Madrid, July 18, 2022 — Moody’s Investors Service (“Moody’s”) has today affirmed Santander Consumer Finance S.A.’s (SCF) deposit ratings at A2/Prime-1, its senior unsecured debt ratings at A2 and the Commercial Paper rating at Prime-1. The rating agency has also affirmed (1) the bank’s Baseline Credit Assessment (BCA) and Adjusted BCA at baa2 and baa1 respectively; (2) the junior senior unsecured rating at Baa1; (3) the subordinated debt rating at Baa2; and (4) its preference shares rating at Ba1(hyb). The outlook on the long-term deposit and senior unsecured debt ratings remains stable.
Moody’s has also affirmed the bank’s Counterparty Risk (CR) Assessment at A3(cr)/Prime-2(cr) and its Counterparty Risk Ratings (CRR) at A2/Prime-1.
A full list of affected ratings can be found at the end of the press release.
RATINGS RATIONALE
— RATIONALE FOR AFFIRMING THE BCA AND ADJUSTED BCA
The affirmation of SCF’s BCA at baa2 reflects the bank’s sound asset quality in light of its business profile as a consumer finance lender, driven by a strong risk management framework. The bank’s non-performing loan ratio has been around 2% for the last few years, and its asset quality hardly deteriorated as a consequence of the pandemic, with the vast majority of loans that benefited from payment moratoria having resumed regular payments as of the end of 2021. Moreover, the share of stage 2 loans, which increased to 4.2% of gross loans at end-2020, are back to 2019 level at 3.4% as of end 2021.
The solid asset quality performance is also reflected in the bank’s cost of credit, which has historically remained at a lower level that one would expect in the consumer finance business. The cost of credit only increased materially in 2020 at 83 basis points, driven by a one off provision of 186 million to account for the expected economic consequences of the pandemic. Cost of credit in 2021 was almost back to pre-Covid, reducing to around 50 basis points. The bank has a sound provisioning policy, which aims to swiftly reflect asset risk deterioration and translates into high loan loss coverage ratios (loan loss reserves / gross loans stood at 104% at the end of 2021).
Moody’s anticipates a moderate increase in problem loans as a result of inflationary pressures and downside risks from the military conflict between Russia and Ukraine, factors which will negatively affect households’ purchasing power in the main countries where SCF operates. However, under Moody’s base case scenario, such deterioration is unlikely to materially weaken SCF’s credit profile, which underpins the affirmation of the BCA.
Profitability is another credit strength of SCF. The bank’s return on assets (net income / tangible assets) has remained above 100 basis points over several years, with the exception of 2020. Recurrent revenues are supported by long-standing agreements with several automobile manufacturers and retail chains. Furthermore, profits benefit from a contained cost of credit and strong operating efficiency the cost to income ratio stood at a low 42% in 2021.
SCF’s capitalization is sound, with a fully loaded Common Equity Tier 1 (CET1) capital ratio of 12.6% as of December 2021.
SCF has a very high reliance on wholesale funding, partly driven by the lack of access to customer deposits in some of the jurisdictions where it operates. Moody’s Funding Structure ratio, which measures reliance on market funding relative to tangible banking assets, stood at a high 56% at the end of 2021. Funding risk is partly mitigated by liquidity support provided by its parent Banco Santander S.A. (Spain) (Banco Santander), which would step in in case SCF’s other sources of funding dry out.
The affirmation of SCF’s Adjusted BCA at baa1 reflects Moody’s unchanged assumption of high affiliate support from its parent Banco Santander, which translates into one notch of uplift from the bank’s BCA.
— RATIONALE FOR AFFIRMING SCF’s SENIOR UNSECURED DEBT AND DEPOSIT RATINGS
The affirmation of SCF’s long-term senior unsecured debt and deposit ratings at A2 reflects: (1) the affirmation of the bank’s BCA and Adjusted BCA; (2) the rating agency’s Advanced Loss Given Failure (LGF) analysis which leads to two notches of uplift for both instruments; and (3) Moody’s assessment of a low probability of government support given the bank’s non-systemic nature in the Spanish market.
Because SCF belongs to Banco Santander’s resolution group, Moody’s applies the Advanced LGF analysis of its parent company, which translates into a very low loss given failure for SCF’s deposits and senior unsecured debt. Although Moody’s LGF analysis provides three notches of uplift above the Adjusted BCA of baa1 for the bank’s long-term deposit and senior unsecured debt ratings, these ratings are capped at A2, two notches above Spain’s sovereign rating of Baa1, as per Moody’s Banks rating methodology.
— RATIONALE FOR THE STABLE OUTLOOK
The outlook on SCF’s long-term deposit and senior unsecured debt ratings is stable, reflecting Moody’s expectation that the bank’s financial metrics will remain broadly stable despite the expected deterioration in asset quality in the next 12-18 months. The outlook on SCF’s ratings (stable) is aligned with the outlook on its parent, Banco Santander.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the baa2 BCA would require an improvement in the bank’s financial indicators, principally stronger solvency levels and a lower reliance on market funding. An upgrade of the BCA would result in the convergence of Moody’s assessment of the bank’s standalone creditworthiness with that of its parent Banco Santander, therefore not affecting its Adjusted BCA of baa1.
Similar to those of its parent, the bank’s long-term deposit and senior debt ratings could be upgraded if Spain’s sovereign rating is upgraded.
SCF’s ratings could be downgraded if the bank’s asset quality deteriorates beyond Moody’s current expectations, or by Moody’s assessment of a lower probability of parental support or a weakening of Banco Santander’s creditworthiness. A downgrade of Spain’s government rating could also lead to a downgrade of SCF’s deposit and senior unsecured debt ratings.
LIST OF AFFECTED RATINGS
Issuer: Santander Consumer Finance S.A.
..Affirmations:
….Long-term Counterparty Risk Ratings, affirmed A2
….Short-term Counterparty Risk Ratings, affirmed P-1
….Long-term Bank Deposits, affirmed A2, outlook remains Stable
….Short-term Bank Deposits, affirmed P-1
….Long-term Counterparty Risk Assessment, affirmed A3(cr)
….Short-term Counterparty Risk Assessment, affirmed P-2(cr)
….Baseline Credit Assessment, affirmed baa2
….Adjusted Baseline Credit Assessment, affirmed baa1
….Senior Unsecured Regular Bond/Debenture, affirmed A2, outlook remains Stable
….Senior Unsecured Medium-Term Note Program, affirmed (P)A2
….Junior Senior Unsecured Regular Bond/Debenture, affirmed Baa1
….Subordinate Regular Bond/Debenture, affirmed Baa2
….Subordinate Medium-Term Note Program, affirmed (P)Baa2
….Preferred Stock Non-cumulative, affirmed Ba1(hyb)
….Commercial Paper, affirmed A2
….Commercial Paper, affirmed P-1
..Outlook Action:
….Outlook remains Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Alberto Postigo
VP – Senior Credit Officer
Financial Institutions Group
Moody’s Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid, 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Maria Cabanyes
Senior Vice President
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody’s Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid, 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
