WOLFSBURG - Volkswagen Bank Polska was voted one of the two best retail banks in Poland in 2003 and 2004.
Admittedly it only has a few thousand customers. But that it competes with traditional banks on their terms symbolizes Volkswagen's ambition to turn financial services into a core operation and expand in areas seemingly unrelated to cars.
"Of European automakers, Volkswagen has been and remains the most ambitious in financial services," says John Lawson, a London-based analyst with Citigroup Smith Barney.
Pioneered by the Big-Three US carmakers, financial services have grown into a major contributor to European carmakers' profits. Just like maintenance and the sale of spare parts, financial services provide manufacturers with a steady source of income that acts as a buffer against the ups and downs of new car sales.
Last year, financial services brought Volkswagen E926 million in operating profit, or 57 percent of the group's E1.62 billion operating profit. That was up from euros 894 million or 56 percent of group operating profit in 2003.
There was also no other European automaker, where financial services posted an equally high contribution to pretax profit, both in percentage and absolute terms. Financial services represented 84 percent of the VW group's E1,099 billion pre-tax profit in 2004, well above the European average of 34 percent.
To be sure, the financial arms of General Motors and Ford still dwarf their European competitors.
Their assets, respectively E280 billion and E180 billion, vastly exceed Volkswagen's E61 billion. Their operating profit of E3.5 billion, coincidentally the same for both US carmakers, was more than three times what VW earned.
First to offer direct banking
Like most automakers, Volkswagen has long been offering loans to dealers and customers to purchase its cars. About 60 percent of all Volkswagen cars are bought with credit from its financing arm, Volkswagen Financial Services (VWFS).
But Volkswagen has led its European automaking rivals in expanding financial services.
"At the moment we act simply as broker, but we want to offer insurance directly," says Burkhard Breiing, VWFS chairman.
Based in Brunswick, 180km west of Berlin, and near Volkswagen group headquarters here, the financial services unit is also expanding in fast-growing Asian markets. Last year it started to provide financial services in China, where consumer credit is still in infancy.
"We are now looking at South Korea and Malaysia," says Breiing, a 48-year-old banker who joined Volkswagen in 2003.
Through direct banking, Volkswagen Bank has 626,000 customers in Germany and 70 percent of them own a VW car. Their deposits are a cheap source of funds for Volkswagen - 30 to 40 basis points (0.3 to 0.4 percentage points) lower than interest rates VW would pay on capital market funds, Lawson estimates. Customer deposits represented E8.0 billion, 15 percent of VW financial services' total needs.
VW's retail banking customers are also precious as potential car buyers. Volkswagen group can target its marketing efforts at them efficiently and VW can keep a direct relationship with its customers rather than depend on its dealers.
VWFS, which opened a Polish direct bank in 1998 and recently in Italy, says other countries such as France or Spain may follow. It would like to increase deposits outside Germany by E2 billion or E3 billion, from a negligible amount now. The question is whether the Volkswagen brand can have the same halo outside its home country.
Other growth areas are leasing and fleet management, Breiing says. Fewer and fewer companies want to own or manage their car fleets, which they see as a drain on scarce management and financial resources.
"Increasingly companies want to outsource their fleet," he says.
In April last year VWFS decided to increase its firepower in multibrand fleet management by buying 50 percent of LeasePlan of the Netherlands. It will complement its fully-owned unit, Europcar Fleet Services.
VW's expansion of financial services boosts revenue and the potential for profit, but analysts question whether new fields such as used-cars financing or China means VW is too daring.
"It may raise its risk profile," said Salomon Smith Barney in a report on European carmaker financial arms.
Traditional car financing is considered a low-risk consumer-market lending. The car acts as collateral. "The default rate is quite low, because nobody wants to lose face before his neighbors," Breiing says.
But that safety is attracting new mainstream bank competitors such as Banco Santander of Spain and Banque Nationale de Paris of France through its Cetelem consumer credit unit.
"It's getting more difficult, not easier, for carmakers to make money with finances," says Karel Williams, who teaches business at the University of Manchester, England. "Margins are heavily eroded by competition everywhere."
But Breiing is confident VWFS can defend itself against commercial banks.
"Our advantage is with our dealers - they are our network and that comes free," he says.
And Volkswagen's car market expertise gives it an edge against commercial banks in more complex operations such as leasing, he argues.
"We know about leased cars' residual value," he says. "We know how to remarket a second-hand car."