ACRA assigns AAA(RU) to Mercedes-Benz Bank Rus LLC, outlook Stable

The credit rating of Mercedes-Benz Bank Rus LLC (hereinafter, the Bank) is based on the very high probability of the Bank receiving extraordinary support from its parent structure Daimler AG (hereinafter, the Supporting Organization, or SO), which boasts a high level of creditworthiness. The Bank’s standalone creditworthiness assessment (SCA) is based on adequate capital adequacy and liquidity and funding positions, a strong risk profile assessment, and satisfactory business profile assessment.

The Bank ranks 124th in assets and 123rd in equity among Russian banks. The Bank’s only shareholder is Daimler AG, one of the world’s largest automobile conglomerates producing passenger cars, vans, trucks, and buses.

Currently, the Bank’s main activity is consumer lending via its own funds and interbank loans to facilitate automobile purchases from the SO that are sold through authorized dealers. The Bank does not have a license to raise consumer funds. Loans provided by the Bank are credited to the current accounts of borrowers in partner banks. In addition to the Bank, the SO’s financial unit in Russia includes two other companies that perform factoring, leasing and insurance intermediation operations.

Key rating assessment factors

Very high probability of extraordinary support from the SO. According to ACRA, if necessary, the SO is able and ready to promptly provide the Bank with additional (extraordinary) long-term and short-term financing in sufficient volumes, as well as capital injections. The final assessment of the country risk of the jurisdiction of foreign SO relative to the country risk of Russia is strong. The SO’s creditworthiness is assessed as moderately strong.

ACRA assesses the Bank’s relationship with the SO as strong based on the following:

  • Potentially high reputational risks for the SO in the event of the Bank’s bankruptcy;
  • Explicit operational integration between the Bank and the SO;
  • Guarantees form the SO on the Bank’s obligations as part of operations to raise       funding from Russian credit institutions;
  • The Bank’s significance for the SO and for maintaining its product sales system in     Russian.

Based on the abovementioned factors, ACRA has added 5 notches to the Bank’s SCA.

The satisfactory business profile is based on a relatively low equity assessment compared to other Russian banks and very low diversification of operating income (Herfindahl-Hirschman Index was 0.79 for 2019) due to the specialized focus of the Bank’s activities. ACRA assesses the Bank’s strategy, which is aimed at increasing the SO’s automobile sales using the Bank’s financing, as positive. The Bank’s management structure is significantly integrated with the SO and is characterized by high quality management and corporate practices.

The SO’s passenger vehicles sold in Russia are niche-specific. The share of passenger car sales in the premium segment of the Russian market amounted to 27% in H1 2020. In terms of sales of new cars in this segment, the SO occupies one of the leading positions in Russia. A significant share of Mercedes-Benz cars sold in Russia are purchased using the Bank’s financing. This provides the Bank with a consistent customer base of borrowers with a stable financial position.

Adequate capital adequacy assessment. With a high loss absorption buffer based on high capital adequacy ratios for regulatory requirements (N1.2 at 19.8% as of July 1, 2020), the average capital generation ratio calculated by ACRA for 2015−2019 is negative due to significant dividend payments in 2016 and 2017. However, the Bank’s core business has been consistently profitable over the past five years. Operating efficiency is adequate, with net interest margin (NIM) averaging 7.3% over the past three years.

ACRA’s stress test showed that withstanding an increase in credit risk by more than 500 bps without violating the N1.2 standard is well within the Bank’s ability.

The strong risk profile assessment is based on a high-quality loan portfolio and its significant granularity, combined with an adequate risk management system characterized by effective underwriting, decision-making, and risk minimization procedures that are approved and controlled by the SO.

The strong liquidity position is supported by the Bank’s funding structure, which assumes a low volume of liabilities to be repaid over the next three months. However, the Bank does not have a significant reserve of highly-liquid funds on its balance sheet. The Bank also has open limits on attracting funding from Russia’s largest credit institutions and the possibility of emergency liquidity from the SO.

The short-term liquidity shortage indicator is positive in ACRA’s base case scenario, while in the stress scenario, excess liquidity exceeds 11% of liabilities. The long-term liquidity shortage indicator was 103%.

Satisfactory funding profile. Funds raised from Russian credit institutions serve as the Bank’s main source of funding (84% of liabilities). Taking into account SO guarantees to repay creditors the interbank loans raised by the Bank, ACRA assesses this funding source as fairly stable. The concentration on funds from the largest creditor and the ten largest creditors is 22% and 63% of the portfolio, respectively, which negatively affects the funding assessment.

Key assumptions

  • Maintaining the ownership structure and business model;
  • N1.2 over 12% within the 12 to 18-month horizon;
  • Credit risk within 3%.

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:

  • Loss of control by the SO or reduced willingness support the Bank;
  • Deterioration in the quality of the loan portfolio (increase in the share of problem debt above 5% of the total loan portfolio);
  • Significant drop in equity.

Rating components

SCA: a.

Adjustments: none.

Support: SCA +5 notches.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned 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 Registered Outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to Mercedes-Benz Bank Rus LLC for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

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

No material discrepancies between the provided information and the data officially disclosed by Mercedes-Benz Bank Rus LLC in its financial statements have been discovered.

ACRA provided no additional services to Mercedes-Benz Bank Rus LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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