Volkswagen’s 2015 first half financial results showed sales and operating profit both up 10% and Volkswagen passed out Toyota to become the world’s best-selling car. Following the recent revelations of cheating on emissions, Volkswagen shares plunged 33% and now lie at a five year low.
There could be even bigger repercussions for Volkswagen than just the legal and regulatory fines. Volkswagen is as much a financial services company as it is a car-maker. Most car-makers enter partnerships with banks to provide their customers with finance. Volkswagen Financial Services has been crucial to Volkswagen’s success.
About 30% of all sales were Volkswagen lease or finance deals rather than outright sales. About 44% of VW’s €374 billion balance sheet is accounted for by its finance activities. It has more than €100 billion of loans outstanding to its customers and financial services generated €1.1 billion profit in the first six months of 2105 – representing one sixth of total group profits.
This poses a substantial risk to the VW business and the way it is funded.
The reputational damage to the VW brand may hurt its ability to generate deposits from customers. It currently holds about €25 billion in deposits, much of which came from discredited banks.
The scandal may lead to credit rating downgrades with a consequent rise in the cost of servicing borrowings of €121 billion in the financial services division. The ECB has suspended Volkswagen bonds from its asset purchase scheme.
Potential interest rate rises in the US and UK will reduce their ability to sell cars using cheap finance.
The biggest issue may be Personal Contract Purchase agreements [PCP], a halfway house between a lease and a loan, giving the consumer the option to buy the vehicle or return it, typically after three years of payments. Financiers say that car-makers have been increasing the risk of PCPs by building in negative buffers between the customer payments and the residual value of the vehicle.
With higher interest rates dampening sales, a glut in second hand cars will force down prices and potentially add to losses.