% 14% 1% 1% 8% 6% 4% % % Median baa-rated banks 6% 5% 4% % %.1% Asset Risk: Problem Loans/ Gross Loans 15.5% 1.9% 54.% 8.5% % Profitability: Net Funding Structure: Liquid Resources: Liquid Capital: Banking Assets/Tangible Market Funds/ Tangible Tangible Common Income/ Banking Assets Tangible Banking Assets Assets Equity/Risk-Weighted Assets Solvency Factors (LHS) Source: Moody's Financial Metrics 1% Liquidity Factors (RHS)

2 Credit Strengths SCB s BCA supported by its Very Strong- Macro Profile Moderate asset risks despite increase in unsecured consumer lending Adequate post-merger capital levels benefiting from ongoing support from the parent Strong and resilient profitability Credit Challenges Negative pressure on profitability from the low interest rate environment High reliance on wholesale funding, mitigated by presence of parent Rating Outlook The outlooks on SCB s deposit and issuer ratings are currently stable Factors that Could Lead to an Upgrade Although unlikely at present, an upgrade of SCB s BCA could occur if the bank s capital position was strengthened and credit risk trends improved, while maintaining satisfactory levels of profitability and reducing reliance on confidence-sensitive market funding. An upgrade of SCB s BCA would likely result in a similar upgrade of the bank s deposit and issuer ratings. A larger cushion of liabilities eligible for a bail-in, resulting in a lower loss-given-failure for deposits and debt, could also lead to an upgrade of the deposit and issuer ratings. Factors that Could Lead to a Downgrade A deterioration of asset quality, which could for instance be triggered by further weakening of Norway s macro-economic growth prospects or by a lower performance of unsecured consumer credit in SCB s portfolio; A significant deterioration in profitability, which could be caused by net interest margin pressures due to the prolonged low interest rate environment A deterioration of the bank s funding and liquidity characteristics A smaller cushion of liabilities eligible for a bail-in, resulting in a higher loss-given-failure for deposits and debt. A downgrade of SCB s BCA would likely result in a similar downgrade of the bank s long-term deposit and issuer ratings. 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. 9 May 17

3 Key Indicators Exhibit Santander Consumer Bank AS (Consolidated Financials) [1] Total Assets (NOK billion) Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (NOK billion) 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 (%) CAGR/Avg ,69 16, ,687 1, ,71 16, ,76 1, ,11 15, ,477 1, ,69 1, , ,715 1, , [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [] Basel II; IFRS [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics Detailed Rating Considerations SCB'S BCA IS SUPPORTED BY ITS VERY STRONG- MACRO PROFILE SCB benefits from operating in countries which have an overall Macro Profile of Very Strong- based on its loan portfolio distribution on a weighted average basis. Norway, which we assess as Very Strong- accounted for 4% of total loans at end-march 17, Sweden (Very Strong-) for 4%, Denmark (Strong+) for % and Finland (Strong+) for 16%. MODERATE ASSET RISKS DESPITE INCREASE IN UNSECURED CONSUMER LENDING We consider that asset risks are moderate as illustrated by a strong track record of low defaults in the bank s portfolio of consumer loans in the Nordic region of Europe. SCB s main products are auto loans, which are secured with the vehicles, and unsecured consumer loans, including credit cards. SCB's loan book is split between secured car financing (around 7% of total loans) and unsecured direct loans, credit cards and sales finance (around %). The bank takes deposits which it gathers with online facilities in its main locations, excluding Finland. In November 14, the bank acquired GE Money Bank s Nordic operations and strengthened its market position on credit cards and unsecured consumer loans. As a result of rapid expansion, both through internal growth and through the merger with GE Money Bank Nordics, SCB currently benefits from leading market shares in the region. The bank s loan book grew by 9% in 15, 59% of this growth being derived from the GE merger. The acquired loan book from Santander Consumer Bank AB, ex-ge Money Bank, was NOK18.8 billion, versus a net loan book prior merger of NOK85.1 billion. During the course of 16 the bank's loan book growth rate declined to a normalised level after the previous peak driven by the merger. At end-march 17 the loan book increased by 9% year-on year (% from year-end 16). At end-march 17, Norway was the main contributor to SCB's loan portfolio (accounting for 4% of total lending), followed by Sweden (4%), Denmark (%) and Finland (16%). 9 May 17

4 Exhibit Norway is the main contributor to SCB's loan portfolio Loan split by Geography as of end-march 17 Denmark % Norway 4% Finland 16% Sweden 4% Source: Company reports Problem loans continued to improve reaching.6% of gross loans at end-march 17 (from.7% at year-end 16 and.1% at year-end 15), following the integration of GE Money Bank's activities and lending standards on par with Santander CF's practices. Going forward, the higher proportion of senior unsecured loans and credit cards in the bank's business mix, caused by the acquisition of GE Money Bank in the Nordics, could place a moderate degree of pressure on asset quality. Nonetheless, we expect that the integration should help improve lending standards and do not expect any asset quality deterioration to be significant in this regard. The high level of provision reserves covering problem loans (18% at end-march 17) places additional comfort on the bank s solvency. Exhibit 4 Asset quality metrics remains slightly under pressure on the back of a weakening domestic growth in Norway Problem Loans % Gross Loans.5%.1%.7%.6% Q1 17.% 1.66% 1.5% 1.5% 1.%.5%.% 1 14 Source: Moody's Banking Financial Metrics Our assigned asset risk score of baa1 reflects asset risks which remain moderate but are subject to caution due to the strong loan growth witnessed by the bank. ADEQUATE POST-MERGER CAPITAL LEVELS BENEFITING FROM ONGOING SUPPORT FROM THE PARENT We assess SCB s capitalisation as adequate for the risks undertaken by the bank in the field of auto finance secured lending and unsecured consumer lending. The bank s common equity tier one (CET1) ratio was 14.94% at end-march 17 (15.67% at year-end 16) following a NOK1. billion payment to Santander Consumer Finance S.A. The bank's CET1 ratio is well above the minimum regulatory requirement of 1.% set by the FSA (including a 1.% bank specific counter cyclical buffer and a Pilar requirement of.%). 4 9 May 17

5 The bank reported a leverage ratio of 1.6% at end-march 17, well above the 5% requirement applicable from July 17. At the end of the first quarter, Tangible Common Equity/Tangible Assets was 1.75% (Moody's leverage definition). In 15, Santander Consumer Finance S.A. injected NOK1.1 billion of capital in the bank, a good reflection of the on-going support from the parent to its Nordic consumer finance subsidiary. In addition, the bank had NOK.5 billion of additional tier one (AT1) securities and NOK1.8 billion of tier subordinated debt as of end-march 17, bringing the Tier 1 ratio to 17.% and the total capital ratio to 18.55% at this date. Our assigned capital score of a1 reflects the adequate capitalisation of the bank. STRONG AND RESILIENT PROFITABILITY DRIVEN BY IMPROVING CORE INCOME DESPITE PRESSURE FROM THE LOW INTEREST RATE ENVIRONMENT SCB has exhibited a relatively strong and resilient profitability over time, with net income increasing to 1.85% of tangible assets during the first three months of 17 (compared to 1.1% of tangible assets on average in the last three years). The improvement in profitability in the first three months of 17 has been mainly driven by a decline in loan losses to NOK.1 billion (6% decrease year-on-year) and an increase in net fee income to NOK.1 billion (19% increase year-on-year). Net interest income remained stable during the first quarter at NOK1.5 billion (compared to the same period last year). Going forward, we expect profitability to remain resilient, despite the negative pressure on net interest margins due to the low interest rate environment. Exhibit 5 SCB's Profitability Metrics Evolution Profitability remains resilient over time with improving core earnings Net Income/Tangible Assets Net Interest Margin 5.% 4.6% 4.5% 4.% 4.5% 4.4% 4.% 4.%.5%.%.5%.% 1.5% 1.9% 1.6% 1.% 1.1% 1.% 1.%.5%.% Q1 17 Source: Moody's Banking Financial Metrics The bank s profit before tax increased to NOK.87 billion in the first three months of 17 from NOK.7 billion in the same period last year, mainly due to lower provision charges, lower funding costs and increased commission income. The cost-to-income ratio was 4% at end-march 17 compared to 9.8% as of year-end 16. Our profitability score of a includes two notches of negative adjustment, because of the negative pressures on net interest margins due to the low interest rate environment and the weakening domestic growth in Norway which could cause an uptick in cost of risk in this country. HIGH RELIANCE ON WHOLESALE FUNDING, MITIGATED BY PRESENCE OF PARENT SCB is largely reliant on the wholesale financial markets for its funding, although this is mitigated by the on-going funding support of its parents SCF and Santander Group and by the development of funding through online retail deposits. In addition, we view positively the bank's strategy to increase its independence from parent funding. As of year-end 16, SCB relied directly on its parent Santander CF for % of its funding, the remainder being made of online retail deposits (5%), securitisation (1%) and unsecured bonds (%). The unsecured bonds are guaranteed by affiliated entities for senior debt or subscribed by the parent for subordinated and additional tier one (AT1) securities. 5 9 May 17

6 SCB s funding strategy is to increase funding independence (direct parental funding was % as of year-end 16, although self funding by SCB was also partly guaranteed or subscribed by the parent) with a particular focus on expanding deposits and nonguaranteed senior unsecured funding. At end-march 17, deposits increased in Norway, Sweden and Denmark, increasing by 1% to NOK4.8 billion compared to year-end 16. As of end of March 17, the bank issued 5 million of senior unsecured bonds in the Euro-market, SEK4 million senior unsecured bonds in the Swedish market and NOK, million senior unsecured bonds in the Norwegian market. The bank has to lower its use of securitisation as part of its funding strategy, as Norwegian legislation has changed and no longer allows for this funding source. The bank will continue to do securitisation in locations outside of Norway. Nonetheless, the bank anticipates to increase the size of its deposit funding and to issue senior unsecured debt (without any guarantee from the parent). Santander CF s presence offers funding security in case resources directly obtained by SCB were to prove insufficient. The bank s high reliance on wholesale funding brings us to assign a b funding structure score, illustrating that funding characteristics are a relative weakness for the overall credit profile of the bank. We consider that SCB s liquidity profile is adequate, albeit on-balance sheet liquidity is relatively modest, as the bank runs negative liquidity gaps on maturities below one year. However, we note an improvement in the bank's reported liquidity coverage ratio (LCR) which increased to 11% as of end-march (119% as of year-end 16), in compliance with the regulatory minimum of 8% by yearend, and already above the fully-loaded minimum of 1% by year-end 17. The bank aims at progressively building its liquidity reserves on balance sheet and this ratio should progressively improve as a result, as per regulatory requirement. The bank has also currently access to considerable liquidity in the form of multicurrency drawdown facilities from Santander CF and Santander Group. QUALITATIVE ADJUSTMENT The unadjusted financial profile is baa, which reflects the relatively strong set of financial ratios of the bank. As for other specialised consumer finance lenders, we adjust this score by one notch down for the lack of business diversification, as the bank is only involved in auto financing and consumer lending. Notching Considerations Affiliate Support We consider there is a high probability that Santander CF would extend extraordinary support to SCB in case of need. This assumption is reflected in a one-notch uplift from the bank's BCA, resulting in an adjusted BCA of baa. Support from Santander CF is illustrated by its high degree of involvement in the strategy and management of SCB's operations. Santander CF also provides, guarantees or subscribes to a portion of SCB's funding and debt issuance. Loss Given Failure Norway is in the process of transposing the EU Bank Resolution and Recovery Directive (BRRD) into local legislation and as such we consider the country an Operational Resolution Regime. In accordance with our methodology we therefore apply our Advanced LGF analysis, considering the risks faced by different debt and deposit classes across the liability structure should the bank enter resolution. 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 5% run-off of junior wholesale deposits and a 5% run-off in preferred deposits. We assume of 1% proportion of deposits considered junior. Moreover, we assign a 5% probability to junior deposits being preferred to senior unsecured debt. These are in line with our standard assumptions. Our LGF analysis indicates a very low loss-given-failure for deposits and senior unsecured debt due to the loss absorption provided by the significant amount of senior unsecured debt and the subordination provided by subordinated debt and AT1 securities, leading us to position SCB's Preliminary Rating Assessment two notches above the adjusted BCA. Government Support We expect only a low probability of government support for deposits and senior debt issued by SCB, resulting in no rating uplift. Counterparty Risk Assessments We assign long-term and short-term CR assessments of A(cr) and P(cr) respectively. 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 () apply 6 9 May 17

7 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. 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. 7 9 May 17

8 Rating Methodology and Scorecard Factors Exhibit 6 Santander Consumer Bank AS Macro Factors Weighted Macro Profile Very Strong - Factor Solvency Asset Risk Problem Loans / Gross Loans Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver #.1% a1 baa1 Sector concentration Loan growth Capital TCE / RWA 15.5% aa a1 Risk-weighted capitalisation Expected trend Profitability Net Income / Tangible Assets 1.4% a1 a Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 55.% b b Expected trend Liquid Resources Liquid Banking Assets / Tangible Banking Assets 1.5% baa baa Expected trend aa a 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 ba Balance Sheet in-scope (NOK million) 58,449 4,885 9,497 4,89,971 1,1,5 4,95 14,15 Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Preference shares (bank) Equity Total Tangible Banking Assets 8 1% 9 May 17 ba baa Aaa baa-ba1 baa 1 baa % in-scope 4.8%.7% 7.6%.1%.%.9% 1.6%.% 1% at-failure (NOK million) 61,5 4,81 7,5,91,971 1,1,5 4,95 14,15 % at-failure 4.% 8.5% 6.%.%.%.9% 1.6%.% 1%

9 Debt class Counterparty Risk Assessment Deposits Senior unsecured bank debt Dated subordinated bank debt Instrument class 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 versus Subordination Subordination BCA.8%.8%.8%.8% a (cr).8% 5.5%.8% 8.5% a.8% 5.5% 8.5% 5.5% a 5.5% 4.6% 5.5% 4.6% baa Loss Given Failure notching Counterparty Risk Assessment Deposits Senior unsecured bank debt Dated subordinated bank debt Additional Preliminary Rating Notching Assessment a (cr) a a baa Government Support notching Local Currency Rating A (cr) -- Foreign Currency Rating - Baa Source: Moody's Financial Metrics Ratings Exhibit 7 Category SANTANDER CONSUMER BANK AS Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured Subordinate MTN ST Issuer Rating Moody's Rating Stable /P- baa baa A(cr)/P(cr) (P)Baa P- PARENT: SANTANDER CONSUMER FINANCE S.A. Outlook Bank Deposits -Dom Curr Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured Subordinate MTN -Dom Curr Commercial Paper -Dom Curr Stable /P- baa baa1 (cr)/p-(cr) (P)Baa P- Source: Moody's Investors Service 9 9 May 17

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11 Analyst Contacts Maria Asensio Associate Analyst 11 9 May 17 CLIENT SERVICES Americas Asia Pacific Japan EMEA