By Gergely Szakacs
BUDAPEST (Reuters) – Turmoil in Europe's auto sector could hit Europe's central economy and damage banks' asset quality, S&P Global said on Tuesday, although it added that lenders were strong enough to withstand stress in their automotive portfolios.
Carmakers across Europe have announced plant closures and major layoffs as they battle weak demand, high costs, competition from China and a slower-than-expected transition to electric vehicles.
The sector is one of the mainstays of economic growth in central Europe, accounting for 5% to 10% of the region's gross domestic product and 5% of its employment, according to S&P.
“Although CEE banks' direct credit exposure to the automotive sector is relatively low, at around 3%-5% of total corporate loans, a significant downturn could disrupt the region's economy and banks' asset quality,” he said.
Although major automakers have diversified their funding away from bank loans and into capital markets, S&P said industry shocks could still have significant knock-on effects.
The threat of US tariffs on European car imports, stricter emissions regulations in the European Union from 2025 and intense competition from Chinese electric car makers could pose additional challenges, S&P said.
“Although further stress in the automotive industry could lead to additional credit losses – mainly due to potential spillovers to suppliers – we believe that CEE banks' earnings and capital levels are strong enough to absorb the financial blow,” he said.
He added that disruption to global trade and the switch to electric cars could create opportunities for some countries, such as Hungary or Serbia, with large Chinese banks actively monitoring investments and opportunities in the region.
Under Prime Minister Viktor Orban, Hungary has become an important trade and investment partner for China, in contrast to some of the other EU countries that are considering becoming less dependent on the world's second largest economy.
“ICBC set up a bank in Austria in 2019 and from there they operate across CEE, like other Chinese banks with subsidiaries in the region,” said S&P analyst Cihan Duran, also citing Bank of China and China Construction Bank as examples .
“There is great interest in Hungary as one of the biggest markets where they are trying to partner with Chinese companies in Hungary, but also with Hungarian companies that have partnerships with Chinese investments and funds.”
(Reporting by Gergely Szakacs; Editing by Edwina Gibbs)