VW Bank GmbH 'A-/A-2' Ratings Affirmed Following Parent Volkswagen's Outlook Revision To Negative On COVID-19 Effects

  • On March 26, 2020, we revised the outlook on Volkswagen AG (VW AG) to negative from stable and affirmed our 'BBB+' ratings.
  • At the same time, we are affirming the 'A-/A-2' ratings on VW Bank GmbH. VW Bank is directly and 100%-owned by VW AG. The affirmation reflects our ongoing assessment of VW Bank as having one-notch higher creditworthiness and being an insulated group subsidiary.
  • Our negative outlook on WV Bank mirrors the negative trends pertaining to economic and industry risk in our banking industry country risk assessment (BICRA) for Germany, as well as the negative outlook on VW AG and additional COVID-19-related pressures on VW Bank's risk exposures and risk-adjusted profitability.
FRANKFURT (S&P Global Ratings) March 26, 2020--S&P Global Ratings said today it affirmed the long- and short-term issuer credit ratings on Volkswagen Bank GmbH (VW Bank) at 'A-/A-2'. The outlook remains negative.
Our ratings affirmation follows our outlook revision to negative on German Volkswagen AG (VW AG), reflecting rapidly declining auto demand globally, and risk of extended production shutdowns beyond two weeks (see VW AG RU published xxx). We believe that the fortunes of VW Bank are related to the Volkswagen group. VW Bank hosts almost all European banking activities for VW Group that are under the authority of the European Central Bank (ECB), and its core strategic business position and franchise reflects its position as a fully-owned subsidiary of Volkswagen AG. Currently, VW Bank has one-notch higher creditworthiness and is an insulated group subsidiary, but we believe that a widening of the rating gap to its parent is less likely considering the reputational and organisational interconnectedness.
We also believe that VW Bank's risk exposures and risk-adjusted profitability are pressured further by the rapid spread of COVID-19 and the sudden halt of the global economy, which has led us to revise our GDP forecast for the eurozone to between minus 0.5% and minus 1.0% in 2020. We expect that this will also affect the German economy and likely lead to rising loan loss provisions for German banks over 2020.
At the same time, we believe that VW Bank is entering the recession from a position of strength given its superior capitalization and solid revenue generation compared to most European peers. This also mitigates its dependence on the parent's constrained automotive sales capability. We forecast, for example, that the bank's risk adjusted capital (RAC), our main capital indicator, will remain resilient at about 20% in the coming years, which is very high compared to international bank peers. We forecast that VW Bank's financial results will deteriorate in the difficult 2020 environment, but we do not expect this decrease to be structural or to impair the bank's strong capitalization. We base this on our view of VW Bank's sound risk management, highly collateralized position in auto loans, and expected sweeping counterbalancing regulatory and government actions to support the German economy and other European economies in which VW Bank operates.
We also see as pivotal that VW Bank continues to benefit from its access to granular and stable customer deposits. We view VW Bank as much less dependent than its captive finance peers on confidence-sensitive wholesale funding markets--this differentiates it from its captive finance peers. We also observe the stability in VW Banks' deposit funding since COVID-19 started to spread, which so far mitigates our general observation that direct-banking-generated customer deposits are typically more price sensitive and less stable than those of large retail banking networks, such as the German savings banks or the cooperative sector. We also note VW Bank's sound regulatory standing, and our funding and liquidity ratios; we understand that VW Bank has no major expensive wholesale funding needs in 2020, and would also benefit from widespread central bank support.
The negative outlook on VW Bank reflects the possibility of a downgrade over the next two years, mirroring our negative trends for economic and industry risk in our BICRA on Germany. It also reflects our negative outlook on VW AG, and additional pressures from COVID-19 on VW Bank's risk exposures and risk-adjusted profitability. Moreover, VW Bank has yet not fully finalized its strategic reorganization within the Volkswagen AG (VW) group, under which it has much larger core businesses. VW Bank now manages VW's European banking activities, which could entail greater economic risks outside German markets. Nevertheless, we currently consider the rating on VW to be a floor for our rating on VW Bank, as long as the bank remains a core subsidiary.
We could lower our 'A-' issue credit rating on VW Bank, as well as the issue ratings on the bank's senior preferred debt, senior subordinated debt, and regulatory capital instruments if VW Bank's anchor were to deteriorate to 'bbb+' from 'a-', if we were to downgrade Volkswagen AG, or we saw idiosyncratic risk from COVID-19 pressures that stood to weaken VW Bank's stand-alone creditworthiness.
We could revise our outlook to stable over the next 24 months if we saw stable economic and industry risk trends for the German banking industry, if our ratings on Volkswagen AG stabilized, and if we saw successful regulatory and government action to stabilize borrowers and the domestic economy against COVID-19 effects over the coming months. At the same time, any rating upside would involve VW Bank demonstrating the strength of its restructured European business model and maintaining superior capitalization to buffer risks.
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