September 18, 2020

VW’s finance arm takes $590 million hit, braces for more pain

Volkswagen Group’s financial-services division boosted provisions for credit and residual-value risks by about 500 million euros ($590 million) in the first six months and warned the fallout from the COVID-19 pandemic could worsen in the second half of the year.

The costs booked mainly covered U.S. operations, because other countries allow deferring some credit payments during the crisis, said Frank Fiedler, CFO of VW’s lending unit. The postponement could shift ripple effects from shutdowns to the second half.

“We’re seeing a substantial rise in unemployment in the U.S., and in Europe the further development is difficult to predict,” Fiedler said. “Maybe the economy revs up again, but we do anticipate that credit defaults go up.”

Regulators around the world are closely watching credit risks that the global pandemic continues to pose to economies supported by impermanent stimulus and relief measures. European banks including HSBC Holdings and Banco Santander set aside about $28 billion to cover bad loans in the second quarter, a number dwarfed by the roughly $41.5 billion earmarked by their more profitable U.S. peers.

Source of stability

Volkswagen Financial Services is one of the world’s largest automotive captive-finance companies and has been a stable source of income for the biggest vehicle producer. The division headquartered in Braunschweig, Germany, lends to car buyers and dealers and offers insurance, mobility and fleet-management services in 48 countries.

Operating profit declined 9.8 percent in the first six months of the year to 1.16 billion euros. Fiedler called the unit’s performance “remarkable” but cautioned that it was helped by older financing contracts.

“The decline in new contracts will eat into results over time,” he said. The number of new contracts slumped 17 percent to 3.4 million during the first half.

Coping mechanisms

The division started offering a range of programs to cope with the crisis, including more digital services for customers and a “massive” initiative to clear used-car inventory, Fiedler said. Freeing up clogged dealer lots helps stabilize residual values — the amount of money cars are worth at the end of leases or a few years of ownership.

The planned expansion of VW’s Heycar used-vehicle website to Spain will go ahead and faced only a minor delay triggered by the COVID-19 crisis, Fiedler said.

VW’s financial-services division also plays a significant role for the refinancing operations of the German automaker. The unit remains open to access capital markets by the end of the year, but it’s not under pressure to raise fresh funds, Fiedler said.