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Western EuropeJuly 31 2005

Volkswagen Bank

Volkswagen, the auto maker that is one of Germany’s best-known companies, has been in trouble lately. Since late June, it has been plagued by an ugly bribery scandal involving senior executives in the personnel department.
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Even worse, Volkswagen’s main car brands – VW, Skoda, Bentley and Bugatti – plunged into the red in 2004 and remained there in Q1 this year. Fortunately for the car maker, there are still some bright spots in the group, most notably Volkswagen Bank, whose main business is financing the purchase of VW-branded cars in nine European countries, including Germany.

Founded in 1949, the bank has emerged as Europe’s biggest auto financier, with balance sheet assets of €21.4bn and an inventory of about 1.4 million consumer car loans. It has distinguished itself by an ability to innovate. In the early 1990s, it unveiled one of Germany’s first online banks, which, beyond providing an account with overdraft protection, offers credit cards, trading with securities and even building loans. Today, the online bank has racked up 625,000 users and a deposit volume of €8bn.

While Volkswagen’s main car business slumped in 2004, its bank saw profit from ordinary activities more than double to €294m from €124m in the previous year. Much of the increase was, however, due to positive one-time effects, including a lucrative asset-backed-securities deal. Barring these, there was an underlying profit gain of 8%.

Despite the bad news at Volkswagen and further sluggishness in the European economy, the outlook for the bank looks promising this year. “In view of the current economic conditions in Germany and Europe, we expect similar growth in profit from ordinary activities this year,” says Burkhard Breiing, CEO of Volkswagen Financial Services, which encompasses an insurer and a car leasing company as well as the bank.

According to the bank, the main reason for the unchanged profit forecast is that European demand for car leasing and finance is “far less cyclical and therefore more stable” than for the cars themselves. It adds that its decision to diversify into online banking services gives it another competitive advantage.

That may be the case but the bank’s optimism still largely rests on a further – albeit export-driven – recovery in the German economy. Demand for cars in Germany and Europe could also suffer greatly this year if the price on oil futures, which recently hit a record $60 a barrel, continues its upward trajectory.

JW

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Read more about:  Western Europe , Germany