In Germany, the financial arms of carmakers like Mercedes, BMW and Volkswagen are far more profitable than banks. How can this success be explained? Focus on Volkswagen Financial Services.
22% profitability for Volkswagen Financial Services
The profitability of Volkswagen Financial Services, the financial arm of carmaker Volkswagen, is such that it could make German banks green with envy. In 2021, Volkswagen FS's ROE (Return on Equity) reached 22%, compared with 3.8% for Deutsche Bank and 1% for Commerzbank.
Last year, while Volkswagen Financial Services' operating profit doubled to 5.67 billion euros, Deutsche Bank's was 3.4 billion euros. Commerzbank, meanwhile, barely managed 1.1 billion euros.
As early as 1949, Volkswagen Bank, which later became Volkswagen Financial Services, was granting loans to customers for the purchase of Beetles. Today, the carmaker's financial arm continues to offer loans to customers for the purchase of vehicles, as well as mortgages, credit cards and health and travel insurance.
In addition, Volkswagen Financial Services is no. 1 in the German market for leasing, car insurance and personal loans.
Profitability boosted by cyclical factors
In Germany, Volkswagen Financial Services is not the only financial arm of a carmaker to be more profitable than a bank. BMW's Mercedes-Benz Mobility boasts an 18% ROE, and its operating profit is expected to reach 3.7 billion euros by 2021.
Several cyclical factors partly explain the profitability of automakers' finance divisions. Firstly, the shortage of semi-conductors has led to production line slowdowns and interruptions, increasing the value of automakers' used vehicle inventories.
What's more, to get rid of their excess liquidity and avoid penalties, German banks granted loans at extremely low rates to automakers, enabling the latter's financial branches to offer attractive loans to their customers.
Finally, the upgrading of the automakers' vehicle fleets has enabled them to improve their solvency and reduce the cost of risk.
Unlike Germany, the French car leasing market is dominated by banks. These include Société Générale's ALD subsidiary, which bought European market leader LeasePlan for 4.9 billion euros, and BNP Paribas' Arval subsidiary, which has 1.4 million vehicles on its books.
Recently, however, we have seen the emergence of partnerships between carmakers and banks, such as Icare, a subsidiary of BNP Paribas, and Volkswagen, or Stellantis, which owns Opel, and Crédit Agricole.