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

LONDON

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.