Training on Forecasting, April 7–8

ACRA affirms AAA(RU) to LLC VW Bank RUS, outlook Stable, and AAA(RU) to bond issues

The credit rating of LLC VW Bank RUS (hereinafter, the Bank) is based on the very high likelihood of extraordinary support from the Bank’s parent group, Volkswagen AG (the Group), which boasts high creditworthiness. The Bank’s high standalone creditworthiness assessment (SCA) is driven by its satisfactory business profile, strong capital adequacy, strong risk profile, and adequate liquidity and funding positions.

The Bank ranked 95th in terms of total assets and 66th in terms of capital among Russian banks as of January 1, 2020. The Bank’s shareholders are Volkswagen Financial Services AG (99%) and Volkswagen Bank GmbH (1%).

The Bank specializes in retail car loans provided to customers the of portfolio of car brands owned by the Group that are sold through authorized dealers on the territory of Russian Federation.

Key rating assessment factors

Very high likelihood of extraordinary support from the Bank’s Supporting Organization. ACRA believes that if necessary, the Group will provide the Bank with short-term and long-term funding and capital injections through Volkswagen Financial Services AG (the Supporting Organization, or the SO). ACRA assesses the country risk of the Supporting Organization’s jurisdiction (Germany) against the country risk of Russia as strong. ACRA assesses the Supporting Organization’s creditworthiness as moderately strong.

The degree of integration between the Bank and the SO is assessed as very strong in view of the following:

  • Importance of the Russian market for the Group;
  • Possible reputational risks in the case of the Bank’s bankruptcy;
  • High operational integration between the Bank and the Group’s companies;
  • The SO’s propensity to support the Bank with liquidity and capital injections.

Satisfactory business profile. The business profile assessment is driven mainly by the Bank’s low market positions and low diversification of operating income as per the nature of its specialized business model (i.e., a captive bank owned by a car manufacturer). The business profile assessment is also supported by the Bank’s strong strategy and the corporate governance prowess of the global franchise, as well as by the brand and quality reputation of cars made by the Group.

The Bank’s strategy is focused solely on financing purchases of cars made by brands in the Group’s portfolio. Currently, the Bank grants loans mostly to individuals who purchase vehicles from the nationwide dealer network affiliated with the Group. The Group sells automobiles to the Russian market that cover all price points and segments, including commercial, passenger, and luxury vehicles, as well as motorcycles. This ensures the Group’s high market share, which in turn supports the profitability of the Bank.

The Bank’s substantial loss absorption buffer is supported by its high capital adequacy ratio (N1.2 was 34.9% as of January 1, 2020), which allows the Bank to withstand an increase in the cost of risk well over 500 bps.

The Bank’s profitability remains high; the average capital generation ratio (ACGR) was 229 bps in 2014 to 2018. ACRA assesses the Bank’s operating efficiency as high. In 2016–2018, the average NIM was 9.0% and CTI was 43.0%. The Group’s current dividend strategy does not provide for dividend payments.

The strong risk profile assessment is based on the Bank’s high quality loan portfolio, strict risk management policies (thorough risk management methods are applied, reviewed, and updated regularly), highly skilled personnel, and the deep integration of the risk function in the Group’s structure. The Bank’s loan portfolio includes retail car loans (82.9% of the portfolio) and loans granted to Russian companies within the Volkswagen group (17.1% of the portfolio). The share of non-performing and potentially non-performing loans (NPLs) stood at 2.2% as of end-June 2019. The Bank’s loan portfolio is characterized by the low concentration of the top ten borrower groups (13.8% of the portfolio as of January 1, 2020), which is typical for banks focused on car loans.

The increase in the volume of loans issued by the Bank is comparable with banks of similar profile due to market trends and does not pose increased risks for the Bank. ACRA expects the scale of car loans to remain close to current levels in 2020. The Bank holds no investments in securities. The Bank’s counterparties in the interbank market are highly reputable banks in line with group policy and its operating risk is at an acceptable level.

The adequate liquidity and funding position is primarily due to the Bank’s high volume of liquid assets, as well as the limited amount of liabilities expected to be repaid within the next three months. In the base case scenario, the short-term liquidity shortage indicator is positive. In the stress scenario, liquidity surplus amounts to 113% of liabilities. The Bank’s long-term position is also assessed as strong, as the long-term liquidity shortage indicator stands at 142%.

In line with the Group’s policy of raising funding in local currencies at its foreign subsidiaries, the Bank’s funding base consists of debt issued on the local market as well as borrowings from local leading banks and Russian subsidiaries of global banks. ACRA notes the ample headroom of unused funds that the Bank has at its disposal.

Key assumptions

  • No material change in the current business model within the 12 to 18-month horizon;
  • Maintaining ownership structure;
  • N1.2 remaining above 20% within the 12 to 18-month horizon;
  • Maintaining NPLs at low levels.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Decline in the Bank’s loan portfolio quality;
  • Loss of shareholder or operational control on the part of the Group;
  • Deterioration in SO creditworthiness.

Rating components

SCA: a+.

Adjustments: none.

Support: SCA + 5

Issue ratings

Certified exchange-traded interest-bearing unregistered bond, 001Р-02 series (RU000A0ZZGE7), maturity date: August 17, 2021, issue volume: RUB 5 bln — AAA(RU)

Certified exchange-traded interest-bearing unregistered bond, 001Р-03 series (RU000A1003L1), maturity date: February 15, 2022, issue volume: RUB 10 bln — AAA(RU)

Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of LLC VW Bank RUSAAA(RU).

Regulatory disclosure

The credit ratings of LLC VW Bank RUS and bonds issued by LLC VW Bank RUS (RU000A0ZZGE7, RU000A1003L1) have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.

The credit ratings of LLC VW Bank RUS and bonds issued by LLC VW Bank RUS (RU000A0ZZGE7, RU000A1003L1) were published by ACRA for the first time on March 2, 2018, August 14, 2018, and February 12, 2019, respectively. The credit rating and outlook of LLC VW Bank RUS and the credit ratings of bonds issued by LLC VW Bank RUS (RU000A0ZZGE7, RU000A1003L1) are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by LLC VW Bank RUS, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of LLC VW Bank RUS and the financial statements of LLC VW Bank RUS drawn up in compliance with Bank of Russia Ordinance № 4927-U, dated October 8, 2018. The credit rating is solicited, and LLC VW Bank RUS participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by LLC VW Bank RUS in its financial statements have been discovered.

ACRA provided no additional services to LLC VW Bank RUS. No conflicts of interest were discovered in the course of credit rating assignment.

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