LONDON: S&P Global Ratings has assigned ‘A-‘ long-term and ‘A-2’ short-term issuer credit ratings to Hitachi Capital (UK) PLC (HCUK).

The outlook of U.K.-based finance company is stable.vHitachi Capital (UJ) is a core subsidiary of HC Corp. HCUK has consistently contributed to group earnings and successfully developed the Hitachi brand and reputation in the U.K. “Given that we assess HCUK as core to HC Corp, our rating on HCUK is equal to that on HC Corp because we assume that the group will continue to support HCUK, as required. As a result, we do not assign a stand-alone credit profile to HCUK”.

HCUK is the U.K. entity of HC Corp, a Japanese financial services provider that maintains a stable domestic franchise and a growing overseas business, in which HCUK plays a key role.

According to HC Corp, its European operations (of which HCUK is by far the largest element) represented 44% of profit before tax in the financial year ended March 31, 2019, and 26% of its operating assets at this date; the latter proportion has been gradually increasing over the past several years.

With reported total assets of £5.9 billion at March 31, 2019, HCUK is a niche player in the competitive U.K. finance markets but we note that it has a long track record of steady business growth.

HCUK’s business activities are well diversified across U.K. consumer finance, business lending, auto leasing, and invoice finance. We assume that HCUK’s useful niche market positions and business diversity will remain stable, and that its avoidance of credit cards or nonstandard lending will limit its exposure to the riskier parts of the U.K. consumer finance market.

The management team is longstanding with a clear strategic focus, and HCUK’s earnings and asset quality track record has been consistent. That said, performance inevitably depends on the health of the U.K. consumer and small business sector.

Reported net loans were £4.8 billion at March 31, 2019, up by a brisk 18% on the prior year. The loan book is split: 54% consumer finance, 24% business finance, 16% vehicle solutions, 4% European vendor solutions (EVS), and 2% invoice solutions. The diversity of financing operations supports earnings stability.

Capitalization is a credit strength. We calculate that HCUK’s risk adjusted capital (RAC) ratio was 11.0% at March 31, 2019, which is line with HC Corp. Management targets debt to equity of 8x (and reported 8x at March 31, 2019), similar to HC Corp, and we expect this metric to be maintained. Indicative of HC Corp’s support for HCUK’s growth plans is that no final dividend was paid in respect of 2019 earnings. “We also note that in 2017 HC Corp injected £100 million into HCUK, which brought its leverage in line with the parent”.

“We consider HCUK’s funding profile to be well diversified in commercial paper, medium term notes, securitizations, and bank facilities. The guaranteed note program from HC Corp is particularly supportive. From a liquidity perspective, we recognize that the relatively short duration of assets and the high propensity for prepayment justifies modest liquidity coverage. We expect that under stress scenarios the company’s cash flow would cover funding needs”.

The higher rating on HCUK, compared with the other U.K. non-bank lenders S&P Global Ratings rates, principally reflects its position within the HC Corp group and, to a lesser extent, its more diverse loan book profile. However, HCUK is also demonstrating a high rate of loan growth and low loan impairment levels, which may reflect current economic conditions rather than a medium-term forecast.

“We would lower the ratings if we were to downgrade HC Corp. Less likely, we could also lower the ratings if our view of HCUK’s position within the HC Corp group weakens. This could arise from a sharp deterioration in operating performance relative to the rest of the group or evidence of a reduced commitment by HC Corp toward its U.K. operations. Given the core group status, a higher rating on HCUK would depend on us upgrading HC Corp”.