Manufacturers exposing themselves to record lending levels

20 September 2017

Europe’s largest vehicle manufacturers have more than doubled the amount of lending on their balance sheets since the 2008 financial crisis, with more than €400 billion of global exposure to loans and leases.

Volkswagen (VW), BMW, Daimler and Renault have seen the growing use of credit in global car sales push their exposure to borrowers to record highs, according to the Financial Times. This is a figure comparable to the total assets of a large standalone bank.

The rise in lending reflects the importance of vehicle manufacturers’ financial arms, which help to support the sales of vehicles by providing a number of ′attractive’ lending options to consumers and businesses. The role of these arms has also risen significantly since the financial crisis, with banks distancing themselves from the market, meaning manufacturers are having to do more to secure financial options for customers.

′The financing parts of those [global] businesses are more important than what they’re churning out at the factories,’ Mike Allen, lead analyst at Zeus Capital, told the newspaper. He added that the use of financing helped to build customer loyalty, in part because of the collection of data. ′You’re almost a banks analyst when you’re covering global automobiles.’

The €400 billion combined global credit assets of the four companies has risen by more than 10% every year for the past three full years, over a period in which the rate of growth of consumer credit for car purchases has emerged as a potential concern for policymakers in the UK. The overall rise is also likely to reflect entries into new geographies and acquisitions, according to analysts, and includes dealer financing as well as lending and leases for car customers.

In April 2017, the FCA announced it was looking to open an investigation into irresponsible lending in the automotive market, particularly due to its place in a massive expansion of consumer credit. It was concerned that there was a lack of transparency in deals and that sales staff were failing to carry out sufficient checks to ensure consumers could afford the credit they were offered.

′We are taking forward a range of work to help us to answer these questions, and to decide what further interventions may be necessary,’ the FCA said in a statement. ′This includes supervisory work with FCA-authorised lenders, detailed analysis of millions of anonymised credit reference agency records, and careful scrutiny of firms’ sales practices and processes.

′We are also working closely with the Bank of England and the Prudential Regulation Authority, who are considering the risks raised by the expansion of motor finance that fall within their regulatory remit. We will publish an update on this work in Q1 2018.’

The financial divisions of car companies, many of which have banking licences, fund their lending through deposits and corporate bond issuance as well as securitisation, where loans are packaged up and sold on to investors. VW, which has more than €100bn of loans and leases on the balance sheet of its financial services department, excluding the US, Canada and Spain, is historically one of the largest issuers of corporate bonds in Europe.

The high exposure to lending also places a large risk on automakers should consumers fail to pay back their credit, or should markets suffer another crash. Therefore the €400 billion figure, which could rise further with vehicle sales in Europe increasing, could soon be a cause for concern in the industry.