CREDIT OPINION 4 April 218 Volvofinans Bank AB Update following rating action 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). Volvofinans Bank AB Domicile Sweden 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 Niclas Boheman +46.8.525.6561 AVP-Analyst niclas.boheman@moodys.com Malika Takhtayeva +44.2.7772.8662 Associate Analyst malika.takhtayeva@moodys.com Sean Marion +44.2.7772.156 MD-Financial Institutions sean.marion@moodys.com 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 Ba2, 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 three notches above Volvo's Ba2 rating. Exhibit 1 Rating Scorecard - Key Financial Ratio Volvofinans (BCA: baa2) 5% 45% 2% 4% 5% 15% % 25% 1% 2% 15% 5% 1%.% 21.4% % CLIENT SERVICES Americas 1-212-5565 Asia Pacific 852-551-77 Japan 81--548-41 EMEA 44-2-7772-5454 Median baa2-rated banks 25% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Source: Moody's Financial Metrics.8% 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 +44.2.7772.565 Tremblay Associate Managing Director jean-francois.tremblay@moodys.com 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. Solvency Factors RATINGS
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 www.moodys.com for the most updated credit rating action information and rating history. 2 4 April 218
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 (%) 1272 1262 1252 1242 4,649 4,15 4,965,926 99 479.2 21.4 2.1 1.4 2.8.8 44.2 4.7 9.7 219.4 5,474,72,95,691 85 46. 22.4 2.8 1. 2.6.8 46.2 8.8 8. 22.4 2,1,494,796,445 76 49.4 2. 2.9 1. 2.7.9 45.6 7.1 12.2 191.2 29,299,9,74,421 61 47.6 24.8 4.5 1.2 2..9 48.2.6 12.9 18.6 12 CAGR/Avg.4 29,86,74 4,65,76 81 526.7 21.1 4.8 1. 1.7.7 52.9. 17.2 168.2 8.5 5.25 1.75.85 1.15-2.5.56 22.97.46 1.6 2.67.86 47.46 7.26 12.16 192.46 [1] All figures and ratios are adjusted using Moody's standard adjustments [2] 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 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 (67% 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 6% and the brand accounting for 2% of market share. 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 April 218
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 74% 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 5 basis points of gross outstanding loans as of 217. 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 217, 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 At end 217 Volvofinans reported a 2.6% Tier 1 ratio and total capital ratio (on a fully loaded basis, including the pillar 2 requirements), well above the regulatory requirements of 1.5% and 14.75% respectively. In addition, Volvofinans has a good leverage ratio, with tangible common equity to total assets at around 1%, which compares favourably with the large Swedish banks where the ratio is much lower in the range of 4-6%. Exhibit Capitalisation and minimum CET1 requirement as of 1 December 217 25% CET1 Minimum capital requirement Capital conservation buffer 21.9% Countercyclical capital buffer 21.8% 21.% 2.6% 2% 15% 1% 2% 2.5% 5% 4.5% % YE 214 YE 215 YE 216 YE 217 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. We expect that the issuance of the SEK 4 Tier 2 bond will give Volvofinans headroom for an extra dividend payment. Such a payout would lower tangible common equity over risk weighted assets (TCE/RWA), but from a very high level. If the payout is equivalent to the recent issuance, TCE/RWA will drop approximately 2 percentage points. 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 that remain relatively insensitive to the situation of interest rates. Net income as a proportion of tangible assets has improved continuously in the last four years, reaching.8% during 217, in line with 216. 4 4 April 218
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 cost-to-income ratio of 44% during 217, only marginally lower compared to 216. Wholesale funding remains high, although the deposit base is growing Volvofinans is becoming increasingly deposit funded. The bank's deposit base accounted for 45% of total liabilities as of 217 (see Exhibit ), compared to 19% at year-end 211. We consider the shift towards deposit funding positive because we think that deposit funding tends to be more stable than wholesale debt funding, as the bank is less exposed to shifts in investor sentiment. The above said, Volvofinans does not offer as a wide range of financial services as larger Swedish banks and that could prompt some customers to easily switch their deposits away from Volvofinans. However, Volvofinans has not suffered from significant deposit outflows to-date. Exhibit 4 Volvofinans increasingly funds itself with deposits Funding sources % total liabilities (217) Other Liabilities 6% Deposits 45% Issued Securities 4% Credit Institutions 6% 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 SEK15.6 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. 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. 5 4 April 218
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 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 April 218
Rating methodology and scorecard factors Exhibit 5 Volvofinans Bank AB Macro Factors Weighted Macro Profile Strong + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Solvency Asset Risk Problem Loans / Gross Loans.% aa1 a1 Sector concentration Capital TCE / RWA 21.4% aa1 a1 Stress capital resilience Profitability Net Income / Tangible Assets.8% 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 aa2 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) 8,652 16,14 14,41 1,61 14,746 1,219 4,61 % in-scope 4 April 218 Key driver #2 a2 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 Equity Total Tangible Banking Assets 7 1% 21.% 9.4% 5.5%.9% 6.%.% 1% at-failure (SEK million) 9,77 14,89 1,692 1,21 14,746 1,219 4,61 % at-failure 24.1% 6.7%.7%.% 6.%.% 1%
Debt class Counterparty Risk Assessment Deposits Dated subordinated bank debt Instrument class 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 (cr).% 9.% 2 2 2 a.%.%.%.% baa Loss Given Failure notching 2 Additional Preliminary Rating Notching Assessment a2 (cr) a baa Government Support notching Local Currency Rating A2 (cr) A Baa Foreign Currency Rating -A -- Source: Moody's Financial Metrics Ratings Exhibit 6 Category VOLVOFINANS BANK AB Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Subordinate -Dom Curr Moody's Rating Stable A/P-2 baa2 baa2 A2(cr)/P(cr) Baa Source: Moody's Investors Service 8 4 April 218
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CLIENT SERVICES 1 Americas 1-212-5565 Asia Pacific 852-551-77 Japan 81--548-41 EMEA 44-2-7772-5454 4 April 218