Rating action

Scope Ratings GmbH (Scope) has today affirmed its ratings on FCA Bank SpA (FCAB). The following ratings have been affirmed:

• Issuer rating of A with a Stable Outlook
   
• Senior unsecured debt rating of A with a Stable Outlook

Rating rationale

The rating reflects FCAB’s solid standing as one of Europe’s largest car-finance providers, operating in 17 European countries as well as in Morocco. FCAB mainly serves the former FCA brands within the Stellantis Group although it also provides financial services to other brands, including, among others, Ferrari, Jaguar-Land Rover and Aston Martin. FCAB has a consistent business model, with a solid record of revenue and profit growth as well as higher returns than those generated by traditional, lower-risk banking activities.

Under Scope’s bank rating methodology, the ‘long-term sustainability’ assessment (ESG factor) captures how relevant environmental, social and governance (ESG) factors and preparedness for digital transition (D) may impact an issuer’s creditworthiness. As part of the first-time implementation of this methodology, Scope assigns a ‘developing’ to FCAB.

The assessment is driven by the nature of FCAB’s exposures. Scope believes that the transition to a greener loan portfolio will depend on the product strategy of FCAB’s commercial partners. In particular, climate transition risk may impact FCAB’s loan originations should Stellantis Group fall behind competitors in greening its product range. Scope also flags the risk that residual values may be negatively impacted by changing emissions regulations. At the same time, Scope acknowledges management efforts to manage environmental risks by increasing the share of hybrid and electric cars in its rental fleet. The ESG-D assessment also acknowledges that, while most board directors are not independent, the arrangement between the two shareholders, Stellantis Group and Crédit Agricole Group, provides a strong balance.

The ratings are supported by FCAB’s strong earnings generation capacity and strong asset quality. Financial performance has proved resilient, even in deep recessions such as the current one. For 2020, FCAB reported only a limited increase in cost of risk and a stable return on average equity of close to 15%. Its return on equity also compares well to those of Italian banking peers and other auto lenders.

The ratings further benefit from FCAB’s comfortable headroom above its minimum capital requirements. The CET1 ratio of 15.4% at the end of December compares to a requirement of 7%.

The bank has diversified funding sources in the past decade, adding deposits, medium-term notes and commercial paper. FCAB has also drawn on the ECB’s TLTRO3 programme. The balance of funding is made up of securitisations and committed bank lines, especially from Crédit Agricole Group.

The ratings benefit from one notch of uplift based on Scope’s view that Crédit Agricole Group would be willing and able to support FCAB in case of need. While FCAB’s integration into Crédit Agricole Group is limited, it is a seasoned relationship that is also rooted in Italy, which the French group increasingly sees as a second home market. The recent acquisition of Credito Valtellinese by Crédit Agricole Italia supports this view. FCAB is part of Crédit Agricole Group’s supervisory and resolution perimeter, which further supports Scope’s view that the French banking group would likely provide extraordinary support if needed.

FCAB’s issuer rating is two notches above the rating of the Republic of Italy (BBB+/Negative). In accordance with Scope’s bank rating methodology, no mechanistic caps are applied based on the sovereign rating, although sovereign risk is considered for each issuer. In FCAB’s case, the correlation between the bank and the sovereign is low due to FCAB’s geographic diversification and lack of exposure to Italian sovereign bonds.

Rating-change drivers

The Outlook is Stable, reflecting Scope’s expectation that the issuer’s performance will prove resilient to the deteriorated operating environment.

A potential positive rating-change driver is evidence of material progress in managing emerging ESG risks, in particular those relating to the auto industry’s transition to lower-emission vehicles.

Potential negative rating-change drivers include a material deterioration in financial fundamentals, as these currently support the rating, as well as an increase in business model risk should the commercial performance of industrial partner Stellantis Group deteriorate, as this would limit FCAB’s origination capacity and revenue growth.

Finally, Scope highlights that any material change in Crédit Agricole Group’s financial fundamentals or commitment to support FCAB could lead to the rating being reviewed.

Rating construct

Operating environment: Supportive

Business model: Consistent

Initial mapping refinement: High

Initial mapping: bbb/bbb+

LT sustainability (ESG-D): Developing

Adjusted anchor: bbb

Earnings capacity & risk exposures: Supportive

Financial viability management: Comfortable

Additional factors: Neutral factor

Standalone rating: a-

External Support: Subsidiary - Less integrated

Approach: Bottom up

Support notches: 1

Long-term issuer rating: A

One or more key drivers of the credit rating action are considered an ESG factor.

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Bank Rating Methodology, 26 January 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Marco Troiano, Executive Director
Person responsible for approval of the Credit Ratings: Dierk Brandenburg, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 17 May 2019. The Credit Ratings/Outlooks were last updated on 11 December 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.