Volkswagen Bank, S.A. -- Moody's upgrades Mexico's Volkswagen Bank's ratings, outlook stable; affirms Volkswagen Bank and Volkswagen Leasing's backed debt ratings; changes outlook to stable

Rating Action: Moody's upgrades Mexico's Volkswagen Bank's ratings, outlook stable; affirms Volkswagen Bank and Volkswagen Leasing's backed debt ratings; changes outlook to stableGlobal Credit Research - 05 Apr 2021 Mexico, April 05, 2021 -- Moody's de México, ("Moody's") has upgraded Volkswagen Bank, S.A.'s (VW Bank) long- term global local and foreign currency deposit ratings to Ba1 from Ba2, following the upgrade of its baseline credit assessment (BCA) to b1 from b2. The adjusted BCA, which incorporates affiliate support, was also upgraded to ba1 from ba2. VW Bank's long-term Mexican national Scale deposit rating was upgraded to A1.mx from A2.mx.In addition, Moody's affirmed the short-term local and foreign currency deposit ratings of Not Prime, and the national scale short-term local currency deposit rating in of MX-1. The outlook on VW Bank's deposits ratings remained stable. The rating agency also affirmed VW Bank and Volkswagen Leasing, S.A de C.V.'s (VW Leasing) backed global and national scale long-term senior unsecured ratings A3 and Aaa.mx, respectively. The outlook on VW Bank senior unsecured rating was changed to stable from negative, and the issuer level outlook of VW Leasing was also changed to stable from negative. This rating action on VW Bank and VW Leasing's debt ratings follows a similar action taken by Moody's on the ratings of Volkswagen Financial Services AG (VW FS AG, senior unsecured debt rating of A3, stable) on 30 March 2021, which in turn, follows the change in outlook of the ratings of Volkswagen Aktiengesellschaft (Volkswagen AG, issuer rating of A3, stable), to stable from negative, on 26 March 2021. Both VW Leasing's and VW Bank's backed senior unsecured debt ratings benefit from an explicit guarantee from VW FS AG. VW Bank's deposit ratings benefit from Moody's assessment of very high support from its parent VW FS AG.The following ratings and assessments of Volkswagen Bank, S.A. (821153838) were upgraded:..Baseline Credit Assessment to b1 from b2...Adjusted baseline credit assessment to ba1 from ba2..Long-term global local currency deposit rating to Ba1 from Ba2, outlook stable..Long-term global foreign currency deposit rating to Ba1 from Ba2, outlook stable..Long-term counterparty risk assessment to Baa3(cr) from Ba1(cr)..Short-term counterparty risk assessment to Prime-3(cr) from Not Prime(cr)..Long-term Mexican National Scale local currency deposits rating to A1.mx from A2.mxThe following ratings of Volkswagen Bank, S.A. (821153838) were affirmed:..Short-term global local currency deposit rating of Not Prime..Short-term global foreign currency deposit rating of Not Prime..Short-term Mexican National Scale local currency deposit rating of MX-1..Backed long-term global local currency senior unsecured debt ratings of A3, outlook changed to stable from negative (VWBANK 18)..Backed long-term Mexican National Scale local currency senior unsecured ratings of Aaa.mx, outlook changed to stable from negative (VWBANK 18)The following ratings of Volkswagen Leasing, S.A de C.V. (820591608) were affirmed:..Backed short-term global local currency senior unsecured debt program rating of Prime-2..Backed short-term global foreign currency senior unsecured debt program rating of Prime-2..Backed short-term Mexican National Scale local currency senior unsecured debt program rating of MX-1..Backed short-term Mexican National Scale foreign currency senior unsecured debt program rating of MX-1..Backed long-term global local currency senior unsecured debt ratings of A3 (VWLEASE 18, VWLEASE 18-2, VWLEASE 19, VWLEASE 19-2)...Backed long-term Mexican National Scale local currency senior unsecured ratings of Aaa.mx (VWLEASE 18, VWLEASE 18-2, VWLEASE 19, VWLEASE 19-2)Outlook action:Volkswagen Leasing, S.A de C.V. (820591608)Outlook changed to stable, from negativeVolkswagen Bank, S.A. (821153838)Outlook changed to stable, from stable(m).RATINGS RATIONALEAFFIRMATION OF VW BANK AND VW LEASING'S BACKED SENIOR UNSECURED DEBT RATINGS, OUTLOOK CHANGED TO STABLEThe outlook change to stable, from negative on VW Bank's and VW Leasing's backed unsecured debt ratings follow the outlook change on the ratings of VW FS AG, which explicitly guaranties their debts. For more information on the actions on Volkswagen AG and VW FS AG, please see the press releases "Moody's changes Volkswagen's outlook to stable, affirms A3 ratings" (https://www.moodys.com/research/Moodys-changes-Volkswagens-outlook-to-stable-affirms-A3-ratings--PR_443011) and " Moody's changes outlook on Volkswagen Financial Services to stable and affirms the A3 issuer and senior unsecured debt ratings" (https://www.moodys.com/research/Moodys-changes-outlook-on-Volkswagen-Financial-Services-to-stable-and--PR_442981) respectively. The parental guarantees for VW Bank and VW Leasing explicitly meet most of Moody's Core Principles for credit Substitution; namely they; (1) are irrevocable and unconditional; (2) promise full and timely payment of the underlying obligations; (3) cover payment-not merely collection; (4) extend as long as the term of the underlying obligation; (5) are enforceable against the guarantor; and (6) are governed under German law, a jurisdiction hospitable to the enforcement of guarantees. The guarantees do not specify that any transfer, assignment or amendment of the guarantee by the guarantor will not result in a deterioration of the credit support provided by the guarantee. Nevertheless, this weakness is offset by (i) the strategic fit and importance of VW Bank's and VW Leasing's operations for the German parent's operations in Mexico, (ii) the fact that the three companies share the name, and (iii) the reputational risk that a default by VW Bank or VW Leasing would represent for VW FS AG and its ultimate parent, car manufacturer Volkswagen AG. VW Bank's and VW Leasing's Aaa.mx Mexican national scale senior unsecured debt rating is the sole Mexican national scale corresponding to its A3 global senior unsecured debt rating.UPGRADE OF VW BANK'S BCA, ADJUSTED BCA, DEPOSIT RATING AND COUNTER PARTY RISK ASSESSMENT Moody's upgrade of VW Bank's ratings and assessments incorporate the resilience of the bank's balance sheet despite a challenging operating environment in Mexico in 2020, as observed by consistent high profitability and a conservative earnings retention policy that have supported its strong capitalization. As of September 2020, the bank's net income to tangible assets was a strong 3.05%, down from 3.5% in December 2019, which reflected VW Bank's ability to manage its funding costs by repricing liabilities faster than its loan book as interest rates declined, despite a material contraction in loan origination relative to prior years. This has helped offset the impact of higher provisioning expenses. Cost control also supported higher bottom line results. VW Bank's capital ratios remained well above Mexican rated banks' average and among the highest in the Mexican banking system, and it will provide a comfortable cushion to withstand any potential increase in credit costs in 2021. Moody's expects VW Bank's capital will remain strong in 2021 supported by consistent earnings generation. VW Bank's business focus on car financing to individuals results in limited asset class and earnings diversification, which could expose the bank to volatility in terms of loan growth and revenues. In addition, we expect the bank's reliance on market funding to remain high, although refinancing risks are mitigated by the full and unconditional parent guarantee on VW Bank's debt issuances. VW Bank's deposit ratings benefit from three notches of uplift from its b1 BCA solely from affiliate support assumptions, in line with the rating agency's assessment of a very high likelihood of affiliate support, if needed, from its parent VW FS AG. VW Bank's A1.mx Mexican national scale deposit rating is the sole Mexican national scale rating corresponding to its Ba1 global scale deposit rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Because VW Bank's and VW Leasing's debt is guaranteed by VW FS AG, its ratings will be upgraded if the ratings of VW FS AG are upgraded. In turn, the Mexican subsidiaries' debt ratings will be downgraded if the ratings of VW FS AG are downgraded. VW Bank's Ba1 deposit ratings could be upgraded if the bank manages to expand its loan book while maintaining sound asset quality, strong profitability and capitalization. At the same time, ratings could be upgraded if the bank continues to improve and sustain its liquidity position. VW Bank's deposits ratings could be downgraded if the bank's asset quality deteriorates significantly impacting its profitability metrics, and its capital replenishment capabilities. However, we consider that a downgrade is unlikely at this point given the recent upgrade of its ratings. The principal methodologies used in rating Volkswagen Bank, S.A. were Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?&docid=PBC_1147865, and Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1068154. The principal methodology used in rating Volkswagen Leasing, S.A. de C.V. was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1068154. Alternatively, please see the Rating Methodologies page on www.moodys.com.mx for a copy of these methodologies. The Spanish language version of the Banks Methodology of November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1194846 is the current version registered at the Comisión Nacional Bancaria y de Valores ("CNBV") and, therefore, is the document to be used in ratings assigned by Moody's de México, S.A. de C.V. Institución Calificadora de Valores ("MDM"). The corresponding English language version of such methodology, however, is already outdated for other jurisdictions and therefore cannot be employed by MDM's affiliates for the assignment of ratings of similar securities or entities in such other jurisdictions. The period of time covered in the financial information used to determine Volkswagen Bank, S.A.'s rating is between 1 January 2017 and 30 September 2020 (source: Financial Audited Statements 2016, 2017, 2018, 2019, Financial Interim Statements Q3 2020). The period of time covered in the financial information used to determine Volkswagen Leasing, S.A. de C.V.'s rating is between 1 January 2017 and 30 September 2020 (source: Financial Audited Statements 2016, 2017, 2018, 2019, Financial Interim Statements Q3 2020). Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309. 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004. Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's information.The ratings have been disclosed to the rated entity prior to public dissemination. A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx. The date of the last Credit Rating Action for Volkswagen Bank, S.A. was 3/6/2020The date of the last Credit Rating Action for Volkswagen Leasing, S.A. de C.V. was 7/10/2020 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 further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.mx. 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. This credit rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result. 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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406. Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating. Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery. 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