News Column

Madrid - Moody’s changes outlook on Santander Consumer Finance’s Baa2 ratings to stable from negative

February 14, 2014



Moody's Investor's Service has today changed to stable from negative Santander Consumer Finance S.A.'s (SCF) Baa2 long-term senior debt and deposit ratings. Concurrently, Moody's affirmed the long-term ratings. The change in outlook and affirmation of the Baa2 ratings follow the affirmation of the bank's standalone bank financial strength rating (BFSR) at C- (equivalent to a baa2 baseline credit assessment (BCA)) with a stable outlook. The bank's short-term ratings were affirmed at Prime-2.

RATINGS RATIONALE RATIONALE FOR CHANGING THE OUTLOOK TO STABLE The change in outlook of SCF's debt and deposit ratings to stable from negative reflects: (1) the stable outlook of its standalone rating, (2) the stable outlook of its parent Banco Santander S.A's ratings (Baa2, C-/baa2), as well as (3) the stable outlook of Spain's Baa3 government rating.

The change in outlook of SCF's standalone C- BFSR to stable from negative, which prompted the change in outlook on the long-term ratings, reflects Moody's view that the downside risks to the bank's standalone creditworthiness have substantially decreased. Moody's considers that SCF's stabilising asset-quality indicators and strong earnings diversification will enable it to offset pressures arising from the modest growth prospects -- albeit improving -- in some of SCF's core markets, namely the peripheral European countries. At the same time, Moody's takes comfort from the entity's improved capitalisation levels over the past recent years, underpinned by Banco Santander's ongoing parental support.

Overall, Moody's believes that SCF's credit profile is sufficiently resilient against any challenges stemming from the operating environment, namely in terms of subdued business growth and very low interest rates.

Liquidity, however, remains a rating constraint due to reliance on intra-group funding.

RATIONALE FOR AFFIRMATION OF SCF's RATINGS Today's affirmation of SCF's ratings reflects Moody's view that the group's risk-absorption capacity will remain resilient in 2014, in light of the improved economic prospects of some of SCF's core markets, namely Spain (Baa3 stable), Italy (Baa2 negative) and Portugal (Ba3 stable). For 2014, the rating agency expects modest GDP growth rates of below 1% for these three countries, reversing the trend from the contraction they experienced in 2013. This is highlighted by the stabilising trend in asset-quality indicators and sound earnings generation capacity displayed in 2013. At year-end 2013, SCF reported a problem loan ratio of 4.0%, which is broadly in line with the 3.9% reported a year earlier, and a pre-provision income over risk-weighted assets of 3.0% compared to 3.15% at year-end 2012.

In affirming SCF's standalone BCA, Moody's has incorporated the pressures on earnings stemming from subdued business levels across most of SCF's markets (including its largest contributor Germany) and very low interest rates. Moody's says that these will be mitigated by the lower provisioning effort for SCF in 2014 as credit trends in Europe continue to stabilise.

Moody's acknowledges SCF's improved capital base throughout the crisis, namely driven by the ongoing support delivered by the parent. Banco Santander's last capital increase (EUR300 million, December 2013) enabled SCF to report a core capital ratio of 9.73% at end-2013.

The rating agency also notes SCF's efforts to improve its funding profile, whereby retail deposits now represent close to 60% of total funding and reliance on intra-group funding has substantially declined (to EUR5.4 billion at end-December 2013 from EUR15 billion a year earlier). However, Moody's considers that SCF's remaining dependence on intra-group funding represents a rating constraint. More positively, Moody's notes that Banco Santander has demonstrated, to date, a strong and ongoing commitment to provide liquidity support to its subsidiary, which Moody's expects will continue.

SCF's debt ratings have been affirmed at Baa2, in line with the affirmation of its BCA at baa2. SCF's standalone BCA is rated one-notch higher than the Spanish sovereign due to the high degree of geographical diversification of its balance sheet and income sources, and its manageable level of direct exposure to Spanish sovereign and sub-sovereigns relative to its Tier 1 capital, including under stress scenarios. As a result, Moody's believes that SCF's limited direct linkages to sovereign risk justify a one-notch difference (see Moody's Cross Sector Rating Methodology "How Sovereign Credit Quality May Affect Other Ratings" published 13 February, 2012).

SUBORDINATED DEBT AND HYBRID RATINGS In line with the affirmation of SCF's BFSR, Moody's has affirmed the bank's senior subordinated debt ratings at Baa3, and the outlook on these ratings has been changed to stable from negative.

WHAT COULD MOVE THE RATING UP/DOWN Any upward pressure on SCF's ratings is unlikely in the near term given that the bank is already rated one notch above Spain's government bond rating. For SCF, Moody's views this notching as the maximum notching difference, given SCF's domestic footprint. However, even were the sovereign to be upgraded, SCF's standalone rating would need to balance the positive rating drivers stemming from its diversified and relatively resilient earning streams with: (1) ongoing challenges stemming from some of its core markets such as Spain and Italy; (2) reliance on intra-group funding and; (3) cyclicality of the consumer finance business, which makes it highly vulnerable to economic downturns.

Downward pressure on SCF's BCA could ultimately result from (1) greater downwards pressure on capital levels or asset quality, or deterioration in recurring earnings power than Moody's currently expects; (2) deterioration of its funding profile, i.e. the entity finds difficulties in refinancing its debt redemptions in the wholesale markets or (3) increased exposure to its domestic market that will no longer justify the current credit de-linkage with Spain's rating.

SCF's debt ratings could be downgraded as a result of a downgrade of the BFSR of the parent (Banco Santander: BCA currently baa2).

As the bank's debt and deposit ratings are linked to the standalone BCA, any change to the BCA would likely also affect these ratings.

PRINCIPAL METHODOLOGY The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Jose Mori Vice President - Senior Analyst 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

SUBSCRIBERS: 44 20 7772 5454

JohannesFelixWassenberg MD - Banking Financial Institutions Group

JOURNALISTS: 44 20 7772 5456

SUBSCRIBERS: 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

SUBSCRIBERS: 44 20 7772 5454 2014

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