FRANKFURT -- Residual values for Volkswagen Group diesel used cars fitted with defeat devices to evade emissions standards are holding up in Europe, which may undermine the case from consumer groups that VW customers should receive compensation as the automaker has agreed to do in the U.S.
While diesel owners in the U.S. first received $1,000 split between a cash card and vouchers and later a deal for up to $10,000 in compensation plus a vehicle buyback, their European counterparts got no such deal.
EU Commissioner Elzbieta Bienkowska has demanded that VW Group's European customers get the same deal as U.S. buyers. Since 8.5 million of the 11 million diesels with defeat devices sold by VW Group worldwide are in Europe, the sum VW would have to pay out is a terrifying thought for the company.
A core argument of consumer advocacy groups has been the fear that the cars are losing value through sinking residuals. According to VW's captive financial services division (VWFS), European customers have nothing to complain about. Citing data from independent market tracker Schwacke, the German unit of EurotaxGlass, used-car prices for VW Group's diesels are developing far better than VWFS initially assumed – a trend they say is valid for the rest of Europe as well.
The division, which offers everything from loans to insurance deals to support VW's manufacturing operations, had written down the value of their entire diesel lease portfolio by 570 million euros in 2015 as a response to the emissions cheating.
This implied a scandal-related decline in the residual values of their diesel cars of 3 percentage points. VWFS also estimated a 1 percentage point drop in gasoline cars as well as "collateral damage." In reality however, VWFS' finance chief Frank Fiedler told reporters earlier this month that the actual development so far revealed an improvement, however slight. Moreover, the Schwacke data showed their used-car values developed marginally better than comparable diesels sold by its rivals.
For Fiedler that means the financial services division may be able to emerge unscathed from the scandal, and book back the entire 570 million as realized profits over the coming two years – assuming of course that diesel residuals continue to hold up.
If his auditors feel comfortable enough to approve these one-off gains to VWFS's earnings statement, logically that same argument should apply for European customers. The data suggests VW diesel owners should be able to sell their fraudulent cars without incurring a material financial penalty so long as they are brought into compliance. Given customers suffered from no monetary disadvantage either prior to the recall or afterwards – when assuming in both cases the vehicle operates in the European driving cycle mode used for certification – it's hard to make the legal case that VW owes them compensation.
In a court of law, in other words, VW should have little to worry about. In the court of public opinion, however, it still smacks of a double standard.
While VWFS had good news to report, including hiking its profit target for the second time this year, there is some bad news mixed in: the European Central Bank is becoming a real thorn in the side of Volkswagen.
Since the ECB took on a further role as supervisor of the largest euro area banks in November 2014 in addition to setting monetary policy, regulators want to apply the same, increasingly strict standards they use for commercial lenders to VW's captive financial services business.
But banks have a different business model from VWFS, whose primary goal is to support sales of the group's core manufacturing operations and which in an emergency can draw on the resources of its cash-rich parent to remain both liquid and solvent.
Despite that key difference, Volkswagen will nonetheless have to stump up 1 billion euros in fresh capital this month to ensure the VWFS's balance sheet meets the ECB's regulatory minimum ratio of 14.6 percent equity to overall assets for next year compared to the 12.8 percent for this one. A further injection of funds is due then in the first quarter as well, although Fiedler as yet cannot estimate the sum required since it depends on factors such as the growth of its portfolio and the amount of profits retained.
In a response to the ever rising regulatory capital requirements that threaten to further drain VW Group of precious cash needed to fund its core business, VWFS AG is enacting “Project Panda”. This oddly named plan foresees a carve out of the EU banking operations – roughly half of the group’s 160 billion euros in overall financial services assets – in order to more affordably finance growth in the rest of its portfolio.
Once its regulatory burden is lessened, Fiedler estimates this will reduce regulatory hurdles and will only cost the stump financial services business 8 percent in equity tied up on its balance sheet starting 2018. The less capital that has to be set aside with each new financing deal, the easier the business can expand and the more cars can be delivered to customers at affordable rates. That should give VWFS the financial leeway it needs to meet its goal of nearly doubling the volume of its portfolio to 30 million contracts by 2025.
And that means more profits for the parent. VWFS forecast namely that its operating profit should increase by about 5 percent to over 2 billion euros this year, keeping it on track to remain the third biggest contributor to group earnings after Audi and Porsche.