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Analysis & Opinion
22.07.10 Captivating Borrowers
By Tai Adelaja

Foreign automakers keep strengthening their foothold in the Russian auto market by opening affiliated auto loan banks, in a bid to help more Russians finance the cars of their dreams. In a practice that has become a trend in recent years, the banking arms of major foreign automobile companies, such as BMW, Toyota and Peugeot, have established captive banks that specialize in granting loans for purchases of their own brands of cars, usually on more favorable terms than stand-alone banks.

On Friday, the German Volkswagen group joined the ranks of the leading automakers with the registration of its Volkswagen Bank Rus, amid fears that ever more domestic banks are losing out to foreign banks in the area of consumer loans. Russia's Central Bank confirmed Monday that Volkswagen has received a banking license in Russia to issue car loans. The debut of Volkswagen Bank Rus on the domestic auto market brings the number of registered foreign-owned auto loan banks in Russia up to six. The others are BMW Bank, Mercedes-Benz Bank Rus, Toyota Bank, Bank PSA Finance (the Bank of the auto Peugeot Citroen), and the Bank of Tokyo-Mitsubishi UFJ.

At least two out of the five auto loan banks have established a very strong position in the Russian consumer loan market, trumping multi-purpose banks with their genial loan-issuance conditions. Last year, RBC-rating ranked BMW Bank, which has issued a total of 4.17 billion rubles in car loans, the seventh strongest in the market, while Toyota Bank garnered 11th place with a total of 2.65 billion rubles worth of car loans issued. In addition, many of the foreign-owned car loan banks reported increases in the volume of auto loans given out last year, even as the economic crisis raged. The volume of car loans given out by BMW Bank and Toyota Bank increased by 159 percent and 85 percent year-on-year respectively, while other major stand-alone banks including Sberbank, Rusfinance Bank, VTB 24, Rosbank, UniCredit bank, Credit Europe Bank, Uniastrum Bank, Raiffeisenbank, and BSGV saw the amount of car loans issued plummet to between 25 percent and 85 percent.

Russia’s car market was once Europe’s fastest growing, as easy-to-get credit fueled demand for high ticket items such as foreign-made automobiles. Russia surpassed Germany in the first half of 2008 as Europe’s biggest auto market, before the global credit crisis and the ruble’s 35 percent tumble in 2009 choked demand. But with the crisis receding, experts are predicting an upswing in car sales, as increases in employment and consumer spending rekindle auto purchases this year. Retail sales rose for the sixth month in a row in June, jumping an annual 5.8 percent, while the jobless rate fell to 6.8 percent, the lowest level in 20 months, Bloomberg reported. The AEB Automobile Manufacturers’ Committee said that between 25 percent and 30 percent of Russians will buy their cars this year with loans arranged via car dealers or manufacturers, and many more will arrange directly with their banks and appear at the dealerships as cash customers.

David Thomas, the chairman of AEB, predicted an increase to some 45 to 50 percent in the number of Russians that will buy their cars using auto loans in the future, in line with similar trends seen in many developed markets. "The issue is not about Russians willing to take out car loans, it is more about the bank or finance company's willingness to offer car loans," Thomas said. Russians bought 1.65 million cars in the first half of 2008, a 41 percent increase from the same period a year earlier, data from PricewaterhouseCoopers LLP shows. Sales totaled 174,838 in June, an increase of 45 percent from the year before, the Moscow-based Association of European Business reported this month.

Such optimism hinges, in part, on the presumption that the Russian auto market is far from saturation. The number of cars per every thousand people in Russia will be around 240 by the end of 2010, compared to the EU average of close to 500, figures from AEB show. As demand for cars inches toward pre-crisis level, new arrivals into the auto loan banking market are expected to jolt demand even further. Alexander Koloshenko, the president of ZAO Toyota Bank, said that up to 30 percent of all Toyota brand cars, including the business-class Lexus, are sold on credit obtained through the bank. "Generally speaking, the number of cars sold on credit this year could reach pre-crisis level, when almost half of all cars sold were sold on credit,” Koloshenko said. “If the market retains its present pace of development, loans will be used to finance over 50 percent of all car purchases in Russia within the next two to three years.” About 35 percent of sales are currently financed with loans, according to Volkswagen and car dealership Rolf Group in Moscow.

Consumer loans remain the biggest business for banks in Russia, and auto loans were the main growth catalyst in the country’s auto industry in the years before the crisis. Russia's auto sales jumped 45 percent in June and were up three percent on average for the first half of the year, in contrast to a five percent decline in the first five months, AEB figures show. Industry insiders said the current demand for cars will inevitably fuel demand for car loans, and therefore for more auto loan banks. “This is a natural development in any market, for manufacturers to be establishing their own finance company or having a single branded partnership with a local bank,” Thomas said. “It brings the manufacturer in closer contact to the customer, and supports repeat business and the sale of additional non-car products, such as insurance and extended warranties.”

But while many foreign car producers have been offering car loans with interest rates in the single digits, car dealers in Russia are known to offer more expensive bank loans to their customers, further tilting the balance in favor of captive loan banks. The sales of Toyota and Lexus brands spiraled up by 50 percent after the Japanese company established the Toyota Bank in Russia in 2007, Koloshenko said. The number of cars bought on credit grew three-fold since January 2010, on special offerings and lower-than-average interest rates, he said. BMW Bank, whose offerings include a nine percent annual interest rate on loans, reported the same growth pattern. “Russians are responding well to special sales conditions offered by the company,” BMW Bank spokeswoman Larissa Shevchenko said. “We have had no bad loans and our client-loyalty rating is one of the highest in the country.” Banque PSA Finance, which is wholly controlled by PSA Peugeot Citroen to promote the sale of the Peugeot models, said its offerings include credit facilities both for wholesale and retail purchases of the Peugeot models since 2008. The bank works with Soci?t? G?n?rale Insurance as well as Rusfinance Bank to help push its sales in Russia.

The arrival of yet another auto loan bank in Russia will up the ante for general purpose banks, such as Bank Soci?t? G?n?rale Group, Sberbank and VTB 24, which hitherto played a significant role on the market, experts and industry executives say. Sberbank and VTB 24 used to control 50 percent of the car loan market, Societe Generale Group – 25 percent, while the rest was controlled by other banks, Kommersant quoted Ivan Syskov, the head of car loan development at UniCredit Bank, as saying.

Before Friday’s debut by Volkswagen Bank, Sberbank acted as the main partner to the German company in Russia. Car loans make up nine percent of the bank’s retail portfolio, and the bank has issued car loans with an annual interest rate of as low as zero to 1.99 percent for purchases of Volkswagen cars. Natalia Karaseva, the director of retail lending at Sberbank, said the state-run bank expects to continue cooperating with the German company. "We are working closely with Volkswagen," Karaseva said. “I do not think that the appearance of a captive bank will seriously affect our relationship with Volkswagen. We operate in almost all regions of the country, while captive banks almost always issue loans only in Moscow and St. Petersburg.”
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