Moody's places Volvo­fi­nans Bank's rat­ings on re­view for down­grade

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Global rat­ing agency Moody's to­day placed on re­view for down­grade Volvo­fi­nans Bank AB's (Volvo­fi­nans) Baa2 long-term de­posit rat­ing, P-2 short-term de­posit rat­ing and its D+ bank fi­nan­cial strength rat­ing (BFSR) which is equiv­a­lent to a stand­alone credit as­sess­ment of baa3. The re­view partly re­flects Moody's con­cerns re­lated to wider pres­sures on Euro­pean auto fi­nanc­ing groups fol­low­ing the rat­ing ac­tions taken on 19 Oc­to­ber 2012. Of par­tic­u­lar con­cern is Volvo­fi­nans's in­ter­con­nec­tiv­ity with, and fi­nan­cial strength of, its ma­jor­ity own­ers: the net­work of Volvo deal­er­ships, for ex­am­ple in orig­i­nat­ing loans and pro­vid­ing guar­an­tees on those loans.

In ad­di­tion to such gen­eral fac­tors, the re­view re­flects Moody's Volvo­fi­nans-spe­cific con­cerns re­lated to (1) the in­crease in un­se­cured lend­ing through the bank's credit card busi­ness and the in­crease in non-auto-re­lated un­se­cured credit card lend­ing; (2) the high, al­beit re­duced, de­pen­dence on mar­ket fund­ing ex­hib­ited by the bank; and (3) un­cer­tainty sur­round­ing the in­volve­ment of AP6, the gov­ern­ment pen­sion scheme, which is a 40% share­holder in the bank.

Volvo­fi­nans's credit card of­fer­ing, the Volvo Card, has be­come in­creas­ingly im­por­tant to the bank's prof­itabil­ity. Launched in 1984 as a means of pay­ment and of­fer­ing dis­counts for re­pairs, ser­vices and fuel at Volvo deal­ers, the card has evolved fol­low­ing the ad­di­tion of a VISA of­fer­ing which al­lows for gen­eral, nonauto, transactions.

Moody's views the sub­se­quent grad­ual shift in the busi­ness and lend­ing mix as in­creas­ing risk , which re­quires the adaptation of the risk man­age­ment cul­ture be­yond the bank's tra­di­tional ar­eas of core com­pe­tence, such as se­cured auto lend­ing.

Since ob­tain­ing a bank­ing li­cense in 2008, Volvo­fi­nans has es­tab­lished an in­ter­net de­posit fund­ing base which ac­counts for around 45% of to­tal fund­ing at end-June 2011, thereby sig­nif­i­cantly re­duc­ing the mar­ket fund­ing re­liance.

While the fund­ing di­ver­si­fi­ca­tion is a credit pos­i­tive fac­tor, the rat­ing agency has some con­cerns over the sus­tain­abil­ity of the de­posit base over time, par­tic­u­larly given the in­ter­net-based na­ture of the de­posits, the com­pet­i­tive Swedish bank­ing sys­tem and Volvo­fi­nans' mod­est bank­ing fran­chise. Moody's also be­lieves that Volvo­fi­nans has had to pay a com­par­a­tively high price for this fund­ing.

Volvo­fi­nans is 40% owned by the Swedish state-owned pen­sion fund AP6. In 2011, the Swedish gov­ern­ment ap­pointed a Spe­cial In­ves­ti­ga­tor to eval­u­ate the wider Swedish pen­sion sys­tem.

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