The UK’s largest car dealer had a bad day yesterday. It issued a profit warning and its shares fell by 17% in value. Why? Because new car sales are down; big discounting by manufacturers is hitting margins and second hand prices are falling.
The first two are signs of a down turn.
You could say the last is too, but it’s more worrying than that. Eighty five per cent of all new car sales are on leasing contracts that have a residual value built in. If the second hand price of cars falls many of the valuations will be too high. And that means that those debts are now loss making for the banks that have issued them. Under new accounting rules they should be anticipating those losses this year. Wait for banking provisions, and so losses, to follow.
It’s not the banks doing the financing:
So it would take a big drop in used car prices to cause serious problems. If that occurred, it would hit the leasing divisions of carmakers first. The Bank of England reckons they finance 70 per cent of new car leases in the UK, and they are vast businesses. Globally, Volkswagen’s financing arm alone has €157bn of loans to customers on its books. They are also an important source of profit in an industry where manufacturing margins are thin.