This report does not constitute a rating action.
While Central and Eastern European (CEE) banks have limited direct exposure to the automotive industry, current challenges in the sector could impair the broader regional economy and have ripple effects on banks' credit losses. That said, CEE banks are well-capitalized, highly profitable, and have improved asset quality metrics, which will provide a solid foundation if stress arises in their automotive portfolios.
What's Happening
European original equipment manufacturers (OEMs) and suppliers are facing pressure due to weak car demand in key markets, insufficient cost competitiveness, and the difficult transition to electric vehicles (EVs), which are an important growth area for OEMs.
Why It Matters
The automotive sector accounts for approximately 5%-10% of the CEE region's GDP, with a gross value added (GVA) of 4.1% in 2023, compared with 3.1% for the EU. As of Sept. 30, 2024, about 5% of the working-age population in CEE countries was employed in this sector. Western European OEMs play a relevant role in CEE economies due to their large manufacturing facilities in the region. Notably, Slovakia (6.6% of GVA from the automotive sector in 2023), the Czech Republic (5.6%), Hungary (4.5%), and Romania (4.5%) are key exporters of vehicles and auto components to Western European markets. While direct credit exposure of CEE banks to the automotive sector is relatively low, at about 3%-5% of total corporate loans, a significant downturn could impair the region's economy and banks' asset quality through indirect effects:
- GDP dependence: The automotive sector's substantial contribution to CEE countries' GDP makes it vital for the region's economic health. For instance, approximately 30% of the Czech Republic's total exports are directed to Germany, a major trading partner for vehicles and components.
- Job market pressure: Western European OEMs' challenges and the transition to EVs could result in job losses or necessitate reskilling in many CEE countries, leading to potential social and economic repercussions.
On a positive note, major automotive companies have diversified their funding sources over recent years, moving away from traditional banks to capital markets, including asset-backed securities and unsecured debt instruments. This shift may mitigate direct risks for banks. That said, second-round effects on other borrowers due to shocks in the automotive industry could still be significant, given the interconnected supply chains in the region.
What Comes Next
Uncertainties related to potential U.S. tariffs on light vehicle imports, stricter CO2 emission regulations for passenger cars and vans in the EU starting in 2025, and intense competition from Chinese manufacturers in European markets will continue to pose challenges for the automotive sector, in our view.
We anticipate that CEE banks will increase their scrutiny of borrowers in the automotive industry and connected sectors. Yet loan activity is unlikely to be restricted due to most OEMs' robust balance sheets and debt servicing capabilities. Maximum loan limits per sector, including the automotive sector, are well defined within local banks' risk appetite frameworks. Additionally, many big banks in CEE countries benefit from risk management standards aligned with their larger Western European parent groups.
While further stress in the automotive industry could lead to additional credit losses--primarily because of potential spillovers to suppliers--we believe CEE banks' earnings and capital levels are sufficiently strong to absorb the financial hit. Stress in systemically important sectors could also lead to government support as happened during the COVID-19 pandemic.
Positively, global trade disruptions and the transition to EVs can create opportunities for some CEE countries due to structural changes and the policymakers' geopolitical interests:
- Nearshoring: Should EU tariffs and global trade protectionism rise, nearshoring in CEE countries could increase as Western European OEMs may relocate more production to the region to mitigate geopolitical risks and reduce operating costs. This shift could enhance business activities for local banks.
- Investments in EV production: Hungary and Serbia might attract higher Chinese investments in battery production for EVs, presenting new opportunities for both nations. However, EU tariffs on EVs could present an obstacle. Notably, some large Chinese banks operate locally through subsidiaries and are actively monitoring investments and opportunities in the CEE region.
We expect more clarity after the new U.S. administration has laid out its trade policies and strategies regarding Europe and China. In response to higher tariffs and trade protectionism, European OEMs and suppliers may need to re-assess their operating models, adjust their geographic footprint, and implement mitigation strategies.
Related Research
- Central And Eastern Europe Banking Outlook 2025: Economic Recovery Supports Banks' Solid Performance, Dec. 11, 2024
- Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024
- Global Auto Outlook: More Players, Less Profit, Oct. 9, 2024
- Your Three Minutes In CEE Sovereign Ratings: The Economic Nexus Between CEE Countries And China, July 4, 2024
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