Training on sovereign risk credit analysis, October 24

ACRA affirms AAA(RU) to AO Toyota Bank, outlook Stable, and ААА(RU) to its bond issues

ACRA affirms AAA(RU) to AO Toyota Bank (hereinafter, Toyota Bank, or the Bank), outlook Stable, and AAA(RU) to its bond issues (ISIN RU000A0ZYHH1, RU000A100436).

The credit rating of the Bank is based on the very high likelihood of extraordinary support from its parent company with high creditworthiness. Toyota Bank’s standalone creditworthiness assessment (SCA) remains moderately high in view of its strong capital adequacy, strong risk profile assessment, adequate funding and liquidity, and satisfactory business profile.

The Bank ranked 76th in terms of assets and 76th in terms of own capital among Russian banks as of July 1, 2019. The Bank is a wholly owned subsidiary of Toyota Kreditbank GmbH and Toyota Leasing Gmbh, which in turn are controlled by the Toyota Motor Corporation.

Key rating assessment factors

Very high likelihood of extraordinary support from the key shareholder. ACRA is of the opinion that, if necessary, the Toyota group of companies (hereinafter, the Toyota Group) will provide the Bank with short-term and long-term funding and capital injections. ACRA assesses the country risk of the Toyota Group’s jurisdiction (Japan) against the country risk of Russia as strong. The Toyota Group’s creditworthiness is determined by ACRA as strong.

The degree of integration between the Bank and its key shareholder is assessed as strong in view of the following:

  • There is pronounced operational integration between the Bank and the Toyota Group;
  • The Bank is an important component of Toyota’s sales and client base support systems in the Russian market;
  • The Bank’s Supervisory Board consists of members who represent other companies within the Toyota Group;
  • The Toyota Group, acting through Toyota Motor Finance (Netherlands) B.V. (TMFNL), provided guarantees for bonds issued by the Bank;
  • TMFNL is an important funding source for the Bank.

Therefore, ACRA has added four notches to the Bank’s SCA.

Satisfactory business profile (bbb). The Bank’s business profile assessment is mainly determined by the relatively high quality of its strategy and corporate governance. The strategy is solely focused on supporting the sales of Toyota and Lexus cars in the Russian market. Because Toyota and Lexus offer specific car models in the Russian market mostly consisting of higher-end models, the Bank’s client base consists of above average net worth borrowers, which allows the Bank to demonstrate consistent profitability amid low credit risk.

The business profile assessment is limited by the Bank’s relatively small business scale compared to peers offering complete banking solutions to clients. It is also limited by the low diversification of operating income due to the Bank’s business model, which is almost entirely formed by interest income on issued loans.

The substantial loss absorption buffer is backed by the Bank’s high capital adequacy ratio (N1.2 equal to 15.15% as of July 1, 2019). Stress testing carried out by ACRA showed that Toyota Bank is able to withstand a substantial increase in credit risk (over 500 bps) without a breach of the N1.2 ratio. The Bank’s strong capital positions are partially based on good financial performance. The Bank’s returns are consistently high, as the average capital generation ratio (ACGR) is 206 bps for 2014-2018. The Bank maintains sustainable and effective operations. For 2016–2018, the average net interest margin (NIM) is 5.6%, and the cost-to-income ratio (CTI) averages 47.4%.

The strong risk profile assessment stems from the adequate quality and relatively low concentration of the loan portfolio. As of June 30, 2019, the share of problem loans was below 2% (NPL90+ = 0.9%) of the total portfolio. The Bank primarily provides auto financing services to retail and corporate clients (about 85% of its credit portfolio as of July 1, 2019), but it also offers loans to auto dealers. ACRA points out the relatively high total loan portfolio concentration on the top 10 borrowers, which stood at 77.3%, as of July 1, 2019. Toyota Bank maintains the adequate quality of its risk management system.

The strong liquidity position is primarily supported by the low amount of liabilities expected to be repaid within the next three months. Relevant calculations of the short-term liquidity shortage indicator (STLSI) show that, in the base case scenario, the Bank has excessive liquidity of about RUB 7.2 bln, while in the stress scenario, the liquidity surplus exceeds 20.2% of liabilities. The long-term liquidity shortage indicator (LTLSI) is above 101%, which corresponds to the strong assessment.

Adequate funding profile. The Bank’s funding base hinges on interbank loans that reach 57.6% of the total liabilities. The Bank’s key lender/depositor is TMFNL, whose share in the total loans obtained by the Bank exceeds 25%. However, ACRA does not view this as a negative factor, as most Russian subsidiaries of large international financial institutions share the same characteristic; they act as branches rather than independent subsidiaries as far as the operational model is concerned.

Key assumptions

  • Maintaining the current development model and the high quality of the loan portfolio;
  • Toyota Group maintaining its shareholding and operating control over the Bank;
  • Maintaining capital adequacy (N1.2)  above 10% within the 12 to 18-month horizon.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Declining propensity of the Toyota Group to develop its business in Russia using car loans issued by the Bank;
  • Substantial deterioration of the financial status of the Toyota Group.

Rating components

SCA: a+.

Adjustments: none

Support: on par with the RF.

Issue ratings

AO Toyota Bank, BO-001R-01 series (ISIN RU000A0ZYHH1); maturity date – December 2, 2020; issue volume – RUB 5 bln, – ААА(RU).

AO Toyota Bank, BO-001R-02 series (ISIN RU000A100436); maturity date – February 21, 2022; issue volume – RUB 3 bln, – ААА(RU).

Credit rating rationale. The outstanding issues represent senior unsecured debt of Toyota Bank. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank. According to ACRA’s methodology, the credit rating of the issues is equivalent to that of the Bank — AAA(RU).

Regulatory disclosure

The credit ratings were assigned to AO Toyota Bank and its bonds  (RU000A0ZYHH1, RU000A100436) under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities. To assign a credit rating to the above bond issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit ratings assigned to AO Toyota Bank and its bond issues (RU000A0ZYHH1, RU000A100436) were published by ACRA on October 13, 2017, November 29, 2017, and February 19, 2019, respectively. The credit rating of AO Toyota Bank and its outlook as well as the credit ratings of the bonds (RU000A0ZYHH1, RU000A100436) issued by AO Toyota Bank are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by AO Toyota Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of AO Toyota Bank and the financial statements of AO Toyota Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit ratings are solicited, and AO Toyota Bank participated in their assignment.

No material discrepancies between the provided information and the data officially disclosed by AO Toyota Bank in its financial statements have been discovered.

ACRA provided no additional services to AO Toyota Bank. No conflicts of interest were discovered in the course of credit ratings assignment.

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