Problems in the automotive industry could affect the assets of banks in Central Europe

Turmoil in the European automotive industry could harm the economy of Central Europe and affect the quality of bank assets, warned S&P Global, concluding that lenders can cope with potential loan losses.

Automakers across Europe are struggling with weak demand, high costs, and competition from China, leading many to close plants and lay off workers.

Among the risks, S&P highlights American threats of tariffs and stricter regulations on harmful emissions in the EU.

Their problems are a significant blow primarily for Central Europe, as the automotive sector accounts for five to ten percent of the region’s GDP and employs five percent of the workforce, S&P notes, highlighting American threats among the risks.

– Banks in CEE (Central and Eastern Europe – ed. note) are only slightly exposed to the automotive sector through loans, which account for about three to five percent of total loans to companies – the agency observes.

– However, a significant decline (in the sector) could harm the region’s economy and the quality of bank assets – they add.

In addition to loans, major automakers today also raise funds in capital markets, but a shock in the automotive industry could have significant indirect consequences, S&P believes.

– New problems in the automotive industry could also result in new loan losses, primarily due to potential spillover difficulties to suppliers, but we believe that the business results of banks in the (region) CEE and their capital levels are strong enough to absorb financial losses – the agency concludes.

Opportunity for Hungary and Serbia

Disruptions in global trade and the transition to electric vehicles could simultaneously open opportunities for certain countries, such as Hungary and Serbia, they estimate, highlighting that large Chinese banks are monitoring the situation in Central and Eastern Europe.

Chinese ICBC established a bank in Austria in 2019 that operates throughout the Eastern and Central European region, as well as other Chinese banks with branches in the region, said agency analyst Cihan Duran, also citing examples of Bank of China and China Construction Bank.

They are particularly interested in Hungary, which is among the largest markets, and are seeking to establish partnerships with Chinese companies in Hungary, as well as with Hungarian companies in partnership with Chinese investors and funds, the agency notes.

Hungary has become an important partner of China in trade and investment during the premiership of Viktor Orban, in contrast to a group of other EU members that want to reduce dependence on the world’s second-largest economy, Reuters recalls.