BMW May Increase Provisions for H2; Will Begin Earnings Recovery in 2011, Says CEO

BMW's CFO Warns of Further Provisions for U.S. Leasing Losses

BMW's chief financial officer (CFO) Michael Ganal has said that the company may have to consider increasing its provisions for the second half of the 2008 calendar year as a result of write-downs on second-hand values of passenger cars coming of lease deals in the United States, according to a Handelsblatt report. The company is also experiencing a growing number of defaults on financing and lease contracts while the sluggish market situation in Western Europe, with the markets in Britain, Italy and Spain performing particularly poorly, is also cause for concern. Ganal also underplayed the significance of recent gains made by the dollar against the Europe with BMW not expecting any positive currency effects as a result in 2008. Ganal also expected that the challenging global business environment will continue to be difficult but that BMW is well placed to rise out the downturn. He said, "From today's viewpoint, 2009 will remain a challenging year for the car industry. However, we will remain a healthy company despite the difficult situation."

Meanwhile in an interview with Die Zeit newspaper, the BMW Group's Chief Executive Norbert Reithofer said that it will take until 2011 before the company recovers from its weak profitability. However he also commented on the industries wider concerns over the weakness of the U.S. market. He said, "The U.S. market could remain weak for a while. But from 2010 onwards the BMW Group will be in a good position again." Reithofer said that the company's drive to introduce 8,100 job cuts was proceeding and that 5,000 temporary workers have already been released, with 4,000 of this number already having found alternative employment in other countries in BMW's home state of Bavaria. Commenting about the current difficult environment the company is currently operating in, Reithofer added that BMW was optimistic about its future and has always come out stronger after phases of weakness.

Outlook and Implications

BMW surprised its investors and the financial community in July when it announced a profit warning and increased loss provisions, mostly on losses incurred by its vehicle leasing business, to 695 million euro (US$977.1 million; see Germany: 1 August 2008: BMW Reports 33% Fall in Net Profit, Lowers Outlook). BMW has ramped up its financing and leasing business considerably in recent years in Western Europe and in particularly in the United States. The latter market has begun to cause significant headaches as a result of last year's credit crunch, which was precipitated by the collapse of the country's sub-prime mortgage lending industry, which has led to increased restrictions on borrowing and higher interest rates. These factors, coupled with high fuel prices and rising living costs has seen the values of second-hand cars coming off lease deals fall to a greater degree than was originally anticipated and has led to provisions for losses in this area that now could be increased.