Fitch Affirms Hyundai Capital Services at 'BBB+'; Hyundai Card at 'BBB'

Thu May 9, 2013 11:23pm EDT

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(The following statement was released by the rating agency) SEOUL, May 09 (Fitch) Fitch Ratings has affirmed Hyundai Capital Services Inc.'s (HCS) Long-Term Issuer Default Rating (IDR) at 'BBB+', its Short-Term IDR at 'F2', and its senior unsecured debt rating at 'BBB+. At the same time, the agency has affirmed Hyundai Card Co., Ltd's (HCC) Long-Term IDR at 'BBB' and its Short-Term IDR at 'F3'. The Outlook on HCS and HCC is Stable. Key Rating Drivers - HCS's IDR HCS's ratings are aligned with those of Hyundai Motor Company (HMC, BBB+/Stable), based on Fitch's view of HCS as a core subsidiary of HMC. This is due to HMC's majority ownership (57%) and operational links between the two companies. HCS enjoys a strong franchise and a favourable operating environment in Korea's auto financing market as a captive auto financier of HMC and Kia Motor Corporation (KMC, BBB+/Stable). HCS's portfolio is composed of 65% captive auto financing-related assets and 35% non-captive assets such as used car financing, personal loans, and mortgage. HCS's asset quality has deteriorated with an increased delinquency ratio of 2.5% at end-2012 from 2.1% at end-2011. However, capitalisation continues to be adequate with a capital adequacy ratio of 14.5% at end-2012. This, together with HCS's solid return on assets of 2% in 2012, should adequately cover potential credit costs in a cyclical downturn. HCS's liquidity remains adequate despite its reliance on wholesale funding and the reduction of General Electric Capital Corporation's (GECC) committed credit line to USD0.7bn from USD1bn in mid-February 2013. Key Rating Drivers - HCC's IDR HCC's ratings reflect Fitch's view of HCC as a strategically important subsidiary of HMC. Fitch believes that there is a high probability that HCC would be supported by HMC, if needed. HCC, HCS and HMC have operational and ownership linkages as they share the same brand name and premises/functions, and jointly execute certain marketing strategies. Unlike HCS, HCC's ratings are one notch lower than HMC's, as the credit card business is not as captive a financing business, as is the case for HCS, which is part of the core operations of the auto manufacturer. Fitch expects HCC's performance remain below industry average. HCC's return on assets decreased to 1.7% in 2012 from 2.4% in 2011 and above 3% in 2010 and was weaker than the industry average of 2.6% in 2012. Furthermore, Fitch believes that HCC's underlying loan quality has become somewhat inferior to that of its domestic peers. HCC aggressively increased its risk assets (card loan, cash advance, revolving receivables) to 52% of total card receivables at end-2012 from 38% at end-2009 while the rest of mono-liners in Korea have reduced their risk assets to 47% from 51% for the same period. HCC's reported delinquency ratio of 0.7% at end-2012 is artificially low as the company actively writes off its delinquent loans, even including less than 60-day delinquent loans, and sells them to HCS. As a non-deposit taking institution, HCC depends solely on wholesale funding, exposing it to capital market conditions. Long-term bonds account for 66% of total funding and the balance consists of commercial papers, loans and asset-backed securities. Despite its reliance on wholesale funding and the reduction of GECC's credit line in mid-February 2013 USD100m from USD200m, HCC's liquidity is adequate. HCC also maintains credit lines for contingency purposes of KRW680bn (approximately equivalent to USD620m) with several domestic banks at end-Q113. HCC's Stable Outlook reflects that of HMC although Fitch views the outlook of the credit card industry as negative. Korea's credit card industry continues to be under regulatory and social pressure. In addition to lowering the merchant fee rate in September 2012, card companies are required from Q413 by regulators to charge interest rates based on individuals' creditworthiness. This in turn will allow consumers to compare interest rate charges across card companies and products, resulting in downward pressure on the interest rate. Regulations on new card issuance and marketing activities have tightened and new cash-advance revolving activity will cease in 2013. Fitch expects they would have negative impact on credit card companies' revenue stream while stabilising the loan quality over the long term. Rating Sensitivities Any change in HMC's ratings or the relationship between HCS or HCC with HMC would trigger a review of their ratings. A sustainable, significant improvement in HCC's profitability, loan quality, funding/liquidity and capitalisation may result in positive rating action. However, Fitch views such prospects as remote, considering HCC's below industry average performance and continued regulatory and social pressure. Likewise, any notable increase in risk-taking that hurts the credit profile or capitalisation would trigger a review of HCC's ratings. HCS and HCC are joint ventures between HMC (with a majority stake) and GECC, and are co-managed by them. The Boards of Directors of HCS and HCC are composed of HMC and GECC appointees, and GECC has veto rights. Contacts: Primary Analyst Mihwa Park Associate Director +82 2 3278 8372 Fitch Ratings Limited 9F Kyobo Securities Building 26-4 Youido-Dong, Youngdeungpo-Gu Seoul 150-737 Secondary Analyst Heakyu Chang Director +82 2 3278 8363 Committee Chairperson Tim Roche Senior Director +61 2 8256 0310 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, "Global Financial Institutions Rating Criteria", dated 15 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. 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