Volkswagen Bank Ratings Lowered To 'A-/A-2'; Outlook Negative

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1 Research Update: Volkswagen Bank Ratings Lowered To 'A-/A-2'; Outlook Negative Primary Credit Analyst: Salla von Steinaecker, Frankfurt (49) ; Secondary Contact: Bernd Ackermann, Frankfurt (49) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List OCTOBER 12,

2 Research Update: Volkswagen Bank Ratings Lowered To 'A-/A-2'; Outlook Negative Overview On Oct. 12, 2015, we lowered our ratings on Volkswagen AG (VW AG) to 'A-/A-2' from 'A/A-1'. We consider VW Bank core to VW AG's strategy but our ratings on VW Bank do not receive any uplift from those on the parent, according to our criteria. We are lowering the ratings on VW Bank to 'A-/A-2' from 'A/A-1' and removing them from CreditWatch negative. The negative outlook reflects potential risks to VW Bank's financial profile resulting from adverse developments at the parent company VW AG. Rating Action On Oct. 12, 2015, Standard & Poor's Ratings Services lowered its long- and short-term ratings on Germany-based Volkswagen Bank GmbH to 'A-/A-2' from 'A/A-1'. The outlook is negative. We removed the ratings from CreditWatch negative, where we had placed them on Sept. 24, Rationale The downgrade follows a similar rating action on the parent company Volkswagen AG (VW AG; A-/Watch Neg/A-2). We consider VW Bank a core subsidiary of VW AG. However, as VW Bank's stand-alone credit profile (SACP) is already at the same level as the rating on the parent, this does not translate into additional support notches for VW Bank. We consider that VW Bank's 'a-' SACP is underpinned by very strong capitalization and a sound funding profile. As a monoline auto finance provider, VW Bank's business position is concentrated, in our view, and it remains reliant on its parent in terms of unit sales and brand recognition. The current events at VW Group could affect the group's car sales in Europe and therefore affect VW Bank's business prospects and profitability. However, we consider that the bank holds a substantial capital buffer to withstand slower growth and potentially increased risk and refinancing costs. Notwithstanding the above, we continue to forecast that VW Bank will maintain OCTOBER 12,

3 very strong capitalization by our metrics. We believe that VW Bank's risk-adjusted capital (RAC) ratio, our measure of capitalization, will remain above our 15% threshold in the next months compared with 18.4% as of year-end We expect VW Bank will maintain decent asset quality. We believe that the bank's coverage of nonperforming loans is above that of other European auto captive finance companies and the bank additionally holds a substantial risk buffer for unexpected losses in peripheral European countries. We anticipate the bank's cost of risk will remain stable at around basis points in At VW Bank, there is only a small portion of leasing business, mainly in the French and Italian markets. The risks related to decreasing residual values would in our view have a minor impact on the bank's financial profile. VW Bank's sound funding profile benefits from an elevated level of customer deposits. These stood at 25.1 billion or 65% of the total funding base as of June 30, 2015, and we assume they will stay at this level. While we consider direct bank customer deposits to be more price-sensitive and less sticky than those of large retail networks, we observe that VW Bank's deposit base has been stable over the past years despite downward adjustments in interest rates paid to customers. Furthermore, we understand that the majority of the customer deposits are protected under the German deposit insurance scheme, and as such we anticipate the deposit base will remain less volatile. We therefore expect VW Bank will maintain its sound funding and liquidity metrics, reflected in a Standard & Poor's stable funding ratio of close to 100% and liquidity ratio (broad liquid assets to short-term wholesale funding) of 1.1x as of June 30, In line with our expectation that VW Bank will remain core to the group's strategy, this supports our "average" funding and "adequate" liquidity assessment on VW Bank. Our ratings on VW Bank are based on the bank's 'a-' anchor, its "weak" business position, "very strong" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. The SACP is 'a-'. The ratings on VW Bank no longer include any additional parental support because the 'a-' SACP is already at the level of the parent rating. Should VW Bank's SACP fall below the parent rating, we could reapply additional notches of support to equalize the rating with that on VW AG, owing to VW Bank's core group status. On the other hand, a negative rating action on VW AG would not automatically lead to a downgrade of VW Bank. The rating on the bank could potentially diverge positively from that on VW AG if the bank's SACP was higher than the group credit profile. This is because we assess it as "insulated" in line with our group rating methodology, reflecting VW Bank's regulatory status as a bank and its independent funding prospects from the group. Although we in general view the captive's default risk as indistinguishable from that of its parent, the presence of any regulatory restrictions regarding liquidity, capital, or OCTOBER 12,

4 funding could prevent the subsidiary from supporting the group and, as such, we could rate the bank above the parent. Although we consider the possibility as extremely remote, we could call into question our view of VW Bank as a "core" entity within the VW group if we saw weaker commitment from VW AG to support its subsidiaries. This could happen if VW AG were to relinquish its majority ownership in VW Bank or if the captive-finance operations were to cease to be pivotal to the VW group's worldwide strategy. Outlook The negative outlook on VW Bank reflects potential risks to the bank's financial and funding profile arising from the events at the parent company VW AG. While we consider the bank's financial profile to be stable, its business prospects are reliant on the unit sales and reputation of the wider group that, over time, could potentially weaken its SACP. Given that VW Bank is a regulated entity, a negative rating action on VW AG would not automatically lead to a downgrade of VW Bank. There is also potential for VW Bank to have a higher rating than the parent given that we consider it an "insulated" subsidiary protected by regulatory restrictions and able to stand on its own operationally in times of stress. We could revise the outlook to stable if we observed that VW Bank's operations and financial profile were not negatively affected by the events at parent group, and if the bank is able to maintain its granular and stable customer deposit base. Ratings Score Snapshot Volkswagen Bank GmbH To From Issuer Credit Rating A-/Negative/A-2 A/Watch Neg/A-1 SACP a- a- Anchor a- a- Business Position Weak (-2) Weak (-2) Capital and Earnings Very Strong (+2) Very Strong (+2) Risk Position Adequate (0) Adequate (0) Funding and Average (0) and Average (0) and Liquidity Adequate (0) Adequate (0) Support 0 +1 GRE Support OCTOBER 12,

5 Group Support 0 +1 Sovereign Support 0 0 Additional Factors 0 0 Related Criteria And Research Related Criteria Group Rating Methodology - November 19, 2013 Banks: Rating Methodology And Assumptions - November 09, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions - November 09, 2011 Bank Capital Methodology And Assumptions - December 06, 2010 Methodology For Mapping Short- And Long-Term Issuer Credit Ratings For Banks - May 04, 2010 Use Of CreditWatch And Outlooks - September 14, 2009 Related Research German Automaker Volkswagen Ratings Lowered To 'A-/A-2' On Governance; L-T Ratings Remain On Watch Neg On Ongoing Risks, Oct. 12, 2015 Banking Industry Country Risk Assessment Update, October, Oct. 7, 2015 Germany-Based Automaker Volkswagen Placed On CreditWatch Negative On 6.5 Billion Charge For Global Recall, Sept. 24, 2015 Volkswagen Bank GmbH, July 24, 2015 Volkswagen Financial Services AG, July 24, 2015 Banking Industry Country Risk Assessment Germany, July 23, 2015 Ratings List Downgraded; CreditWatch/Outlook Action To From Volkswagen Bank GmbH Counterparty Credit Rating A-/Negative/A-2 A/Watch Neg/A-1 Senior Unsecured A- A/Watch Neg Commercial Paper A-2 A-1/Watch Neg Additional Contact: Financial Institutions Ratings Europe; [email protected] Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm OCTOBER 12,

6 (46) ; or Moscow 7 (495) OCTOBER 12,

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