santander consumer bank as
TRANSCRIPT
Update
RATINGS
Long Term CRR A2
Outlook Not Assigned
Outlook Stable
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
Katarzyna Szymanska
Santander Consumer Bank AS Update to credit analysis
Summary Santander Consumer Bank AS' (SCB) A3 long-term deposit, senior unsecured and issuer ratings are derived from (1) the bank's baa3 baseline credit assessment (BCA); (2) one notch of upflift from our expectation of a high probability of affiliate support from its parent Santander Consumer Finance S.A. (SCF; A2/A2 stable; baa21), leading to an Adjusted BCA of baa2; and (3) two notches uplift from our Advanced Loss Given Failure (LGF) analysis. LGF takes into account the risks faced by different debt and deposit classes across the liability structure should the bank enter into resolution.
SCB's Counterparty Risk Ratings (CRR) are A2/Prime-1, its Counterparty Risk (CR) assessment is A2(cr)/Prime-1(cr).
SCB's baa3 standalone BCA reflects the bank's established position as one of the Nordics’ leading auto and consumer finance lenders that underpins resilient profitability, as well as, its adequate capitalisation and overall moderate asset risks. The bank's BCA also reflects its high reliance on potentially more confidence-sensitive wholesale funding and the restrictions of its monoline focus.
Exhibit 1
2.0% 16.5% 1.8%
Banking Assets
Santander Consumer Bank (BCA: baa3) Median baa3-rated banks
S o
lv e
rs
These represent our Banks methodology scorecard ratios. Asset risk and profitability reflect the weaker of either the three-year average and latest annual figure. Capital is the latest reported figure. Funding structure and liquid resources reflect the latest fiscal year-end figures. Source: Moody's Financial Metrics
Credit strengths
» Moderate asset risks from the bank's focus on auto financing and unsecured lending, and geographical footprint
» Adequate capital levels, benefiting from ongoing support from the parent
» Strong and resilient profitability
» High probability of extraordinary affiliate support from SCF, in case of need
Credit challenges
» High reliance on wholesale funding, mitigated by presence of parent
» Undiversified business model
Outlook The outlook on SCB’s deposit, issuer and senior unsecured ratings is stable reflecting our expectation that the bank will manage pressures on its profitability and a changing regulatory environment. The outlook on SCB's ratings is also aligned with the outlook on its direct parent, SCF.
Factors that could lead to an upgrade
» An upgrade of SCB’s BCA could occur if the bank’s capital position strengthened materially and credit risk trends improved, while maintaining satisfactory levels of profitability and reliance on confidence-sensitive market funding declined. The bank's BCA could also be upgraded if it significantly diversifies its business model, though not currently expected.
» An upgrade of SCB’s BCA could result in a similar upgrade of the bank’s deposit and senior ratings.
» A substantially larger cushion of more junior liabilities, 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
» SCB's BCA could be downgraded if (1) the weighted Macro Profile deteriorates to 'Strong' from 'Strong +'; (2) asset quality deteriorates beyond historical averages, or, SCB's risk profile increases in combination with a lower profitability; (3) changes in regulation permanently impair SCB's franchise and ongoing profitability; (4) the bank’s funding and liquidity characteristics weaken.
» A downgrade of SCB’s BCA would likely result in a similar downgrade of the bank’s long-term deposit and senior ratings.
» SCB's ratings could also be downgraded in case we lower our affiliate support assumptions.
» A shift in SCB's liability profile, for example if the amount of outstanding senior unsecured debt were to materially decline, could lead to lower LGF uplift and a downgrade of the bank's deposit and senior 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 www.moodys.com for the most updated credit rating action information and rating history.
2 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Key indicators
Exhibit 2
Santander Consumer Bank AS (Consolidated Financials) [1] 12-182 12-172 12-162 12-152 12-142 CAGR/Avg.3
Total Assets (NOK billion) 176 159 143 136 96 16.34
Total Assets (EUR million) 17,791 16,199 15,721 14,131 10,609 13.84
Total Assets (USD million) 20,338 19,451 16,582 15,351 12,838 12.24
Tangible Common Equity (NOK billion) 20 18 16 14 8.7 23.24
Tangible Common Equity (EUR million) 2,025 1,815 1,765 1,477 959 20.54
Tangible Common Equity (USD million) 2,315 2,179 1,862 1,605 1,161 18.84
Problem Loans / Gross Loans (%) 2.0 2.0 2.1 2.1 1.5 1.95
Tangible Common Equity / Risk Weighted Assets (%) 16.5 16.1 16.5 15.9 11.4 15.36
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 14.1 14.1 13.6 14.5 12.3 13.75
Net Interest Margin (%) 4.2 4.5 4.6 4.5 4.2 4.45
PPI / Average RWA (%) 3.5 3.6 4.6 3.3 3.2 3.66
Net Income / Tangible Assets (%) 1.8 1.9 1.7 1.1 1.0 1.55
Cost / Income Ratio (%) 46.6 44.7 39.4 48.6 39.5 43.75
Market Funds / Tangible Banking Assets (%) 53.3 52.2 55.0 56.5 66.6 56.75
Liquid Banking Assets / Tangible Banking Assets (%) 7.7 6.4 10.5 11.2 8.4 8.85
Gross Loans / Due to Customers (%) 297.9 292.3 304.2 311.1 460.6 333.25
[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] 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 SCB is a fully-owned subsidiary of SCF, part of Banco Santander S.A. Spain (Banco Santander, A2/A2 stable, baa1), operating in the Nordic region of Europe. Headquartered in Norway, SCB provides secured auto financing (78% of lending as of the end of 2018) and unsecured consumer loans and credit cards (22%) in Norway, Sweden, Denmark and Finland. The bank also collects online retail deposits in these countries, apart from Finland. In 2014, it acquired GE Money Bank AB, with a business focus on unsecured consumer loans and credit cards in the Nordic countries.
SCB is the market leader in auto finance in Norway, Denmark and Finland with reported market shares of 27%, 22% and 39% respectively as of the end of 2018, and holds fourth position in Sweden with a market share of 9%. SCB's gross loan book totaled NOK163 billion and its total assets NOK176 billion (equivalent to €18.8 billion) as of the end of 2018.
The larger Santander Group operated out of 13,217 branches and served a customer base of 144 million as of the end of 2018.
Detailed credit considerations Moderate asset risks from the bank's focus on auto financing and unsecured lending, and geographical footprint We consider SCB's asset risks to be moderate, reflected in our baa1 score, as illustrated by a track record of relatively modest credit losses, while also taking into account continuing strong loan growth (10% during 2018) and SCB's portfolio focus towards less secured forms of financing compared, for example, to mortgage lending.
The bank's credit costs (loan loss provisions/average gross loans) averaged 0.5% between 2014-2018 (see Exhibit 3) and 0.8% over a longer ten year period. Adequate pricing of risk allowed strong coverage of credit losses by pre-provision income that averaged 25% during the past ten years. Problem loans (IFRS 9 stage 3 loans) have remained broadly unchanged at 2.0% of gross loans as of the end of 2018 (YE2017: 2.0%). Loss allowance coverage of stage 3 unsecured loans stood at 64% as of the end of 2018 and 48% for secured loans, which is in line with historical loss and recovery rates for these loans.
3 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
Exhibit 3
Asset risk metrics have remained broadly adequate in the past five years Credit costs and problem loan ratio evolution
1.5%
Loan loss provisions / average gross loans Problem loans / gross loans
Source: Moody's Investors Service, company reports
SCB's main products are auto loans, which are secured by vehicles, and unsecured loans, predominantly consumer loans and credit cards. Secured car financing made up 78% of total loans (see Exhibit 4) and unsecured direct loans, credit cards and sales finance for the remaining 22%.
SCB operates throughout the Nordic region of Europe and benefits from relatively benign operating conditions and from a degree of geographical diversification. Norway is the main contributor to SCB's loan portfolio (accounting for 36% of total lending, see Exhibit 5), followed by Sweden (23%), Denmark (20%) and Finland (21%). This mix of operations leads to an overall Macro Profile of 'Strong +'.
Exhibit 4
SCB's focus is auto and consumer financing Loan breakdown by product type as of end-2018
Exhibit 5
SCB has a diversified presence in the Nordics Loan breakdown by geography as of end-2018
Auto loans - private persons 60%
Auto loans - SME 11%
Other auto loans 7%
Norway 36%
Sweden 23%
Finland 21%
Denmark 20%
Sources: Moody's Investors Service, company reports
At the same time, we also consider risks from rising levels of household indebtedness in key markets, but also macro-prudential regulation that will help partly mitigate these risks. In Norway, which accounts for 32% of unsecured lending, new regulation on prudent consumer lending practices and a debt register for unsecured loans to be implemented this summer, will help curb high and growing consumer household debt and moderate asset risks in the longer term. During 2019, however, it will continue to dampen growth opportunities and may lead to higher impairments for the bank because it may halt 'evergreening' of loans by borrowers through continuing refinancing between different lenders.
Sweden (41% of consumer lending) has been the main area of consumer lending growth for the bank and within that country it already has access to detailed credit information. Overall, the unsecured portfolio grew by 3% in 2018, while auto financing grew by 13%.
4 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Adequate capital, benefiting from ongoing support from the parent We expect SCB’s capitalisation will remain adequate and sufficiently above regulatory requirements, which is reflected in our a1 assigned Capital score. At the end of 2018, our preferred capital metic, which is tangible common equity/risk-weighted assets was 16.4% (see Exhibit 6), marginally higher than the 16.1% achieved in 2017.
The bank reported a common equity tier 1 (CET1) capital ratio of 15.4% as of the end of 2018 (including the full impact from IFRS 9), which was substantially above the minimum requirement of 13.44% applicable at that time. SCB's CET1 requirement included a 3% systemic risk buffer for Norwegian banks, an 1.14% countercyclical capital buffer that reflects SCB's Nordic operations mix and a bank- specific pillar 2 requirement of 2.3% set by the Financial Supervisory Authority of Norway. According to the bank, its countercyclical capital buffer will increase to 1.62% during 2019 following increases in individual markets and its pillar 2 requirement to 2.6%, raising the overall CET1 requirement to 14.22%. SCB also reported a strong Basel leverage ratio of 11.8% (after IFRS 9 impact) as of the end of 2018, well above a 5% regulatory requirement.
Exhibit 6
16.4% 15.4%
2014 2015 2016 2017 2018
Tangible common equity / risk weighted assets CET1 ratio Basel leverage ratio
Source: Moody's Investors service, company reports
Our assessment also takes into account potential access to capital from its parent that supports SCB's ability to grow its business. For example, in 2015 SCF injected NOK1.1 billion of capital in the bank. Further, all of SCB's NOK1.73 billion of tier 2 capital-eligible subordinated debt and NOK2.25 billion additional tier 1 capital instruments as of the end of 2018 were issued to SCF.
Strong and resilient profitability, despite margin pressure We expect that SCB will maintain relatively strong profitability over the coming quarters, although strong competition will continue to put pressure on lending margins and by extension on SCB's net interest margin (NIM). This expectation is reflected in our a2 Profitability score.
Net income remained broadly unchanged at 1.79% of tangible assets during 2018 compared to 1.85% for 2017 (see Exhibit 7). Net interest income, the main revenue driver, grew by 5% on higher lending volumes and lower cost of funding, but also lower lending margins from competition and a shift to more secure lending. As a result, SCB's NIM declined to 4.2% in 2018 from 4.5% in 2017.
5 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 7
Profitability has remained broadly stable, despite margin pressure Evolution of SCB's profitability metrics
1.0% 1.1%
Net inome / tangible assets Net interest margin
Source: Moody's Investors Service
We expect strong competition will continue to pressure lending margins in key markets. Further, the aforementioned regulatory changes on consumer lending in Norway will continue to dampen unsecured lending growth in the country, however, we expect the bank will continue to grow in auto lending and in other markets and therefore support income growth. Cost efficiency remains adequate with a cost-to-income ratio of 46.6% for 2018 compared to 44.7% at 2017, in light of higher IT investment costs.
High reliance on wholesale funding and modest liquidity, mitigated by presence of parent Our Funding Structure score of b3 reflects SCB's relatively high reliance on potentially confidence-sensitive wholesale funding, although this is partly mitigated by the on-going funding support of its parents SCF and Banco Santander and by growth in customer deposits through online retail deposits in its main locations, excluding Finland. Deposits in Norway, Sweden and Denmark grew by a total of 8% during 2018.
As of the end of 2018, market funds/tangible banking assets were 53%. SCB relied directly on its parent SCF for 27% of its funding (excluding hybrid capital instruments), the remainder was made up of customer deposits (37%), senior unsecured bonds (25%) and securitisation (11%).
SCB’s funding strategy is to improve its funding independence with a particular focus on expanding deposits and senior unsecured funding, which we view positively. Nonetheless, potential recourse to SCF offers funding security in case other direct sources of funding dry out.
We consider that SCB’s liquidity profile is adequate, reflected in our ba1 Liquid Resources score. On-balance sheet liquidity is relatively modest. The bank reported an overall liquidity coverage ratio (LCR) of 134% as of the end of 2018 (2017: 148%), above the 100% minimum requirement. The net stable funding ratio for the same period was 94%. In addition, however, the bank has access to considerable liquidity in the form of multi-currency drawdown facilities from SCF and Santander Group.
Undiversified business model focused on auto financing and consumer lending SCB has an established market position and is the leader in auto financing in Norway, Finland and Denmark, and ranks number four in Sweden. The bank serves around 1.5 million customers and worked with more than 5,000 merchants and 5,600 car dealers as of the end of 2018.
However, the main products contributing to SCB's bottom-line are limited because the bank is predominantly involved in auto financing and unsecured consumer lending and the bank's earnings may be vulnerable to unexpected shocks, such as new regulation curbing lending growth. Similarly to other specialised lenders, we therefore adjust the bank's financial profile of baa2, which reflects the relatively strong set of financial ratios, downwards by one notch for the lack of “Business Diversification”.
6 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Source of facts and figures cited in this report Bank-specific figures originate from banks' reports and Moody's Banking Financial Metrics. All figures are based on our own chart of accounts and may be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in the Analysis of Financial Institutions, published on 9 August 2018.
Support and structural considerations Affiliate support SCB's baa2 Adjusted BCA incorporates a high probability of extraordinary affiliate support from SCF in case of need and ultimately by Banco Santander itself, which translates into a one-notch uplift from its baa3 standalone BCA. Our view of high probability of affiliate support is based on (1) the 100% ownership by SCF; (2) SCF's high degree of involvement in the strategy and management of SCB; and (3) ongoing funding and capital support as SCF guarantees or subscribes to a portion of SCB's debt and hybrid capital instruments.
Loss Given Failure (LGF) analysis Norway has transposed the EU Bank Resolution and Recovery Directive (BRRD) into local legislation effective from January 2019 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.
In our Advanced LGF analysis, we use our standard assumptions and assume residual tangible common equity of 3% and losses post- failure of 8% of tangible banking assets. 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. For SCB, however, we assume that 10% of deposits can be considered as junior deposits to reflect its more retail-based deposit structure. We exclude intra- group liabilities, such as hybrid capital instruments that are issued to the parent SCF, from our LGF waterfall for SCB because we consider these part of the benefit SCB derives from our affiliate support assumption.
Under these assumptions, for SCB's A3 deposits and senior unsecured debt, our LGF analysis indicates a very low loss-given-failure because of the loss absorption provided by the significant amount of senior unsecured debt outstanding. This leads to a two notch of rating uplift for deposits and senior unsecured debt from the bank's baa2 Adjusted BCA.
Government support considerations We do not incorporate any government support uplift on SCB’s ratings because we consider the probability of government support, in case of need, to be low.
Counterparty Risk Rating Counterparty Risk Ratings (CRRs) are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRRs are distinct from ratings assigned to senior unsecured debt instruments and from issuer ratings because they reflect that, in a resolution, CRR liabilities might benefit from preferential treatment compared with senior unsecured debt. Examples of CRR liabilities include the uncollateralised portion of payables arising from derivatives transactions and the uncollateralised portion of liabilities under sale and repurchase agreements
SCB's CRRs are positioned at A2/Prime-1 The CRR is positioned three notches above the Adjusted BCA of baa2, reflecting the extremely low loss-given-failure from the high volume of instruments that are subordinated to CRR liabilities.
Counterparty Risk (CR) 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 both the likelihood of default and the expected financial loss, 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 (for example, swaps), letters of credit, guarantees and liquidity facilities.
7 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
SCB's CR Assessment is positioned at A2(cr)/Prime-1(cr) For SCB, our Advanced LGF analysis indicates an extremely low loss-given-failure for the CR Assessment, leading to three notches of uplift from the bank's baa2 Adjusted BCA.
Methodology and scorecard 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.
8 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Rating methodology and scorecard factors
Exhibit 8
Santander Consumer Bank AS Macro Factors Weighted Macro Profile Strong + 100%
Factor Historic Ratio
Assigned Score Key driver #1 Key driver #2
Solvency Asset Risk Problem Loans / Gross Loans 2.0% a2 ← → baa1 Loan growth Long-run loss
performance Capital TCE / RWA 16.5% aa2 ← → a1 Expected trend Stress capital resilience
Profitability Net Income / Tangible Assets 1.8% aa3 ← → a2 Expected trend
Combined Solvency Score aa3 a2 Liquidity Funding Structure Market Funds / Tangible Banking Assets 53.3% b3 ← → b3 Extent of market
funding reliance Liquid Resources Liquid Banking Assets / Tangible Banking Assets 7.7% ba2 ← → ba1 Additional
liquidity resources Combined Liquidity Score b1 b1 Financial Profile baa2
Business Diversification -1 Opacity and Complexity 0 Corporate Behavior 0
Total Qualitative Adjustments -1 Sovereign or Affiliate constraint: Aaa Scorecard Calculated BCA range baa2-ba1 Assigned BCA baa3 Affiliate Support notching 1 Adjusted BCA baa2
Balance Sheet in-scope (NOK million)
% in-scope at-failure (NOK million)
% at-failure
Other liabilities 79,623 45.5% 83,448 47.7% Deposits 54,645 31.2% 50,820 29.0%
Preferred deposits 49,181 28.1% 46,722 26.7% Junior Deposits 5,465 3.1% 4,098 2.3%
Senior unsecured bank debt 35,497 20.3% 35,497 20.3% Equity 5,250 3.0% 5,250 3.0% Total Tangible Banking Assets 175,015 100% 175,015 100%
9 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
De Jure waterfall De Facto waterfall NotchingDebt class Instrument volume +
subordination
Notching Guidance
vs. Adjusted
Assessment
Counterparty Risk Rating 25.6% 25.6% 25.6% 25.6% 3 3 3 3 0 a2 Counterparty Risk Assessment 25.6% 25.6% 25.6% 25.6% 3 3 3 3 0 a2 (cr) Deposits 25.6% 3.0% 25.6% 23.3% 2 3 2 2 0 a3 Senior unsecured bank debt 25.6% 3.0% 23.3% 3.0% 2 2 2 2 0 a3 Dated subordinated bank debt 3.0% 3.0% 3.0% 3.0% -1 -1 -1 -1 0 baa3 Non-cumulative bank preference shares 3.0% 3.0% 3.0% 3.0% -1 -1 -1 -1 -2 ba2 (hyb)
Instrument class Loss Given Failure notching
Additional Notching
Foreign Currency
Rating Counterparty Risk Rating 3 0 a2 0 A2 A2 Counterparty Risk Assessment 3 0 a2 (cr) 0 A2 (cr) -- Deposits 2 0 a3 0 A3 A3 Senior unsecured bank debt 2 0 a3 0 A3 A3 Dated subordinated bank debt -1 0 baa3 0 -- (P)Baa3 Non-cumulative bank preference shares -1 -2 ba2 (hyb) 0 Ba2 (hyb) -- [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
Outlook Stable Counterparty Risk Rating A2/P-1 Bank Deposits A3/P-2 Baseline Credit Assessment baa3 Adjusted Baseline Credit Assessment baa2 Counterparty Risk Assessment A2(cr)/P-1(cr) Issuer Rating A3 Senior Unsecured A3 Subordinate MTN (P)Baa3 Pref. Stock Non-cumulative -Dom Curr Ba2 (hyb) ST Issuer Rating P-2
PARENT: SANTANDER CONSUMER FINANCE S.A.
Outlook Stable Counterparty Risk Rating A2/P-1 Bank Deposits -Dom Curr A2/P-1 Baseline Credit Assessment baa2 Adjusted Baseline Credit Assessment baa1 Counterparty Risk Assessment A3(cr)/P-2(cr) Senior Unsecured A2 Subordinate -Dom Curr Baa2 Pref. Stock Non-cumulative -Dom Curr Ba1 (hyb) Commercial Paper -Dom Curr P-1
Source: Moody's Investors Service
Endnotes 1 The bank ratings shown here are the bank's deposit rating, senior unsecured rating and baseline credit assessment
10 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1163753
11 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
RATINGS
Long Term CRR A2
Outlook Not Assigned
Outlook Stable
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
Katarzyna Szymanska
Santander Consumer Bank AS Update to credit analysis
Summary Santander Consumer Bank AS' (SCB) A3 long-term deposit, senior unsecured and issuer ratings are derived from (1) the bank's baa3 baseline credit assessment (BCA); (2) one notch of upflift from our expectation of a high probability of affiliate support from its parent Santander Consumer Finance S.A. (SCF; A2/A2 stable; baa21), leading to an Adjusted BCA of baa2; and (3) two notches uplift from our Advanced Loss Given Failure (LGF) analysis. LGF takes into account the risks faced by different debt and deposit classes across the liability structure should the bank enter into resolution.
SCB's Counterparty Risk Ratings (CRR) are A2/Prime-1, its Counterparty Risk (CR) assessment is A2(cr)/Prime-1(cr).
SCB's baa3 standalone BCA reflects the bank's established position as one of the Nordics’ leading auto and consumer finance lenders that underpins resilient profitability, as well as, its adequate capitalisation and overall moderate asset risks. The bank's BCA also reflects its high reliance on potentially more confidence-sensitive wholesale funding and the restrictions of its monoline focus.
Exhibit 1
2.0% 16.5% 1.8%
Banking Assets
Santander Consumer Bank (BCA: baa3) Median baa3-rated banks
S o
lv e
rs
These represent our Banks methodology scorecard ratios. Asset risk and profitability reflect the weaker of either the three-year average and latest annual figure. Capital is the latest reported figure. Funding structure and liquid resources reflect the latest fiscal year-end figures. Source: Moody's Financial Metrics
Credit strengths
» Moderate asset risks from the bank's focus on auto financing and unsecured lending, and geographical footprint
» Adequate capital levels, benefiting from ongoing support from the parent
» Strong and resilient profitability
» High probability of extraordinary affiliate support from SCF, in case of need
Credit challenges
» High reliance on wholesale funding, mitigated by presence of parent
» Undiversified business model
Outlook The outlook on SCB’s deposit, issuer and senior unsecured ratings is stable reflecting our expectation that the bank will manage pressures on its profitability and a changing regulatory environment. The outlook on SCB's ratings is also aligned with the outlook on its direct parent, SCF.
Factors that could lead to an upgrade
» An upgrade of SCB’s BCA could occur if the bank’s capital position strengthened materially and credit risk trends improved, while maintaining satisfactory levels of profitability and reliance on confidence-sensitive market funding declined. The bank's BCA could also be upgraded if it significantly diversifies its business model, though not currently expected.
» An upgrade of SCB’s BCA could result in a similar upgrade of the bank’s deposit and senior ratings.
» A substantially larger cushion of more junior liabilities, 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
» SCB's BCA could be downgraded if (1) the weighted Macro Profile deteriorates to 'Strong' from 'Strong +'; (2) asset quality deteriorates beyond historical averages, or, SCB's risk profile increases in combination with a lower profitability; (3) changes in regulation permanently impair SCB's franchise and ongoing profitability; (4) the bank’s funding and liquidity characteristics weaken.
» A downgrade of SCB’s BCA would likely result in a similar downgrade of the bank’s long-term deposit and senior ratings.
» SCB's ratings could also be downgraded in case we lower our affiliate support assumptions.
» A shift in SCB's liability profile, for example if the amount of outstanding senior unsecured debt were to materially decline, could lead to lower LGF uplift and a downgrade of the bank's deposit and senior 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 www.moodys.com for the most updated credit rating action information and rating history.
2 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Key indicators
Exhibit 2
Santander Consumer Bank AS (Consolidated Financials) [1] 12-182 12-172 12-162 12-152 12-142 CAGR/Avg.3
Total Assets (NOK billion) 176 159 143 136 96 16.34
Total Assets (EUR million) 17,791 16,199 15,721 14,131 10,609 13.84
Total Assets (USD million) 20,338 19,451 16,582 15,351 12,838 12.24
Tangible Common Equity (NOK billion) 20 18 16 14 8.7 23.24
Tangible Common Equity (EUR million) 2,025 1,815 1,765 1,477 959 20.54
Tangible Common Equity (USD million) 2,315 2,179 1,862 1,605 1,161 18.84
Problem Loans / Gross Loans (%) 2.0 2.0 2.1 2.1 1.5 1.95
Tangible Common Equity / Risk Weighted Assets (%) 16.5 16.1 16.5 15.9 11.4 15.36
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 14.1 14.1 13.6 14.5 12.3 13.75
Net Interest Margin (%) 4.2 4.5 4.6 4.5 4.2 4.45
PPI / Average RWA (%) 3.5 3.6 4.6 3.3 3.2 3.66
Net Income / Tangible Assets (%) 1.8 1.9 1.7 1.1 1.0 1.55
Cost / Income Ratio (%) 46.6 44.7 39.4 48.6 39.5 43.75
Market Funds / Tangible Banking Assets (%) 53.3 52.2 55.0 56.5 66.6 56.75
Liquid Banking Assets / Tangible Banking Assets (%) 7.7 6.4 10.5 11.2 8.4 8.85
Gross Loans / Due to Customers (%) 297.9 292.3 304.2 311.1 460.6 333.25
[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] 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 SCB is a fully-owned subsidiary of SCF, part of Banco Santander S.A. Spain (Banco Santander, A2/A2 stable, baa1), operating in the Nordic region of Europe. Headquartered in Norway, SCB provides secured auto financing (78% of lending as of the end of 2018) and unsecured consumer loans and credit cards (22%) in Norway, Sweden, Denmark and Finland. The bank also collects online retail deposits in these countries, apart from Finland. In 2014, it acquired GE Money Bank AB, with a business focus on unsecured consumer loans and credit cards in the Nordic countries.
SCB is the market leader in auto finance in Norway, Denmark and Finland with reported market shares of 27%, 22% and 39% respectively as of the end of 2018, and holds fourth position in Sweden with a market share of 9%. SCB's gross loan book totaled NOK163 billion and its total assets NOK176 billion (equivalent to €18.8 billion) as of the end of 2018.
The larger Santander Group operated out of 13,217 branches and served a customer base of 144 million as of the end of 2018.
Detailed credit considerations Moderate asset risks from the bank's focus on auto financing and unsecured lending, and geographical footprint We consider SCB's asset risks to be moderate, reflected in our baa1 score, as illustrated by a track record of relatively modest credit losses, while also taking into account continuing strong loan growth (10% during 2018) and SCB's portfolio focus towards less secured forms of financing compared, for example, to mortgage lending.
The bank's credit costs (loan loss provisions/average gross loans) averaged 0.5% between 2014-2018 (see Exhibit 3) and 0.8% over a longer ten year period. Adequate pricing of risk allowed strong coverage of credit losses by pre-provision income that averaged 25% during the past ten years. Problem loans (IFRS 9 stage 3 loans) have remained broadly unchanged at 2.0% of gross loans as of the end of 2018 (YE2017: 2.0%). Loss allowance coverage of stage 3 unsecured loans stood at 64% as of the end of 2018 and 48% for secured loans, which is in line with historical loss and recovery rates for these loans.
3 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
Exhibit 3
Asset risk metrics have remained broadly adequate in the past five years Credit costs and problem loan ratio evolution
1.5%
Loan loss provisions / average gross loans Problem loans / gross loans
Source: Moody's Investors Service, company reports
SCB's main products are auto loans, which are secured by vehicles, and unsecured loans, predominantly consumer loans and credit cards. Secured car financing made up 78% of total loans (see Exhibit 4) and unsecured direct loans, credit cards and sales finance for the remaining 22%.
SCB operates throughout the Nordic region of Europe and benefits from relatively benign operating conditions and from a degree of geographical diversification. Norway is the main contributor to SCB's loan portfolio (accounting for 36% of total lending, see Exhibit 5), followed by Sweden (23%), Denmark (20%) and Finland (21%). This mix of operations leads to an overall Macro Profile of 'Strong +'.
Exhibit 4
SCB's focus is auto and consumer financing Loan breakdown by product type as of end-2018
Exhibit 5
SCB has a diversified presence in the Nordics Loan breakdown by geography as of end-2018
Auto loans - private persons 60%
Auto loans - SME 11%
Other auto loans 7%
Norway 36%
Sweden 23%
Finland 21%
Denmark 20%
Sources: Moody's Investors Service, company reports
At the same time, we also consider risks from rising levels of household indebtedness in key markets, but also macro-prudential regulation that will help partly mitigate these risks. In Norway, which accounts for 32% of unsecured lending, new regulation on prudent consumer lending practices and a debt register for unsecured loans to be implemented this summer, will help curb high and growing consumer household debt and moderate asset risks in the longer term. During 2019, however, it will continue to dampen growth opportunities and may lead to higher impairments for the bank because it may halt 'evergreening' of loans by borrowers through continuing refinancing between different lenders.
Sweden (41% of consumer lending) has been the main area of consumer lending growth for the bank and within that country it already has access to detailed credit information. Overall, the unsecured portfolio grew by 3% in 2018, while auto financing grew by 13%.
4 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Adequate capital, benefiting from ongoing support from the parent We expect SCB’s capitalisation will remain adequate and sufficiently above regulatory requirements, which is reflected in our a1 assigned Capital score. At the end of 2018, our preferred capital metic, which is tangible common equity/risk-weighted assets was 16.4% (see Exhibit 6), marginally higher than the 16.1% achieved in 2017.
The bank reported a common equity tier 1 (CET1) capital ratio of 15.4% as of the end of 2018 (including the full impact from IFRS 9), which was substantially above the minimum requirement of 13.44% applicable at that time. SCB's CET1 requirement included a 3% systemic risk buffer for Norwegian banks, an 1.14% countercyclical capital buffer that reflects SCB's Nordic operations mix and a bank- specific pillar 2 requirement of 2.3% set by the Financial Supervisory Authority of Norway. According to the bank, its countercyclical capital buffer will increase to 1.62% during 2019 following increases in individual markets and its pillar 2 requirement to 2.6%, raising the overall CET1 requirement to 14.22%. SCB also reported a strong Basel leverage ratio of 11.8% (after IFRS 9 impact) as of the end of 2018, well above a 5% regulatory requirement.
Exhibit 6
16.4% 15.4%
2014 2015 2016 2017 2018
Tangible common equity / risk weighted assets CET1 ratio Basel leverage ratio
Source: Moody's Investors service, company reports
Our assessment also takes into account potential access to capital from its parent that supports SCB's ability to grow its business. For example, in 2015 SCF injected NOK1.1 billion of capital in the bank. Further, all of SCB's NOK1.73 billion of tier 2 capital-eligible subordinated debt and NOK2.25 billion additional tier 1 capital instruments as of the end of 2018 were issued to SCF.
Strong and resilient profitability, despite margin pressure We expect that SCB will maintain relatively strong profitability over the coming quarters, although strong competition will continue to put pressure on lending margins and by extension on SCB's net interest margin (NIM). This expectation is reflected in our a2 Profitability score.
Net income remained broadly unchanged at 1.79% of tangible assets during 2018 compared to 1.85% for 2017 (see Exhibit 7). Net interest income, the main revenue driver, grew by 5% on higher lending volumes and lower cost of funding, but also lower lending margins from competition and a shift to more secure lending. As a result, SCB's NIM declined to 4.2% in 2018 from 4.5% in 2017.
5 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 7
Profitability has remained broadly stable, despite margin pressure Evolution of SCB's profitability metrics
1.0% 1.1%
Net inome / tangible assets Net interest margin
Source: Moody's Investors Service
We expect strong competition will continue to pressure lending margins in key markets. Further, the aforementioned regulatory changes on consumer lending in Norway will continue to dampen unsecured lending growth in the country, however, we expect the bank will continue to grow in auto lending and in other markets and therefore support income growth. Cost efficiency remains adequate with a cost-to-income ratio of 46.6% for 2018 compared to 44.7% at 2017, in light of higher IT investment costs.
High reliance on wholesale funding and modest liquidity, mitigated by presence of parent Our Funding Structure score of b3 reflects SCB's relatively high reliance on potentially confidence-sensitive wholesale funding, although this is partly mitigated by the on-going funding support of its parents SCF and Banco Santander and by growth in customer deposits through online retail deposits in its main locations, excluding Finland. Deposits in Norway, Sweden and Denmark grew by a total of 8% during 2018.
As of the end of 2018, market funds/tangible banking assets were 53%. SCB relied directly on its parent SCF for 27% of its funding (excluding hybrid capital instruments), the remainder was made up of customer deposits (37%), senior unsecured bonds (25%) and securitisation (11%).
SCB’s funding strategy is to improve its funding independence with a particular focus on expanding deposits and senior unsecured funding, which we view positively. Nonetheless, potential recourse to SCF offers funding security in case other direct sources of funding dry out.
We consider that SCB’s liquidity profile is adequate, reflected in our ba1 Liquid Resources score. On-balance sheet liquidity is relatively modest. The bank reported an overall liquidity coverage ratio (LCR) of 134% as of the end of 2018 (2017: 148%), above the 100% minimum requirement. The net stable funding ratio for the same period was 94%. In addition, however, the bank has access to considerable liquidity in the form of multi-currency drawdown facilities from SCF and Santander Group.
Undiversified business model focused on auto financing and consumer lending SCB has an established market position and is the leader in auto financing in Norway, Finland and Denmark, and ranks number four in Sweden. The bank serves around 1.5 million customers and worked with more than 5,000 merchants and 5,600 car dealers as of the end of 2018.
However, the main products contributing to SCB's bottom-line are limited because the bank is predominantly involved in auto financing and unsecured consumer lending and the bank's earnings may be vulnerable to unexpected shocks, such as new regulation curbing lending growth. Similarly to other specialised lenders, we therefore adjust the bank's financial profile of baa2, which reflects the relatively strong set of financial ratios, downwards by one notch for the lack of “Business Diversification”.
6 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Source of facts and figures cited in this report Bank-specific figures originate from banks' reports and Moody's Banking Financial Metrics. All figures are based on our own chart of accounts and may be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in the Analysis of Financial Institutions, published on 9 August 2018.
Support and structural considerations Affiliate support SCB's baa2 Adjusted BCA incorporates a high probability of extraordinary affiliate support from SCF in case of need and ultimately by Banco Santander itself, which translates into a one-notch uplift from its baa3 standalone BCA. Our view of high probability of affiliate support is based on (1) the 100% ownership by SCF; (2) SCF's high degree of involvement in the strategy and management of SCB; and (3) ongoing funding and capital support as SCF guarantees or subscribes to a portion of SCB's debt and hybrid capital instruments.
Loss Given Failure (LGF) analysis Norway has transposed the EU Bank Resolution and Recovery Directive (BRRD) into local legislation effective from January 2019 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.
In our Advanced LGF analysis, we use our standard assumptions and assume residual tangible common equity of 3% and losses post- failure of 8% of tangible banking assets. 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. For SCB, however, we assume that 10% of deposits can be considered as junior deposits to reflect its more retail-based deposit structure. We exclude intra- group liabilities, such as hybrid capital instruments that are issued to the parent SCF, from our LGF waterfall for SCB because we consider these part of the benefit SCB derives from our affiliate support assumption.
Under these assumptions, for SCB's A3 deposits and senior unsecured debt, our LGF analysis indicates a very low loss-given-failure because of the loss absorption provided by the significant amount of senior unsecured debt outstanding. This leads to a two notch of rating uplift for deposits and senior unsecured debt from the bank's baa2 Adjusted BCA.
Government support considerations We do not incorporate any government support uplift on SCB’s ratings because we consider the probability of government support, in case of need, to be low.
Counterparty Risk Rating Counterparty Risk Ratings (CRRs) are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRRs are distinct from ratings assigned to senior unsecured debt instruments and from issuer ratings because they reflect that, in a resolution, CRR liabilities might benefit from preferential treatment compared with senior unsecured debt. Examples of CRR liabilities include the uncollateralised portion of payables arising from derivatives transactions and the uncollateralised portion of liabilities under sale and repurchase agreements
SCB's CRRs are positioned at A2/Prime-1 The CRR is positioned three notches above the Adjusted BCA of baa2, reflecting the extremely low loss-given-failure from the high volume of instruments that are subordinated to CRR liabilities.
Counterparty Risk (CR) 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 both the likelihood of default and the expected financial loss, 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 (for example, swaps), letters of credit, guarantees and liquidity facilities.
7 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
SCB's CR Assessment is positioned at A2(cr)/Prime-1(cr) For SCB, our Advanced LGF analysis indicates an extremely low loss-given-failure for the CR Assessment, leading to three notches of uplift from the bank's baa2 Adjusted BCA.
Methodology and scorecard 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.
8 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Rating methodology and scorecard factors
Exhibit 8
Santander Consumer Bank AS Macro Factors Weighted Macro Profile Strong + 100%
Factor Historic Ratio
Assigned Score Key driver #1 Key driver #2
Solvency Asset Risk Problem Loans / Gross Loans 2.0% a2 ← → baa1 Loan growth Long-run loss
performance Capital TCE / RWA 16.5% aa2 ← → a1 Expected trend Stress capital resilience
Profitability Net Income / Tangible Assets 1.8% aa3 ← → a2 Expected trend
Combined Solvency Score aa3 a2 Liquidity Funding Structure Market Funds / Tangible Banking Assets 53.3% b3 ← → b3 Extent of market
funding reliance Liquid Resources Liquid Banking Assets / Tangible Banking Assets 7.7% ba2 ← → ba1 Additional
liquidity resources Combined Liquidity Score b1 b1 Financial Profile baa2
Business Diversification -1 Opacity and Complexity 0 Corporate Behavior 0
Total Qualitative Adjustments -1 Sovereign or Affiliate constraint: Aaa Scorecard Calculated BCA range baa2-ba1 Assigned BCA baa3 Affiliate Support notching 1 Adjusted BCA baa2
Balance Sheet in-scope (NOK million)
% in-scope at-failure (NOK million)
% at-failure
Other liabilities 79,623 45.5% 83,448 47.7% Deposits 54,645 31.2% 50,820 29.0%
Preferred deposits 49,181 28.1% 46,722 26.7% Junior Deposits 5,465 3.1% 4,098 2.3%
Senior unsecured bank debt 35,497 20.3% 35,497 20.3% Equity 5,250 3.0% 5,250 3.0% Total Tangible Banking Assets 175,015 100% 175,015 100%
9 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
De Jure waterfall De Facto waterfall NotchingDebt class Instrument volume +
subordination
Notching Guidance
vs. Adjusted
Assessment
Counterparty Risk Rating 25.6% 25.6% 25.6% 25.6% 3 3 3 3 0 a2 Counterparty Risk Assessment 25.6% 25.6% 25.6% 25.6% 3 3 3 3 0 a2 (cr) Deposits 25.6% 3.0% 25.6% 23.3% 2 3 2 2 0 a3 Senior unsecured bank debt 25.6% 3.0% 23.3% 3.0% 2 2 2 2 0 a3 Dated subordinated bank debt 3.0% 3.0% 3.0% 3.0% -1 -1 -1 -1 0 baa3 Non-cumulative bank preference shares 3.0% 3.0% 3.0% 3.0% -1 -1 -1 -1 -2 ba2 (hyb)
Instrument class Loss Given Failure notching
Additional Notching
Foreign Currency
Rating Counterparty Risk Rating 3 0 a2 0 A2 A2 Counterparty Risk Assessment 3 0 a2 (cr) 0 A2 (cr) -- Deposits 2 0 a3 0 A3 A3 Senior unsecured bank debt 2 0 a3 0 A3 A3 Dated subordinated bank debt -1 0 baa3 0 -- (P)Baa3 Non-cumulative bank preference shares -1 -2 ba2 (hyb) 0 Ba2 (hyb) -- [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
Outlook Stable Counterparty Risk Rating A2/P-1 Bank Deposits A3/P-2 Baseline Credit Assessment baa3 Adjusted Baseline Credit Assessment baa2 Counterparty Risk Assessment A2(cr)/P-1(cr) Issuer Rating A3 Senior Unsecured A3 Subordinate MTN (P)Baa3 Pref. Stock Non-cumulative -Dom Curr Ba2 (hyb) ST Issuer Rating P-2
PARENT: SANTANDER CONSUMER FINANCE S.A.
Outlook Stable Counterparty Risk Rating A2/P-1 Bank Deposits -Dom Curr A2/P-1 Baseline Credit Assessment baa2 Adjusted Baseline Credit Assessment baa1 Counterparty Risk Assessment A3(cr)/P-2(cr) Senior Unsecured A2 Subordinate -Dom Curr Baa2 Pref. Stock Non-cumulative -Dom Curr Ba1 (hyb) Commercial Paper -Dom Curr P-1
Source: Moody's Investors Service
Endnotes 1 The bank ratings shown here are the bank's deposit rating, senior unsecured rating and baseline credit assessment
10 16 April 2019 Santander Consumer Bank AS: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1163753
11 16 April 2019 Santander Consumer Bank AS: Update to credit analysis