FINANCIAL INSTITUTIONS CREDIT OPINION 23 April 2020 Update RATINGS FCA Bank S.p.A. Domicile Italy Long Term CRR Baa1 Type LT Counterparty Risk Rating - Fgn Curr Outlook Not Assigned Long Term Debt Not Assigned Long Term Deposit Baa1 Type LT Bank Deposits - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Raffaele Del Cimmuto +33.1.5330.3360 Associate Analyst [email protected]Alain Laurin +33.1.5330.1059 Associate Managing Director [email protected]Nick Hill +33.1.5330.1029 MD-Banking [email protected]FCA Bank S.p.A. Update to credit analysis Summary The Baa1 long-term deposit and issuer ratings of FCA Bank S.p.A. (FCA Bank), a joint venture between the car manufacturer Fiat Chrysler Automobiles N.V. (FCA, Ba1 1 , ratings under review direction uncertain) and Credit Agricole S.A. (CASA, Aa3 stable, baa2 2 ), reflect (1) the bank’s ba1 BCA, which is mainly driven by its sound solvency profile and commercial dependence on FCA; (2) a high probability of affiliate support from CASA, whose Adjusted BCA of a3 drives a one-notch uplift from FCA Bank's BCA to baa3; (3) a very low loss given failure, which results in three and two notches of uplift for the deposit and issuer ratings, respectively; (4) the low probability of government support; and (5) Italy 's (Baa3 stable) sovereign debt rating, which constrains FCA Bank's long-term deposit ratings. The outlook on the issuer rating is negative, reflecting the deteriorating operating environment because of the coronavirus outbreak in Italy and the downside risks to the bank's standalone credit profile. Exhibit 1 Rating Scorecard - Key financial ratios 1.3% 13.6% 1.4% 79.2% 8.3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 2% 4% 6% 8% 10% 12% 14% 16% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets Solvency Factors (LHS) Liquidity Factors (RHS) FCA Bank (BCA: ba1) Median ba1-rated banks Solvency Factors Liquidity Factors The ratios of capital, funding structure and liquid resources are based on the most recent data; the ratios of asset risk and profitability are based on three-year averages or the most recent data if they are worse than averages. Source: Moody's Financial Metrics
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FINANCIAL INSTITUTIONS
CREDIT OPINION23 April 2020
Update
RATINGS
FCA Bank S.p.A.Domicile Italy
Long Term CRR Baa1
Type LT Counterparty RiskRating - Fgn Curr
Outlook Not Assigned
Long Term Debt Not Assigned
Long Term Deposit Baa1
Type LT Bank Deposits - FgnCurr
Outlook Stable
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
SummaryThe Baa1 long-term deposit and issuer ratings of FCA Bank S.p.A. (FCA Bank), a joint venturebetween the car manufacturer Fiat Chrysler Automobiles N.V. (FCA, Ba11, ratings underreview direction uncertain) and Credit Agricole S.A.(CASA, Aa3 stable, baa22), reflect (1)the bank’s ba1 BCA, which is mainly driven by its sound solvency profile and commercialdependence on FCA; (2) a high probability of affiliate support from CASA, whose AdjustedBCA of a3 drives a one-notch uplift from FCA Bank's BCA to baa3; (3) a very low loss givenfailure, which results in three and two notches of uplift for the deposit and issuer ratings,respectively; (4) the low probability of government support; and (5) Italy's (Baa3 stable)sovereign debt rating, which constrains FCA Bank's long-term deposit ratings.
The outlook on the issuer rating is negative, reflecting the deteriorating operatingenvironment because of the coronavirus outbreak in Italy and the downside risks to thebank's standalone credit profile.
The ratios of capital, funding structure and liquid resources are based on the most recent data; the ratios of asset risk andprofitability are based on three-year averages or the most recent data if they are worse than averages.Source: Moody's Financial Metrics
» Monoline business model and commercial dependence on FCA
» Wholesale funding profile, which is mitigated by Credit Agricole's ongoing support
» High exposure to small and medium-sized enterprises (SMEs), which are at risk, given the deteriorating operating environmentbecause of the coronavirus outbreak
OutlookThe negative outlook on the long-term issuer rating of FCA Bank reflects the deteriorating operating environment because of thecoronavirus outbreak in Italy and the downside risks to the bank's standalone credit profile. Despite the support packages put in placeby the Italian government, the European Union as well as by the European Central Bank, we expect a material increase in FCA Bank'scost of risk.
The outlook on FCA Bank's long-term deposit rating is stable as the rating is currently constrained by Italy's Baa3 sovereign debt rating.Therefore, FCA Bank's deposits are unlikely to be downgraded in the event of a lowering of the Adjusted BCA.
Factors that could lead to an upgradeAn upgrade of FCA Bank's ratings is unlikely, given the negative outlook on the long-term issuer rating and the constraint on thedeposit ratings arising from Italy's government bond rating of Baa3. Under our Banks methodology, banks' ratings do not typicallyexceed the related sovereign bond rating by more than two notches, reflecting our view that the expected loss of rated bankinstruments is unlikely to be significantly lower than that of the sovereign's own debt.
Factors that could lead to a downgradeA downgrade of FCA Bank's issuer rating would likely be driven by a lower BCA or a lower Adjusted BCA, which could be prompted by amaterial decline in solvency or liquidity and/or a lower parental support.
A downgrade of the issuer rating could also be triggered by a higher LGF on senior unsecured liabilities.
A downgrade of Italy's sovereign rating to Ba1 would also lead to a downgrade of FCA Bank's deposit and issuer ratings.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
2 23 April 2020 FCA Bank S.p.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Key indicators
Exhibit 2
FCA Bank S.p.A. (Consolidated Financials) [1]
12-192 12-182 12-172 12-162 12-152 CAGR/Avg.3
Total Assets (EUR Million) 31,705.7 30,536.5 27,187.0 23,283.6 19,509.2 12.94
Total Assets (USD Million) 35,589.6 34,907.6 32,646.0 24,558.5 21,192.7 13.84
Gross Loans / Due to Customers (%) 1344.0 1309.1 1450.7 2684.7 3467.3 2051.25
[1]All figures and ratios are adjusted using Moody's standard adjustments. [2]Basel III - fully-loaded or transitional phase-in; IFRS. [3]May include rounding differences due to scaleof reported amounts. [4]Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5]Simple average of periods presented for the latestaccounting regime. [6]Simple average of Basel III periods presented.Source: Moody's Investors Service; Company Filings
ProfileFCA Bank S.p.A. (FCA Bank) is a captive finance company that supports vehicle sales in selected European countries by its manufacturershareholder FCA and also by non-FCA brands such as Ferrari, Jaguar, Land Rover, Erwin Hymer, Morgan and Aston Martin. Furthermore,in 2018, FCA Bank ventured into the motorcycle segment through agreements with Harley Davidson and MV Agusta.
The bank operates in 17 European countries and Morocco, either directly or through branches and subsidiaries, and provides servicesmainly through the dealership networks of the respective manufacturers.
The company is a 50:50 joint venture between Credit Agricole Consumer Finance SA, a subsidiary of CASA, and FCA Italy S.p.A., asubsidiary of FCA. For more information, please see FCA Bank's Company Profile.
Detailed credit considerationsFCA Bank’s BCA strained by the coronavirus outbreakThe rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices and asset-pricedeclines are creating a severe and extensive credit shock across many sectors, regions and markets. Given production disruptions atmost carmakers, the bank's lending activity is currently materially reduced and is likely to resume progressively over several quarters.Consequently FCA Bank's metrics, in particular profitability and also asset quality will likely be under pressure in the next twelvemonths.
Stock of problem loans to increase following the outbreak in FCA Bank's European marketsFCA Bank’s asset risk is low, indicated by our a3 score, one notch below the Macro-Adjusted score of a2 to reflect our view that thebank's problem loan ratio will deteriorate following the coronavirus outbreak.
The very rapid spread of the coronavirus outbreak has led Italy to enforce far-reaching restrictions, which will have a material impacton the country's economy, affecting both corporates and individuals, with more acute consequences for the important SME sector. FCABank's significant exposure to SMEs makes the bank's credit profile sensitive to such rapidly evolving market conditions.
To some extent, the economic consequences of the Covid crisis will be mitigated by the supporting measures taken by the Italiangovernment and the European Union alongside the support provided by the European Central Bank. The Italian government published
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law decrees on 17 March 2020 and on 8 April 20203 which includes inter alia a six-month bank loan moratorium for companies underspecific conditions as well as a large state guarantee program on new loans up to €340 billion.
Cars are of critical importance to most consumers, who usually repay their car loans with priority over other debt; this results in arelatively low level of problem loans4. FCA Bank disclosed a low stock of problem loans, at 1.2% of gross loans in December 2019,which compared favourably with an average of 2.9% for European banks, according to data published by the European BankingAuthority5 and with the Italian system average of 8.1% as of June 20196.
The provisioning coverage of December 2019 was 49%, slightly down from 51% as of December 2018.
Sound capital and good profitabilityFCA Bank’s tangible common equity/risk-weighted assets of 13.6% in December 2019 was sound. Our score for FCA Bank's Capitalis baa1, one notch below the Macro-Adjusted score to factor in the downside pressure from the deteriorating operating environmentin which the bank operates. In 2019, most of FCA Bank's outstanding businesses (retail, dealer and rental) were in Italy (48% of totalloans), followed by Germany (18%), the UK (8%), France (8%) and Spain (6%).
Unlike its peers, FCA Bank computes its risk-weighted assets using the standardised approach, limiting comparability with peers thattypically compute a material share of their exposures under the internal risk-based approach (IRB). We do not expect the bank to adoptadvanced credit risk models in the foreseeable future.
The bank’s profitability is robust and in line with that of its main peers (see Exhibit 3). Our score for FCA Bank's Profitability is a3, in linewith the Macro-Adjusted score. In December 2019, the bank's return on tangible assets was 1.5%.
Exhibit 3
Good profitability
1.0%1.1%
0.8%0.7%
0.9% 0.9%
0.7%0.8% 0.8%
1.9%1.8%
1.7%
1.4%
1.6%1.5%
1.5%
1.7%
1.5%
0.9%
1.1% 1.1%
1.2%
1.3%1.4%
1.4%
1.3%
1.5%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Volkswagen Bank GmbH (baa2) RCI Banque (baa3) FCA Bank S.p.A. (ba1)
Data for return on tangible income in 2019 for Volkswagen Bank GmbH and RCI Banque are referred as of 30 June 2019.Source: Moody's Investors Service
FCA Bank's net profit has grown on a sustained basis since 2007 and throughout the years of recession. The bank disclosed for 2019 anet income of €467 million (+20% on a yearly basis). However, the spread of the coronavirus outbreak in Europe will have a negativeimpact on FCA Bank's profitability.
FCA Bank was fined by Italy's competition authority, Autorità Garante della Concorrenza e de Mercato (AGCM), on 9 January 2019,along with eight other auto captives, for exchange of commercial information on the main characteristics of their loans between 2003and 20177. The fine imposed on FCA Bank was €179 million. Nevertheless, the bank posted a net income of €388 million in 2018, inline with €383 million in 2017, notwithstanding a provision, amounting to €60 million, against the related risks.
FCA Bank appealed AGCM's decision in March 2019, but the legal proceedings will likely take more than two years to conclude. On26th February 2020 the Regional Administrative Court of Rome (Lazio) decided to postpone any decision following the introduction ofadditional reasons by some plaintiffs. Next Court Hearing has been scheduled on 21 October 2020. Pursuant to the ruling, FCA Bank
4 23 April 2020 FCA Bank S.p.A.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
provided AGCM with a bank guarantee for an amount equal to the sanction, which will be retained by AGCM until the final decision istaken. We assume the fine to be manageable for FCA Bank.
Wholesale funding profile, with matching maturitiesFCA Bank is dependent on inherently credit-sensitive market funding; we consider its Funding Structure a weakness and assign a scoreof caa1. Dependence on market funding may cause some difficulties in a volatile operating environment such as Italy.
Our Market Funds assigned score is two notches above the caa3 Macro-Adjusted score. The adjustment takes into account our viewthat a material amount of funding is stable, because it comes from FCA's shareholder, Credit Agricole (13% of the total debt), and alsobecause the maturities of FCA Bank's senior debt match the relatively short-term duration of assets. FCA Bank's funding sources arealso well diversified (Exhibit 4).
Exhibit 4
Diversified funding profile as of December 2019
Funding from CASA 13%
Interbank funding excl CASA 22%
Wholesale unsecured bonds 34%
Deposits 4%
ECB 5%
Securitisation 21%
Commercial Paper 1%
Sources: Company's presentation and Moody's Investors Service
The bank has been able to tap the wholesale markets under its own name several times over the last few years. FCA Bank has limitedliquid assets, which represented 8.2% of its tangible assets in December 2019. The assigned score for Liquid Resources is ba3, in linewith the Macro-Adjusted score.
Qualitative adjustments and affiliate constraintsFCA Bank’s creditworthiness is constrained by its monoline business and lack of business diversification, which is reflected by a one-notch negative adjustment to its Financial Profile score of baa3, which results in a BCA of ba1.
Environmental, social and governance considerationsAs a financial institution, FCA Bank has a moderate exposure to social risks, in line with our general view for the banking sector asdescribed in our social risk heat map, notwithstanding the aforementioned litigations in Italy.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health andsafety. The rapid and widening spread of the coronavirus outbreak and the deteriorating global economic outlook are creating a severeand extensive credit shock across many sectors, regions and markets, affecting debt purchasers' business and performance.
Although banks generally have a low exposure to environmental risk, as explained in our environmental risk heat map, certain bankscould, however, face a higher risk from concentrated lending to individual sectors or operations concentrated in disaster-prone areasor more generally to environmental risks. This is the case for FCA Bank because of its function as a captive bank of an automotivemanufacturer. This industry has an “elevated risk - emerging” score for us as exposed to the transition risks of the industry towardsalternative fuel vehicles. We note that FCA has been reluctant so far to invest aggressively into this area compared with most of itsEuropean peers. In our carbon transition assessments (CTAs) of 20 leading auto manufacturers, we ranked FCA at CT-9, on our 10-pointCTA scale, indicating that it is poorly positioned for the industry's carbon transition. It was the weakest score of any automaker in our
5 23 April 2020 FCA Bank S.p.A.: Update to credit analysis
sample group. The car automaker FCA is also exposed to sector-specific social risks, including strike risks of typically well-organizedworkers' unions.
Governance risks are largely internal rather than externally driven. Our view on FCA Bank’s governance is credit neutral, despite severalcontrol issues and governance shortfalls faced by CASA in recent years in the Italian consumer finance market with Agos Ducato S.p.A(Agos). Given the remedial actions taken by Agos in terms of its governance structure and FCA's status as a listed company with highstandards in terms of organisational structure and public disclosure, we do not apply qualitative adjustments neither under Opacity andComplexity nor under Corporate Behaviour in our scorecard. Nonetheless, corporate governance remains a key credit considerationand requires ongoing monitoring, like for any other bank.
Support and structural considerationsAffiliate supportOur view that there is a high probability that Credit Agricole would extend extraordinary support to FCA Bank in case of need drives aone-notch uplift from the bank's ba1 BCA to an Adjusted BCA of baa3. This expectation is based on the fact that FCA Bank is a strategicsubsidiary for Credit Agricole's European consumer finance business. Furthermore, this status is underpinned by the joint ventureagreement that was recently extended until December 2024.
Loss Given Failure (LGF) analysisFCA Bank is subject to the European Union's Bank Recovery and Resolution Directive (BRRD), which we consider an operationalresolution regime. Our analysis assumes residual tangible common equity of 3% and losses post-failure of 8% of tangible bankingassets, a 25% run-off in “junior” wholesale deposits, a 5% run-off in preferred deposits and 26% junior deposits over total deposits.These are in line with our standard assumptions. Furthermore, we take into account the full depositor preference whereby juniordeposits are preferred over senior debt creditors in accordance with a law decree introducing full depositor preference in Italy startingfrom 2019.
In determining the stock of bail-in-able debt in a resolution scenario, we consider all bonds issued by FCA Bank and its foreign branches(for example, FCA Bank S.p.A., Irish branch, Baa1 negative), as well as those issued by all funding vehicles outside Italy that issueinstruments guaranteed by FCA Bank, such as FCA Capital Suisse SA, Baa1 negative).
We believe that FCA Bank's deposits are likely to face extremely low loss given failure because of the loss absorption provided by theresidual equity that we expect in resolution (3%) and senior unsecured debt, as well as the volume of junior deposits. This is supportedby the combination of deposit volume and subordination. This results in an uplift of three notches from the bank’s baa3 AdjustedBCA. However, we constrain the uplift to two notches above Italy's Baa3 sovereign debt rating. In accordance with our methodology,the bank's ratings do not typically exceed the related sovereign bond rating by more than two notches, reflecting our view that theexpected loss of rated bank instruments is unlikely to be significantly lower than that of the sovereign’s own debt.
We believe that FCA Bank's long-term issuer rating is likely to face very low loss given failure because of the loss absorption providedby the residual equity that we expect in resolution, as well as the volume of senior unsecured debt itself. This is supported by thecombination of senior unsecured debt volume and subordination. This results in an uplift of two notches from the bank’s baa3 AdjustedBCA. The long-term issuer rating carries a negative outlook as FCA Bank's senior unsecured instruments would likely be downgraded inthe event of a one-notch downgrade of FCA Bank's BCA.
Government support considerationsThere is no rating uplift, given our view of a low probability of government support for this entity, which is not considered systemic.
Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.
6 23 April 2020 FCA Bank S.p.A.: Update to credit analysis
FCA Bank's CR Assessment is positioned at Baa2(cr)/Prime-2(cr)The long-term CR Assessment is positioned one notch above the Adjusted BCA of baa3, and it is also capped at one notch above Italy'sBaa3 sovereign debt rating. According to our methodology, CR Assessments do not typically exceed by more than one notch the ratingof the sovereign in which the bank is domiciled, reflecting our view that the probability of default of counterparty obligations is unlikelyto be significantly below that of the sovereign’s own debt.
The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures theprobability of default on certain senior obligations, rather than expected loss; therefore, we focus purely on subordination and take noaccount of the volume of the instrument class.
Counterparty Risk Rating (CRRs)CRRs are opinions on the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRRliabilities) and also reflect the expected financial losses in the event that such liabilities are not honoured. CRR liabilities typicallyrelate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralised portion of payables arising fromderivative transactions and the uncollateralised portion of liabilities under sale and repurchase agreements. CRRs are not applicable tofunding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations,and other similar obligations that arise from a bank performing its essential operating functions.
FCA Bank's CRRs are positioned at Baa1/Prime-2The long-term CRR is two notches above the bank's Adjusted BCA of baa3, reflecting the more limited benefit of debt instrumentslikely to absorb losses before such counterparty obligations under a scenario of sovereign default. FCA Bank's CRR is also capped at twonotches above Italy's Baa3 sovereign debt rating, reflecting our view that expected loss is likely to be higher under a sovereign default.
Methodology and scorecardAbout Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When read inconjunction with our research, a fulsome presentation of our judgement is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.
7 23 April 2020 FCA Bank S.p.A.: Update to credit analysis
Bkd Senior Unsecured Baa1FCA BANK S.P.A., IRISH BRANCH
Outlook NegativeCounterparty Risk Rating Baa1/P-2Counterparty Risk Assessment Baa2(cr)/P-2(cr)Senior Unsecured -Dom Curr Baa1Commercial Paper P-2
FCA CAPITAL SUISSE SA
Outlook NegativeBkd Senior Unsecured -Dom Curr Baa1
Source: Moody's Investors Service
Endnotes1 Corporate family rating.
2 The bank's ratings shown are deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment.
3 Italian government strengthens support for economy and banks amid coronavirus, 9 April 2020.
4 We consider as “problem loans” the sum of the three categories that Italian banks have been reporting since 2015 (from most to least problematic): (1)bad loans (in Italian, “sofferenze”): loans to insolvent borrowers; (2) unlikely to pay (in Italian, “inadempienze probabili”); and (3) past due by more than 90days and not already included in the previous two categories (in Italian, “esposizioni scadute e/o sconfinanti”).
5 European Banking Authority, Risk Dashboard data as of Q3 2019.
6 Source: Bank of Italy, Financial Stability Report.
7 See our Sector Comment Italy fines nine financial captives of Europe's largest carmakers, a credit negative, January 2019
9 23 April 2020 FCA Bank S.p.A.: Update to credit analysis
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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and servicesrendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1225696
10 23 April 2020 FCA Bank S.p.A.: Update to credit analysis
