Fitch Affirms Santander Consumer Finance, S.A. at 'A-'; Outlook Stable
KEY RATING DRIVERS
IDRS, SENIOR, SUBORDINATED DEBT, AND SR
SCF's Long- and Short-term IDRs are equalised with those of its parent, Banco Santander, S.A. (Santander; A-/Stable) as Fitch regards it as a core group subsidiary. We therefore believe there is an extremely high probability that support will be provided to SCF by its parent, if needed.
SCF is 100% owned (directly and indirectly) by Santander and is an integral part of the group as it manages most of the group's consumer finance operations. Its management and corporate culture are highly integrated with those of Santander, and within regulatory restrictions, Santander's capital and liquidity are highly fungible within the group, at least in the eurozone.
The entity's subordinated debt rating is notched down once from its IDR for loss severity.
VR
SCF's VR reflects the entity's standalone creditworthiness and is based on its strong consumer finance franchise and market share in Europe, which supports consistently healthy profitability, resilient asset quality favoured by its geographic and product mix and its improved capitalisation. The VR also factors in its diversified funding structure, albeit biased towards wholesale funds, increased parent bank funding due to the recent agreement in France and tight liquidity at some units. Execution risks from recent acquisitions are mitigated by SCF's track record in integrating acquired businesses in the past five years.
SCF has a leading consumer franchise in Europe, ranking among top three players in the core markets where it operates. The bank's geographic diversification is well spread across Northern and Southern European countries, especially after the closed agreement in 2015 with Banque PSA Finance, the auto financing arm of car manufacturer Peugeot-Citroen, to create a joint venture to finance auto loans in France. Despite the latter, SCF's activities remain biased towards Germany, which accounts for 45% of the group's total loans, followed by Nordic countries which account for another 19%, France and Spain 12% respectively, and Italy for 7%.
The French agreement has also strengthened the group's historical foothold in the auto-finance segment and its brand reach, despite slightly reducing its product portfolio diversification. However, within its monoline consumer lending focus, SCF's product diversification remains balanced between auto loans (51% at end-1H15), other consumer lending (38%) and retail mortgages (11%).
SCF has been acquisitive in the past five years, which has enabled the bank to build its strong consumer lending franchise. Fitch anticipates that SCF's future growth will largely be centred on organic growth while balancing its product mix.
SCF's risk profile benefits from its large exposure to more stable and highly rated European economies, a large share of relatively less risky secured lending, mainly auto loans, and tight risk management controls and risk appetite. All this is reflected in its impaired loan ratio of 3.95% at end-1H15 and coverage ratio of 103%.
SCF's profitability benefits from its leading market share in most of the markets within the consumer lending segment, which supports healthy net interest revenue generation and cost efficiency benefits from forming part of Santander group. This provides healthy net interest margins, which can absorb potentially cyclical loan impairment charges, which accounted for about 30% of pre-impairment operating profit in 1H15.
SCF's capitalisation improved to sound levels for its rating and its business profile, with a fully-loaded Basel III CET1 ratio of 11.5% at end-1H15. The balance-sheet leverage ratio, measured as tangible common equity to tangible assets, is also sound at 8.4%. SCF's capitalisation is largely managed by its parent Banco Santander on a "need-cost optimisation" basis. As a result, SCF has limited flexibility to retain earnings given the group's capital policy. However, in our assessment of capitalisation, we also take into account SCF's well reserved credit risks and, ultimately, ordinary capital support from the parent if needed.
In Fitch's assessment of SCF's funding and liquidity profile, we incorporate potential ordinary support from the parent and the fact that SCF has banking licences in some of the countries where it operates, including its recent agreement in France. The latter brings funding diversification compared with typically wholesale funded non-bank peers. In particular, in Germany, retail deposits represent a meaningful funding source and to date roughly 46% of SCF's total funding comprises retail deposits. However, SCF remains wholesale-funded reliant, largely secured, and biased towards short-term maturities in line with the short-term nature of its lending activities. SCF temporarily increased funding from the parent to 9% of total funding at end-1H15 to fund the Banque PSA agreement but it expects to reduce this to negligible levels by 2018, which Fitch views as feasible.
While just adequate at the group level, SCF's liquidity is tight at a few of its units, for which it is building liquidity buffers to comply with the Basel III liquidity coverage ratio. We understand that Santander/SCF's intention is to make all operating subsidiaries self-reliant with regard to compliance with regulatory requirements.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
SCF's IDRs and debt ratings are sensitive to the same factors that might drive a change in Santander's IDRs. While it is not our base case, SCF's ratings would also be sensitive to a reduction in Banco Santander's stake in SCF or if it were to become significantly less integrated into the group, leading Fitch to no longer view SCF as a core subsidiary.
VR
SCF's VR could be upgraded if material improvements in liquidity are accompanied by a longer track-record of self-sufficiency, involving for example reduced parent bank funding, while successfully completing the integration of Banque PSA. Conversely, negative rating pressure could arise from a marked deterioration of asset quality, resulting in earnings and capital pressure. A prolonged inability to competitively access wholesale markets or unexpected execution risks would also put pressure on ratings.
The rating actions are as follows:
SCF
Long-term IDR affirmed at 'A-'; Outlook Stable
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '1'
Viability Rating affirmed at 'bbb+'
Senior unsecured debt long-term rating affirmed at 'A-'
Senior unsecured debt short-term rating and commercial paper affirmed at 'F2'
Subordinated debt affirmed at 'BBB+'
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