VW Bank's Downgrade Reflects Low Systemic Support

Moody's Investors Service has downgraded Volkswagen Bank's (VW Bank) long and short-term debt and deposit ratings to A3/prime-2 from A2/prime-1 following Moody's re-assessment of systemic support being made available to the bank. The outlook on these ratings as well as the bank's subordinated debt at Baa1 and its Baa2 (hyb) junior subordinated debt ratings is now positive. VW Bank's standalone bank financial strength rating (BFSR) of C-, which maps to Baa1 on the long-term rating scale, is not affected by this rating action and continues to carry a stable outlook.

Simultaneously, Moody's changed the outlook on the A3 long-term debt ratings of Volkswagen Financial Services (VWFS) to positive from stable.

The downgrade of VW Bank's long and short-term debt and deposit ratings reflects Moody's view of low systemic support for the bank going forward following the recent introduction of a resolution regime in Germany and given the bank's small size and overall market share in its deposit-taking activities. If applied, the resolution regime would allow regulators to selectively transfer assets and/or liabilities and impose losses on creditors.

Moody's believes there is a decreasing willingness of the central government to support banks using taxpayer's money. The reassessment results in VW Bank's debt and deposit ratings being based on the bank's Baa1 standalone credit strength and on parental support assumptions from Volkswagen Aktiengesellschaft, no longer incorporating any rating uplift from systemic support.

Posted in: Market Analysis