Navigating Automotive Financing Trends in Uncertain Times

BBJ: What are the key trends you foresee in the automotive industry over the next few years, and how is MBH Bank preparing to address these trends?

Ádám Záhonyi: The future trends in the automotive industry are becoming increasingly unpredictable due to fluctuating consumer demand. Despite the EU’s decision to phase out internal combustion engines by 2035, the transition to electromobility is not progressing as quickly as anticipated. Major car manufacturers are focusing on improving battery technology to attract new customers and make EVs more appealing. Chinese car manufacturers have a competitive advantage in this technological shift and are entering the European market, creating intense competition. Prices for new cars are unlikely to return to levels seen in the past, leading to a greater need for financing options for both new and used vehicles. MBH Bank Group is dedicated to providing financial support to various players in the automotive industry, including manufacturers, suppliers, importers, dealers, and consumers. As the pace of change accelerates, having a knowledgeable financial partner is crucial for success in the industry. MBH Bank Group can provide financing for every stage of vehicle production, from manufacturing to sales, ensuring a smooth process for all involved.

BBJ: How does MBH Bank support SMEs within the automotive sector, and what unique challenges do these businesses face?

ÁZ: With its more than 400 branches, MBH Bank is considered the bank with the largest branch coverage in Hungary, and it is a significant advantage for us that 40% of automotive companies with revenues exceeding HUF 1 billion have a relationship with MBH Bank. Additionally, Euroleasing is the market leader in the leasing market, allowing us to be informed firsthand and at an early stage about the needs of customers and the challenges they face. In the context of the price competition observed in the sector, increasing efficiency is the key to survival. Efficiency should not only focus on production or investments but also on utilizing reserves in working capital financing. Our bank offers several opportunities for this, ranging from supported loans to rationalizing working capital and trade finance solutions.

BBJ: Can you elaborate on the knowledge center operated with Euroleasing and how it leverages synergies to cover the entire automotive value chain?

ÁZ: The knowledge center operated with Euroleasing serves as a hub for gathering and disseminating information related to the automotive value chain. By leveraging synergies with Euroleasing, the knowledge center is able to provide valuable insights and expertise to all stakeholders in the automotive industry, from manufacturers and suppliers to dealers and consumers. This collaboration allows for a more holistic approach to understanding and optimizing the entire automotive value chain. The knowledge center works closely with Euroleasing to identify trends, challenges, and opportunities within the industry, and develops customized solutions to address them. By combining their resources and expertise, Euroleasing and the knowledge center are able to offer comprehensive support to businesses at every stage of the automotive value chain, from financing and leasing options to market analysis and strategic planning.

BBJ: Let’s talk about car loans for individuals. What are the latest trends?

ÁZ: Following a significant increase in car stocks at manufacturers and importers in the latter half of 2023, numerous marketing campaigns were launched this year to drive sales. While these offered attractive discounts, potential buyers faced challenges due to prevailing interest rates. Some customers sought financing but were deterred by high interest rates of 10% or more. Others held investments, particularly in high-yield treasury bonds, and were reluctant to divest. In response, many importers collaborated with leasing partners to provide subsidized financing options, making the decision-making process easier for consumers. With interest rates below 5% and coupled with substantial price reductions, these initiatives successfully attracted private individuals back to the new car market. The first four months of the year saw nearly 14,000 new passenger car registrations by individuals, accounting for approximately one-third of total registrations. This marked an impressive growth of over 30% compared to the previous year, while the number of corporate customers remained stable. Despite these positive trends, it is worth noting that prior to the disruptions caused by COVID and regional conflicts, private individuals held a market share of around 40%, indicating further growth potential in this segment.

BBJ: Could you explain the typical structure of a car loan for an average individual in Hungary in 2024?

ÁZ: From a business perspective, the substantial number of customers at Euroleasing leads us to believe that our market share aligns closely with industry averages. Specifically, when considering Euroleasing, the typical private individual seeking financing for a new car applies for HUF 5.7 mln over a 57-month period for a vehicle priced at HUF 10.6 mln. The extended repayment period is directly influenced by the interest-subsidized financing campaigns, as the favorable interest rates encourage individuals to opt for longer-term financing solutions. While the initial down payment tends to be quite high, reflecting a preference among many customers to minimize the financed amount, there are also legal constraints, such as the income burden indicator, which restricts the maximum monthly payment to a percentage of the individual’s net income.

BBJ:  Do you think that we need new loan constructions to make the new car market more accessible to people while also boosting sales?

ÁZ: The legal constraint mentioned earlier represents just one of the challenges individuals face when considering leasing a new car. In the traditional financing model, many people find it financially unattainable to repay the full price of a vehicle valued at over HUF 10 mln, along with accrued interest, within a five-year period. Additionally, factors such as insurance, maintenance, fuel, or electricity costs further compound the financial burden. In this context, open-end financial leasing emerges as a viable solution. This leasing approach incorporates a residual value at the end of the agreed-upon term, allowing the lessee the flexibility to either purchase the vehicle, designate a third party for acquisition, or return the car to the lessor. Moreover, there is an option to extend the lease contract instead of terminating it. The inclusion of a residual value makes the monthly payments more manageable for a broader segment of the population. Compared to long-term rentals, open-end financial leasing offers several advantages, including exemptions from company car taxes, reduced VAT and local tax obligations, and the opportunity to purchase the vehicle at a predetermined fixed price at the end of the lease term, distinguishing it as a unique benefit of this leasing arrangement.

This article was first published in the Budapest Business Journal print issue of June 14, 2024.