Financial alarm bells
22 October 2012
News that the French government may step in to protect the credit rating of Banque PSA was not widely reported. But it should be ringing alarm bells across the whole auto retail industry, not just in the Peugeot and Citroen networks.
Manufacturer-owned finance companies (most of them are registered as banks in Europe and the US) are more than just providers of new car retail loans. They underpin the whole industry by funding factories, providing stocking loans and, in many cases, holding freehold on dealership sites, which are then leased back to the operating retailer.
When GM filed for Chapter 11, one vital move was to float off its bank, GMAC (now called Ally), in order to avoid defaulting on hundreds of thousands of car loans.
In the boom years, many European car manufacturers were making more money from their banking operations than they were from selling cars. Now, car sales have slumped and the loans that the banks have made to their parent company and the franchised networks are looking increasingly risky.
Credit ratings fall, interest rates go up and suddenly the failing company is even more uncompetitive. If whole national economies (Greece, Spain, Portugal) can be brought to their knees, it would be naive in the extreme to think it can’t happen to a vehicle manufacturer.
Several European manufacturers are already weak and Robert Forrester of Vertu has already warned his shareholders that margins may be under pressure as the carmakers push for volume without the financial incentives to support it. His group reported half-year profits ahead of plan this week.
Meanwhile, the high street is beginning to get its act together on personal loans. Tesco Bank has just launched a fixed-rate mortgage at 1.99% and, last week, Derbyshire Building Society offered personal loans at 5.6% – the lowest headline rate since November 2006.
The last thing you need right now is to find yourself on the wrong side of an uncompetitive finance deal.
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