Santander Consumer Bank AS · PDF fileSantander Consumer Bank AS ... which could be caused by net interest margin pressures due to the ... The acquired loan book from Santander Consumer

FINANCIAL INSTITUTIONS

CREDIT OPINION24 May 2016

Update

RATINGSSantander Consumer Bank AS

Domicile Norway

Long Term Rating A3

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.

Contacts

Guillaume Lucien-Baugas

33-1-5330-3350

VP-Senior [email protected]

Oscar Heemskerk 44-20-7772-5532Associate [email protected]

Maria Asensio 44-20-7772-1078Associate [email protected]

Santander Consumer Bank ASNew Issuer: Strong Performance of Consumer Loan Portfolioin Nordic European Countries

Summary Rating RationaleSantander Consumer Bank AS's (SCB) deposit and issuer ratings of A3/Prime-2 reflect (1) thebank's baseline credit assessment (BCA) of baa3; (2) our assumption of a high probability ofaffiliate support from its parent Santander Consumer Finance S.A. (Santander CF; depositsand debt A3/A3; BCA baa2), leading to an adjusted BCA of baa2; (3) a two-notch uplift fromour Advanced Loss Given Failure (LGF) analysis. SCB's Counterparty Risk (CR) assessment isA2(cr)/Prime-1(cr).

SCB's standalone BCA of baa3 reflects its strong positioning as one of the Nordics’ leadingconsumer finance lenders as well as its overall sound credit-risk profile, with strongcapitalisation and resilient profitability. The bank's standalone BCA also reflects its high,albeit declining, reliance on wholesale funding and the restrictions of its monoline focus.

SCB is the fully-owned subsidiary of Santander CF operating in the Nordic region of Europe.SCB provides secured auto financing (71% of lending at year-end 2015) and unsecuredconsumer loans and credit cards (29%) in Norway, where the bank is headquartered,Sweden, Denmark and Finland. The bank also collects online retail deposits in thesecountries, apart from Finland. In 2014, it acquired GE Money Bank AB, with a business focuson unsecured consumer loans and credit cards in the Nordic countries.

Exhibit 1

Rating Scorecard - Key Financial Ratios

Source: Moody's Financial Metrics

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1028421

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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 24 May 2016 Santander Consumer Bank AS: New Issuer: Strong Performance of Consumer Loan Portfolio in Nordic European Countries

Credit Strengths

» SCB’s BCA is supported by its Very Strong- Macro Profile

» Moderate asset risks despite increase in unsecured consumer lending

» Adequate post-merger capital levels benefiting from ongoing support from the parent

Credit Challenges

» Strong and resilient profitability under pressure from the low interest rate environment

» High reliance on wholesale funding, mitigated by presence of parent

Rating OutlookThe outlooks on SCB’s deposit and issuer ratings are currently stable.

Factors that Could Lead to an Upgrade

» Although unlikely at present, an upgrade of SCB’s BCA could occur if the bank’s capital position was strengthened and credit risktrends improved, while maintaining satisfactory levels of profitability and reducing reliance on confidence-sensitive market funding.

» An upgrade of SCB’s BCA would likely result in a similar upgrade of the bank’s deposit and issuer ratings.

» A larger cushion of liabilities eligible for a bail-in, resulting in a lower loss-given-failure for deposits and debt, could also lead to anupgrade of the deposit and issuer ratings.

Factors that Could Lead to a DowngradeA downgrade of SCB’s BCA could result from:

» A deterioration of asset quality, which could for instance be triggered by further weakening of Norway’s macro-economic growthprospects or by a lower performance of unsecured consumer credit in SCB’s portfolio;

» A significant deterioration in profitability, which could be caused by net interest margin pressures due to the prolonged low interestrate environment

» A deterioration of the bank’s funding and liquidity characteristics

» A smaller cushion of liabilities eligible for a bail-in, resulting in a higher loss-given-failure for deposits and debt.

» A downgrade of SCB’s BCA would likely result in a similar downgrade of the bank’s long-term deposit and issuer ratings.



Key Indicators

Exhibit 2

Santander Consumer Bank AS (Consolidated Financials) [1]12-152 12-142 12-133 12-123 12-113 Avg.

Total Assets (NOK billion) 135.9 96.3 81.2 64.6 57.2 24.24

Total Assets (EUR million) 14137.7 10609.2 9714.9 8805.2 7382.2 17.64

Total Assets (USD million) 15357.7 12837.7 13386.6 11608.7 9583.2 12.54

Tangible Common Equity (NOK billion) 14.2 8.5 6.7 5.5 5.0 30.14

Tangible Common Equity (EUR million) 1480.1 938.2 799.0 745.4 641.4 23.34

Tangible Common Equity (USD million) 1607.8 1135.2 1101.0 982.8 832.6 17.94

Problem Loans / Gross Loans (%) 2.1 1.5 1.7 1.8 1.9 1.85

Tangible Common Equity / Risk Weighted Assets (%) 15.9 11.2 10.0 10.0 9.8 13.56

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 14.5 12.6 15.2 16.6 17.4 15.35

Net Interest Margin (%) 4.6 4.2 4.3 4.5 4.5 4.45

PPI / Average RWA (%) 3.3 3.2 3.2 3.2 3.0 3.26

Net Income / Tangible Assets (%) 1.1 1.0 1.3 1.3 1.4 1.25

Cost / Income Ratio (%) 48.6 39.5 41.5 40.4 43.4 42.75

Market Funds / Tangible Banking Assets (%) 56.4 66.6 73.9 87.0 87.4 74.35

Liquid Banking Assets / Tangible Banking Assets (%) 11.2 8.4 6.1 4.7 1.6 6.45

Gross loans / Due to customers (%) 311.0 460.6 780.1 21103.5 21026.1 8736.35

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate basedon IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used foraverage calculationSource: Moody's Financial Metrics

Detailed Rating ConsiderationsSCB'S BCA IS SUPPORTED BY ITS VERY STRONG- MACRO PROFILESCB benefits from operating in countries which have an overall Macro Profile of Very Strong- based on its loan portfolio distribution ona weighted average basis. Norway, which we assess as Very Strong- accounted for 41% of total loans at year-end 2015, Sweden (VeryStrong-) for 24%, Denmark (Strong+) for 20% and Finland (Strong+) for 15%.

MODERATE ASSET RISKS DESPITE INCREASE IN UNSECURED CONSUMER LENDINGWe consider that asset risks are moderate as illustrated by a strong track record of low defaults in the bank’s portfolio of consumerloans in the Nordic region of Europe. SCB’s main products are auto loans, which are secured with the vehicles, and unsecured consumerloans, including credit cards. SCB's loan book is split between secured car financing (70% of total loans) and unsecured direct loans,credit cards and sales finance (30%). The bank takes deposits which it gathers with online facilities in its main locations, excludingFinland. In November 2014, the bank acquired GE Money Bank’s Nordic operations and strengthened its market position on creditcards and unsecured consumer loans. As a result of rapid expansion, both through internal growth and through the merger with GEMoney Bank Nordics, SCB currently benefits from leading market shares in the region. The bank’s loan book grew by 39% in 2015, 59%of this growth being derived from the GE merger. The acquired loan book from Santander Consumer Bank AB, ex-GE Money Bank, wasNOK18.8 billion, versus a net loan book prior merger of NOK85.1 billion. At year-end 2015, Norway was the main contributor to SCB'sloan portfolio (accounting for 41% of total lending), followed by Sweden (24%), Denmark (20%) and Finland (15%).



Exhibit 3

Norway is the main contributor to SCB's loan portfolioLoan Split by Geography

Source: Company Reports

Problem loans were a low 2.1% of gross loans at year-end 2015, versus 1.5% at year-end 2014, an increase which is partly explainedby an increase in problem loans in Norway in 2015, on the back of weakening domestic growth. Going forward, the higher proportionof senior unsecured loans and credit cards in the bank's business mix, caused by the acquisition of GE Money Bank in the Nordics,could place a moderate degree of pressure on asset quality. Nonetheless, we expect that the integration of GE Money Bank's activitiesshould help improve lending standards on par with Santander CF's practices, and do not expect any further asset quality deteriorationto be significant in this regard. The high level of provision reserves covering problem loans (108% at year-end 2015) places additionalcomfort on the bank’s solvency.

Exhibit 4

Asset quality is slightly under pressure on the back of weakening domestic growth in NorwayProblem Loans % Gross Loans

Source: Moody's Banking Financial Metrics

Our assigned asset risk score of baa1 reflects asset risks which remain moderate but are subject to caution due to the strong loangrowth witnessed by the bank.

ADEQUATE POST-MERGER CAPITAL LEVELS BENEFITING FROM ONGOING SUPPORT FROM THE PARENTWe assess SCB’s capitalisation as adequate for the risks undertaken by the bank in the field of auto finance secured lending andunsecured consumer lending. The bank’s common equity tier one (CET1) ratio was 15.3% at year-end 2015. In 2015, SantanderConsumer Finance S.A. injected NOK1.1 billion of capital in the bank, a good reflection of the on-going support from the parent to itsNordic consumer finance subsidiary. In addition, the bank had NOK2.25 billion of additional tier one (AT1) securities and NOK1.23



billion of tier 2 subordinated debt as of year-end 2015, bringing the Tier 1 ratio to 17.8% and the total capital ratio to 19.1% at thisdate.

As of July 2016, the CET1 requirement will increase to 11.5% for Norwegian banks. Under Basel’s Pillar 2, the Norwegian supervisor willimpose additional capital requirements to be respected as of July 2016, which we believe SCB already satisfies.

Our assigned capital score of a1 reflects the adequate capitalisation of the bank.

STRONG AND RESILIENT PROFITABILITY UNDER PRESSURE FROM THE LOW INTEREST RATE ENVIRONMENTSCB has exhibited a relatively strong and resilient profitability over time, with net income representing 1.1% of tangible assets onaverage in the last three years. Going forward, we expect profitability to remain adequate, despite the negative pressure on net interestmargins due to the low interest rate environment. In addition, the decrease in merger costs which weighted on profitability in 2015 willhelp support net earnings.

The bank’s profit before tax increased to NOK1.5 billion in 2015 from NOK1.3 billion in 2014, mainly due to a net loan balanceincreasing by 39% year-over-year, 59% of this growth being derived from the GE merger. Lower funding costs also helped net incomeduring 2015. Nonetheless, the cost-to-income ratio increased to 49% as of year-end 2015 from 40% at year-end 2014 as a result ofthe integration costs derived from the merger.

Our profitability score of a3 includes a one notch negative adjustment, because of the negative pressures on net interest margins dueto the low interest rate environment and the weakening domestic growth in Norway which could cause an uptick in cost of risk in thiscountry.

HIGH RELIANCE ON WHOLESALE FUNDING, MITIGATED BY PRESENCE OF PARENTSCB is largely reliant on the wholesale financial markets for its funding, although this is mitigated by the on-going funding support ofits parents SCF and Santander Group and by the development of funding through online retail deposits. In addition, we view positivelythe bank's strategy to increase its independence from parent funding. As year-end 2015, SCB relied directly on its parent Santander CFfor 30% of its funding, the remainder being made of online retail deposits (33%), securitisation (20%) and unsecured bonds (17%). Theunsecured bonds are guaranteed by affiliated entities for senior debt or subscribed by the parent for subordinated and additional tierone (AT1) securities.

SCB’s funding strategy is to increase funding independence (direct parental funding was 30% as of year-end 2015, although self-funding by SCB was also partly guaranteed or subscribed by the parent) with a particular focus on expanding deposits and non-guaranteed senior unsecured funding. The bank has to lower its use of securitisation as part of its funding strategy, as Norwegianlegislation has changed and no longer allows for this funding source. The bank will continue to do securitisation in locations outside ofNorway. Nonetheless, the bank anticipates to increase the size of its deposit funding and to issue senior unsecured debt (without anyguarantee from the parent). Santander CF’s presence offers funding security in case resources directly obtained by SCB were to proveinsufficient. The bank’s high reliance on wholesale funding brings us to assign a b2 funding structure score, illustrating that fundingcharacteristics are a relative weakness for the overall credit profile of the bank.



Exhibit 5

SCB's reliance on the wholesale financial markets is mitigated by the on-going funding support of its parents and online retail depositsFunding Profile as of year-end 2015

Source: Company Reports

We consider that SCB’s liquidity profile is adequate, albeit on-balance sheet liquidity is relatively modest, as the bank runs negativeliquidity gaps on maturities below one year. A reflection of this latter point is that the liquidity coverage ratio (LCR) was only 82% as ofyear-end 2015, in compliance with the regulatory minimum of 70%, but short of the fully-loaded minimum of 100% by year-end 2017.The bank aims at progressively building its liquidity reserves on balance sheet and this ratio should progressively improve as a result,as per regulatory requirement. Nonetheless, we note that the bank has currently access to considerable liquidity in the form of multi-currency drawdown facilities from Santander CF and Santander Group (€6.7 billion in total, €2.9 billion being undrawn).

QUALITATIVE ADJUSTMENTThe unadjusted financial profile is baa2, which reflects the relatively strong set of financial ratios of the bank. As for other specialisedconsumer finance lenders, we adjust this score by one notch down for the lack of “business diversification”, as the bank is only involvedin auto financing and consumer lending.

Notching Considerations

Affiliate SupportWe consider there is a high probability that Santander CF would extend extraordinary support to SCB in case of need. This assumptionis reflected in a one-notch uplift from the bank's BCA, resulting in an adjusted BCA of baa2. Support from Santander CF is illustratedby its high degree of involvement in the strategy and management of SCB's operations. Santander CF also provides, guarantees orsubscribes to a portion of SCB's funding and debt issuance.

Loss Given FailureWe apply our Advanced LGF analysis to SCB reflecting Norway's upcoming implementation of the European Union's Bank Recoveryand Resolution Directive (BRRD), which we consider to be an Operational Resolution Regime. For this analysis we assume that equityand losses stand at 3% and 8%, respectively, of tangible banking assets in a failure scenario. We also assume a 25% run-off of “junior”wholesale deposits and a 5% run-off in preferred deposits. Moreover, we assign a 25% probability to junior deposits being preferred tosenior unsecured debt. These are in line with our standard assumptions.

SCB's deposits and senior unsecured creditors would likely face a very low loss rate in resolution, due to the loss absorption provided bythe significant amount of senior unsecured debt and the subordination provided by subordinated debt and AT1 securities. This results intwo notches of LGF uplift for both the deposit rating and the issuer rating from SOFIB's adjusted BCA.

Government SupportWe expect only a low probability of government support for deposits and senior debt issued by SCB, resulting in no rating uplift.



Counterparty Risk AssessmentsWe assign long-term and short-term CR assessments of A2(cr) and P-1(cr) respectively.

CR 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 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 (e.g., swaps), letters of credit, guarantees and liquidity facilities.

About Moody's Bank ScorecardOur Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment 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.

Rating Methodology and Scorecard Factors

Exhibit 6

Santander Consumer Bank ASMacro FactorsWeighted Macro Profile Very Strong - 100%

Financial ProfileFactor Historic Ratio Macro

Adjusted ScoreCredit Trend Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 2.1% a1 ← → baa1 Sector

concentrationLoan growth

CapitalTCE / RWA 15.9% aa2 ← → a1 Risk-weighted

capitalisationExpected trend

ProfitabilityNet Income / Tangible Assets 1.1% a2 ← → a3 Expected trend

Combined Solvency Score aa3 a3LiquidityFunding StructureMarket Funds / Tangible BankingAssets

56.4% b2 ← → b2 Expected trend

Liquid ResourcesLiquid Banking Assets / TangibleBanking Assets

11.2% baa3 ← → baa3 Expected trend

Combined Liquidity Score ba3 ba3Financial Profile baa2Business Diversification -1Opacity and Complexity 0Corporate Behavior 0Total Qualitative Adjustments -1Sovereign or Affiliate constraint: AaaScorecard Calculated BCA range baa2-ba1Assigned BCA baa3Affiliate Support notching --Adjusted BCA baa2

Instrument Class Loss GivenFailure

notching

Additional notching PreliminaryRating

Assessment

GovernmentSupport notching

Local Currencyrating

ForeignCurrency

rating



Counterparty Risk Assessment 3 0 a2 (cr) 0 A2 (cr) --Deposits 2 0 a3 0 A3 A3Source: Moody's Financial Metrics

Ratings

Exhibit 7Category Moody's RatingSANTANDER CONSUMER BANK AS

Outlook StableBank Deposits A3/P-2Baseline Credit Assessment baa3Adjusted Baseline Credit Assessment baa2Counterparty Risk Assessment A2(cr)/P-1(cr)Issuer Rating A3Bkd Senior Unsecured A3Bkd Subordinate MTN (P)Baa2ST Issuer Rating P-2Bkd Other Short Term (P)P-2

PARENT: SANTANDER CONSUMER FINANCE S.A.

Outlook StableBank Deposits -Dom Curr A3/P-2Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment A3(cr)/P-2(cr)Senior Unsecured A3Subordinate -Dom Curr Baa2Commercial Paper -Dom Curr P-2

Source: Moody's Investors Service



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Santander Consumer Bank AS · PDF fileSantander Consumer Bank AS ... which could be caused by net interest margin pressures due to the ... The acquired loan book from Santander Consumer