FILE – In this Feb. 14, 2013, file photo, a Volkswagen logo is seen on the grill of a Volkswagen on display in Pittsburgh. New Mexico is suing Volkswagen and other German automakers over an emissions cheating scandal that involves millions of cars worldwide, the first state to do so but almost certainly not the last. (AP Photo/Gene J. Puskar, File)
Volkswagen is more than just a scandal-plagued automaker. It is also one of Europe’s largest banks, and its loan portfolio appears vulnerable to the emissions-cheating crisis that has engulfed the company.
Volkswagen Financial Services, the company’s in-house bank, has been an important element in Volkswagen’s rise to become the No. 2 carmaker in the world after Toyota. The unit has helped speed Volkswagen’s growth by lending money to buyers, financing leases and extending credit to dealers. It even offers checking accounts.
But the finance unit’s focus on a single asset – Volkswagen cars – could endanger profits if the scandal continues to undercut new-car sales or undermine the value of used vehicles. A particular concern is leased vehicles. Typically, Volkswagen and its dealers are obligated to buy back leased cars when the leases – valued at about 20 billion euros – expire. If their value drops more than planned, Volkswagen must absorb the difference.
The risks have drawn scrutiny from regulators and prompted all three major credit-rating firms to downgrade debt issued by Volkswagen, a company once considered so solid that even during the financial crisis its bonds found buyers.
Investors’ view of Volkswagen as a creditor “has deteriorated quite significantly,” said Yasmina Serghini, a senior credit officer at Moody’s Investors Service, which downgraded the financial-services unit one notch to A1 from Aa3 in November. The risk increases, she said, the longer it takes Volkswagen to reach agreement with U.S. regulators on how to make its diesels compliant with air-quality rules.
Values of Volkswagens are falling in the United States. Kelley Blue Book estimates prices for used Volkswagens have declined 16 percent since the scandal became public in September.
Some owners report steeper losses. Mark Winnett, a drug-development team leader for a pharmaceutical company, was forced to sell his 2014 Jetta in December when he moved from Phoenixville, Pennsylvania, to a posting in Shanghai.
Winnett, 58, paid about $28,000 for the car in April 2014. A Volkswagen dealer bought the car in December 2015 for a little more than half that amount. Winnett also said the dealer acted as though he was doing him a favor.
“I felt betrayed,” he said. Even before suffering the financial hit, Winnett said, he was angry at Volkswagen for marketing diesel as environmentally friendly. In fact, the cars emitted as much as 40 times the allowable amount of nitrogen oxide, a pollutant linked to lung ailments, according to the Environmental Protection Agency.
“We bought the car because we thought we were doing a good thing,” Winnett said.
Frank Fiedler, chief financial officer of Volkswagen Financial Services, said in a statement that “no effect on the resale value of vehicles has been established so far in the majority of the markets.” The unit has set aside enough money to cover any losses that might materialize, Fiedler said in a written response to questions.
Volkswagen does not have any trouble raising money, he said, although he said the company had sometimes had to pay higher interest rates.
The financial services unit makes heavy use of asset-backed securities, bundles of loans sold to investors who are then entitled to proceeds from the payments. The transactions allow Volkswagen to raise money for new loans.
In October, after the scandal broke, Fiedler said, Volkswagen paid the lowest interest rate since the financial crisis on an asset-backed security tied to Spanish auto loans. But, in a sign that investors are concerned about the scandal, Volkswagen had to pay investors about half a percentage point more in November, compared with a similar issue in May, to get them to buy an asset-backed security tied to leased vehicles in Germany.
Volkswagen Financial Services is also a full-service bank. Its Volkswagen Bank subsidiary has retail branches in Germany where customers can keep checking and savings accounts, in addition to applying for loans. Credit agencies consider the retail operations positive for the unit, because customer deposits provide a more stable source of funding than debt markets, which can be volatile.
Volkswagen has a separate finance unit in the United States, VW Credit. It has a $28 billion loan portfolio, 90 percent of which consists of credit to buyers or for leased vehicles.
In Europe, Volkswagen sales have not suffered as much as in the United States. That is good news for Volkswagen Financial Services, which does three-quarters of its lending in Europe. In December, sales including other Volkswagen brands, like SEAT and Skoda, rose 5 percent in the European Union to 246,278 vehicles.
That was much slower than the overall market, which rose 17 percent. And Volkswagen’s market share in the European Union slipped to 22 percent from 25 percent, though it was still double that of the nearest competitor, PSA Peugeot Citroen.
Whatever happens, Volkswagen is likely to keep offering competitive lending rates to customers, although it might cost the company more to do so. Fiedler of Volkswagen Financial Services said that it was in the company’s “own interest that we always offer our customers attractive financing and leasing conditions.”