OREANDA-NEWS. Fitch Ratings has affirmed Hyundai Capital Services Inc.'s (HCS) Long-Term Issuer Default Rating (IDR) at 'BBB+', its Short-Term IDR at 'F2', and its senior unsecured debt rating at 'BBB+. The agency has also affirmed Hyundai Card Co., Ltd's (HCC) Long-Term IDR at 'BBB' and its Short-Term IDR at 'F3'. The Outlook on HCS and HCC is Stable, reflecting the Outlook on Hyundai Motor Company (HMC; BBB+/Stable), the parent of both companies.

KEY RATING DRIVERS - HCS's IDRs and Senior Unsecured Debt

HCS's ratings are equalised with those of HMC because Fitch views HCS as a core subsidiary of the car maker, which owns 57% of the financing company. HCS is a captive auto financier of HMC and Kia Motor Corporation (Kia; BBB+/Stable) and is highly integrated in terms of management and operation with the two car makers. The ratings do not reflect extraordinary support from General Electric Capital Corporation (GECC), which owns 43% of HCS and HCC, because Fitch views its minority ownership in the Korean companies as an opportunistic investment.

HCS's franchise remains strong in South Korea thanks to the dominance of HMC and Kia in the local market. At end-3Q14, about 70% of buyers who sought financing to purchase vehicles from Hyundai and Kia took loans from HCS. Nevertheless, Fitch expects HCS's loan book growth to slow as sales of imported cars increase and competition from banks and other consumer financiers intensify. Captive auto financing-related assets, such as auto loans, instalments, and leases, accounted for about 70% of HCS's total portfolio. The balance comprises used car loans, unsecured consumer loans and mortgage.

HCS's asset quality, like its peers', would continue to be pressured by high household leverage in Korea. Nevertheless, the household debt issue is not likely to materialise in the near term, given that Korea's unemployment ratio remains quite low at 3.8% in January 2015, interest rates are at historic lows, and the government is taking steps to boost household income. In the longer term, households will likely find it more difficult to service their debt, particularly if interest rates begin to rise.

HCS's liquidity remains adequate despite heavy reliance on wholesale funding. Although HCS might be vulnerable to tighter capital market conditions when the economy is stressed, the risk would be mitigated by the accompanying decline in auto sales, which would reduce funding needs. In addition, market access is likely to be underpinned by strong support from its parent. HCS maintains a euro committed credit line equivalent to USD600m for contingency purposes from GECC.

HCS's senior unsecured debt is rated at the same level as its Long-Term IDR, in line with Fitch's criteria on rating senior unsecured bond instruments.

KEY RATING DRIVERS - HCC's IDRs

HCC's Long-Term IDR of 'BBB' reflects Fitch's view that HCC is a strategically important subsidiary for HMC and there is a high probability of support from HMC. This is because HCC is 53% owned by HMC and they share the same brand name. HCC and HCS share the same staff members, collection platform, and premises. The one notch difference reflects Fitch's view that the credit card business is not a core operation of HMC.

HCC's portfolio mix is increasingly weighted towards riskier assets and Korea's households, especially those categorised as sub-prime, which are more highly leveraged. In addition, Fitch expects HCC's profitability, like its local peers, to continue to be pressured because the credit card industry will remain subject to stringent regulation and intense competition. Its credit cost could increase noticeably if the economy goes into a downturn, given that it has increased card loans significantly to boost profitability. In 2014, its profitability recovered after it trimmed costs by reducing customer benefits.

HCC also lacks a bank affiliation that has helped other card issuers expand their debit and cheque card businesses, which have eaten into the credit card market. HCC is unable to compete effectively in the debit and cheque card business because its costs are higher. The lack of a bank affiliation is also a handicap in terms of funding.

HCC depends solely on wholesale funding, exposing it to volatility in capital market conditions. HCC currently maintains adequate funding and liquidity and maintains credit lines of KRW490bn for contingency purposes, mostly with domestic banks at end-2014. In addition, market access is likely to be underpinned by strong support from its parent.

RATING SENSITIVITIES - HCS and Senior Unsecured Debt, and HCC

The ratings of HCS and HCC would be reviewed if there is any change in HMC's ability to support them or any change in the relationship among HCS, HCC and HMC. If the financial profiles of HCS and HCC deteriorate materially, resulting in weakening in HMC's financial profile or rendering them as less important to the parent's business strategy, their ratings will be reviewed, although Fitch considers this to be a remote possibility. If HCC's financial profile improves significantly in a sustainable manner, its ratings could be upgraded, but this is an unlikely prospect in the near term given the challenges the industry is facing. The ratings are unlikely to be affected by any changes in GECC's ownership in HCS or HCC.

Any action on HCS's ratings would trigger a similar change in its senior unsecured debt rating.