CREDIT OPINION 19 June 17 FCA Bank S.p.A. Periodic Update Update Summary Rating Rationale The A deposit rating and issuer rating of FCA Bank S.p.A., a joint venture between car manufacture Fiat Chrysler Automobiles (FCA) and banking Groupe Credit Agricole, take into account the bank s standalone creditworthiness, its linkages with the carmaker Fiat Chrysler Automobiles N.V., affiliate support coming from Groupe Credit Agricole, extremely low and very low loss-given-failure respectively, and low probability of government support. RATINGS FCA Bank S.p.A. Domicile Italy Long Term Deposit A Type LT Bank Deposits - Fgn Curr Outlook Negative 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. FCA Bank's standalone baseline credit assessment (BCA) of ba is underpinned by the bank's sound solvency profile, with a low level of problem loans, adequate capital, and satisfactory profitability. The BCA is constrained by the bank's commercial dependence on the FCA group. Our expectation of a high probability of support from Credit Agricole results in a ba adjusted BCA, two notches above the standalone BCA. Exhibit 1 Rating Scorecard - Key Financial Ratios FCA Bank S.p.A. (BCA: ba) Median ba-rated banks 1% Contacts 8% 6% 5% 6% 4% 4% % % % 1.9% 11.% 1.% 8.% 6.5% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets % Alain Laurin -1-5-159 Associate Managing Director alain.laurin@moodys.com -1-5-19 7% 8% 1% % Solvency Factors (LHS) Source: Moody's Financial Metrics Credit Strengths Low stock of problem loans Adequate capital Satisfactory profitability Strong macro profile in the EU Liquidity Factors (RHS) Liquidity Factors Valentino Balletta 44--777-1744 Associate Analyst valentino.balletta@moodys.com Solvency Factors 1% Edoardo Calandro 44--777-197 AVP-Analyst edoardo.calandro@moodys.com Nick Hill MD-Banking nick.hill@moodys.com 9%
Credit Challenges Monoline business model Commercial dependence on FCA is a constraint for the BCA Wholesale funding profile Rating Outlook The outlook on FCA Bank s A deposit rating is negative, reflecting pressure on the Italian government s Baa ratings, which has been assigned a negative outlook on 7 December 16. In accordance with Moody s bank methodology, deposit ratings are typically constrained by a two-notch cap above the sovereign bond rating, reflecting our view that the expected loss of rated bank instruments is unlikely to be significantly below that of the sovereign s own debt. The outlook on FCA Bank s issuer rating is stable, reflecting our expectation that the credit profile of the bank will remain resilient over the next 1-18 months, and that the volume and subordination of senior unsecured debt will remain broadly in line with our current loss-given-failure assumptions. Factors that Could Lead to an Upgrade FCA Bank s BCA is currently constrained by the carmaker s B Corporate Family Rating given the linkages between the carmaker and its finance captive ; we consider that the difference between the FCA Bank's BCA and the carmaker's senior debt should not exceed one notch. An upgrade of FCA would therefore likely lead to an upgrade of the bank s BCA as the bank's BCA is currently constrained by the one notch difference. We could also upgrade the bank s issuer rating in response to significantly increasing subordinated debt, which would enhance the protection available to senior creditors. Factors that Could Lead to a Downgrade We could downgrade the bank s BCA as a result of a deterioration in FCA's creditworthiness or a weakening of FCA Bank's solvency profile. In addition to a lower BCA, we could also downgrade the bank's deposit rating following a downgrade of Italy's sovereign ratings or following any reduction in the probability of support from Groupe Credit Agricole, for example through the termination of the jointventure agreement. The issuer rating could be downgraded following any reduction in the probability of support from the French parent, for example through the termination of the joint-venture agreement. 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. 19 June 17
Key Indicators Exhibit FCA Bank S.p.A. (Consolidated Financials) [1] Total Assets (EUR million) Total Assets (USD 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 (%) 1-16 1-15 1-14 1-1,84 4,558 1,991,1 1.6 11. 1.1.7.8 1.4 5.1 8. 6.5,684.7 19,59 1,19 1,817 1,974 1.9 11.1 14.4.8 1. 51.8 8.9 7.,467. 16,94,491 1,661,1. 16.6.6 1. 54. 8.6 4.6 8,5. 16,56,8 1,58,18.8.7.6 1.1 56.9 84.9 4.7 16,57.8 1-1 CAGR/Avg.4 15,74,754 1,45 1,916.5 6..8 1.1 57.7 85.7.5 5,916. 1.5 4.5 8.5.5.46 11.17 18.6.76.87 1.6 54.56 84.16 5.6 11,74.86 [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 Low stock of problem loans We consider FCA Bank s solvency profile as sound, assigning a score of. FCA Bank s asset risk is low (score a, in line with macro-adjusted score), with problem loans1 accounting for just 1.9% of gross loans. The low level of problem loans reflects the low risk of FCA Bank's activities compared with traditional banking business; cars are of critical importance for most consumers who are eager to repay their car loans with priority over other debts ; collateral (cars) are easier to repossess and sell compared with real estate collateral. Adequate capital and satisfactory profitability We view FCA Bank s Tangible Common Equity of 11.% of risk-weighted assets in December 16 as adequate relative to its low risk profile. We score it at baa in line with its macro-adjusted score. Our opinion also takes into account the intention of Credit Agricole to maintain an adequate level of capital; this is laid out in the shareholders agreement, which does not represent an obligation for Credit Agricole yet exposes it to reputational risk in case of breach. FCA Bank has increased its capital ratio since 7 by consistently retaining more than 5% of its profits. The bank s profitability is sound and we score it at, in line with its macro adjusted-score. In December 16 return on tangible assets was 1.%; this is a sound return in the context of Italian banks, but weaker than FCA Bank's main peer RCI Banque (/ stable, ba), which benefits from a better cost efficiency. FCA Bank's net profit has consistently grown since 7 and throughout the years of recession, with the exception of 9 owing to a one-off credit loss in Spain. We believe this trend will continue given our expectations of economic growth in Europe in 16 and 17 (about 1.5% in the Euro area and about 1.5% in the UK), and increasing commercial penetration, a leading indicator of future profitability. In 16 the operating income coming from Italy was around 5% of the group, with the remainder coming from the rest of Europe; the biggest contributor outside of Italy remain the UK and Germany, with around 19% and 1% respectively. 19 June 17
Exhibit Improving profitability but lower than its main peer Net Income / Tangible Assets 1.9%.% 1.8% 1.7% 1.8% 1.6% 1.6% 1.4% 1.% 1.%.9% 1.% 1.4%.9%.8% 1.5% 1.% 1.4%.9%.7%.8%.6%.4%.%.% 11 Volkswagen Bank GmbH, baa 1 1 14 Banque PSA Finance, ba1 15 16 FCA Bank S.p.A., ba Source: Moody's Investors Services Wholesale finding profile and low liquidity FCA Bank is dependent on inherently volatile market funding; we consider funding and liquidity a weakness, and we score it b. Our assigned score is two notches above the macro-adjusted score to take into account some mitigating factors. Contrary to its peers, FCA Bank benefits more from a material amount of parental funding, and it enjoys good diversification. Exhibit 4 Funding Profile ECB 9% Deposits 1% Funding from CASA 14% Securitisations 18% Wholesale unsecured bonds 8% Interbank funding excl CASA % Source: Company's Presentation and Moody's Investors Service FCA Bank was able to tap the wholesale markets under its own name several times over the last three years, reflecting its ability to access alternative funding sources. We expect this to continue, given the current favourable environment in wholesale markets. FCA Bank received a banking license in Italy in January 15, which allows it to access the ECB funding and also take retail deposits. FCA Bank was previously established as a non-bank financial institution, supervised by the Bank of Italy. While we believe that it will take several years for deposits to account for a material share of the bank's resources, we believe that the banking license enhanced funding diversification and liquidity. Similarly to other auto-captive banks, FCA Bank s maturities of assets and liabilities are fully matched and market risks are hedged. FCA Bank reported a strong Liquidity Coverage Ratio (LCR) of 1% as of December 16. 4 19 June 17
Monoline business model and commercial dependence on FCA constrain BCA We adjust downwards by one notch the bank s financial profile (ba) to reflect the bank s monoline business. Nevertheless the BCA is set at b because we cap it one notch above the industrial parent's rating, which we also do for other financial captives. FCA Bank has three main activities: dealer financing (9% of outstanding assets in December 16), retail financing (6%) and longterm rental (8%). FCA Bank s fundamentals are correlated to the trend of the European auto manufacturing industry. In 16, the automotive market in the countries in which FCA Bank operates grew by 6% compared to 15. Car demand was stronger in FCA's home market Italy (+16%), which represents approximately 5% of FCA's passenger car registration in Europe. Given significant commercial dependence on the business success of its parent company FCA, FCA Bank's financial strength is inherently linked to that of FCA. 85% of FCA Bank's loans are linked to FCA brands. FCA Bank s BCA is supported by its macro profile of strong As an auto-captive bank diversified across Europe, FCA Bank benefits from operating in countries which give a macro profile of Strong on a weighted average basis. In particular, UK and Germany which we assess as Very Strong- account for 8% of total loans, France (Strong+) accounts for 8% while Spain (Strong-) accounts for 5%. Italy (Moderate+) 46% and other 1 European Union countries (Strong) 1% as of December 16. Exhibit 5 Strong Macro Profile Source: Moody's Investors Service Notching Considerations Affiliate Support Our expectation of a high probability that Credit Agricole would extend extraordinary support to FCA Bank in case of need drives a two-notch uplift from the bank's ba BCA to an adjusted BCA of ba. This expectation is based on FCA Bank as a strategic subsidiary for Groupe Credit Agricole's European consumer finance business; furthermore, we take comfort from the extension of the jointventure agreement with FCA until 1. Loss Given Failure FCA Bank is subject to the EU Bank Recovery and Resolution Directive (BRRD), which we consider to be an Operational Resolution Regime. Our analysis assumes residual tangible common equity of % and losses post-failure of 8% of tangible banking assets, a 5% 5 19 June 17
run-off in junior wholesale deposits, a 5% run-off in preferred deposits and 6% junior deposits over total deposits. These are in line with our standard assumptions. Furthermore, we take into account the full depositor preference whereby junior deposits are preferred over senior debt creditors in accordance with a law decree introducing full depositor preference in Italy starting from 19. We believe that FCA Bank's deposits are likely to face extremely low loss-given-failure, due to the loss absorption provided by the residual equity that we expect in resolution and senior unsecured debt, as well as the volume of deposits themselves. This is supported by the combination of deposit volume and subordination. This results in an uplift of three notches from the bank s ba Adjusted BCA. We believe that FCAB 's senior unsecured debt is likely to face very low loss-given-failure, due to the loss absorption provided by the residual equity that we expect in resolution, as well as the volume of senior unsecured debt itself. This is supported by the combination of senior unsecured debt volume and subordination. This results in an uplift of two notches from the bank s ba Adjusted BCA. Government Support There is no uplift given our expectation of a low probability of government support. Counterparty Risk Assessment The CR Assessment is positioned at (cr). The CR Assessment is positioned two notches above the Adjusted BCA of ba, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments amounting to 61% of Tangible Banking Assets. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the volume of the instrument class. 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 both the likelihood of default and the expected financial loss suffered in the event of default and () 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. 6 19 June 17
Rating Methodology and Scorecard Factors Exhibit 6 FCA Bank S.p.A. 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 1.9% a a Quality of assets Capital TCE / RWA 11.% baa baa Risk-weighted capitalisation Profitability Net Income / Tangible Assets 1.% Return on assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 8.% ca b Market funding quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets 6.5% b1 b1 Quality of liquid assets caa1 Balance Sheet in-scope (EUR million) 4,69 7 5 18 7,64 8 1,716 19 June 17 Key driver # 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% b ba -1-1 -ba1-b ba -ba % in-scope 4.4% 5.5% 4.1% 1.4% 57.1%.% 1% at-failure (EUR million) 4,69 7 494 17 7,64 8 1,716 % at-failure 4.4% 5.5%.9% 57.1%.% 1%
Debt class Counterparty Risk Assessment Deposits Senior unsecured bank debt Instrument class Counterparty Risk Assessment Deposits Senior unsecured 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 61.% 61.% 61.% 61.% baa1 (cr) 61.%.% 61.% 6.1% 61.%.% 6.1%.% baa1 Loss Given Failure notching Additional Preliminary Rating Notching Assessment baa1 (cr) baa1 Government Support notching Local Currency Rating (cr) A -- Foreign Currency Rating -A Source: Moody's Financial Metrics Ratings Exhibit 7 Category FCA BANK S.P.A. Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Moody's Rating Negative(m) A/P- ba ba (cr)/p-(cr) FCA BANK S.P.A, IRISH BRANCH Outlook Senior Unsecured -Dom Curr Stable FCA CAPITAL IRELAND P.L.C. Bkd Senior Unsecured FCA CAPITAL SUISSE SA Outlook Bkd Senior Unsecured -Dom Curr Stable Source: Moody's Investors Service Endnotes 1 We consider as problem loans the sum of the three categories that Italian banks have been reporting since 15 (from most to least problematic): (1) bad loans (in Italian, sofferenze ): loans to insolvent borrowers; () unlikely to pay (in Italian, inadempienze probabili ); () past due - by more than 9 days not already included in the previous two categories (in Italian, esposizioni scadute e/o sconfinanti ). Unless noted otherwise, data in this report is sourced from the company, company reports, Moody's Banking Financial Metrics and the Bank of Italy and include Moody's standard adjustments. 8 19 June 17
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