Cash returns plunge as European carmakers hoard liquidity
Renowned for their adventurous treasury investment policies, Volkswagen, BMW and Daimler are earning rock-bottom interest rates as they accumulate cash to protect against the effects of Covid-19.
A year ago, treasurers at major European companies were enjoying cash returns of 200 basis points or more above benchmark rates with the help of innovative fund and derivative strategies. A year later, these companies – Volkswagen, Siemens, BMW and Daimler- are earning rock-bottom interest rates after they dramatically boosted cash holdings as a cushion against the Covid-19 slowdown.
In the first half of 2020, the three largest German automakers ramped up their liquidity – defined as the total of cash, cash equivalents and marketable securities. The biggest of them is Volkswagen whose automotive division increased its investments from €31.6 billion at the end of 2019 to €48.3 billion in Q2 2020, amounting to a rise of more than 50%. The amount is such that VW would be able to pay expenses for two quarters even if income fell to zero.
Its counterpart, BMW has shown a jump of 24% in its investment holdings to €21.7 billion in Q2 2020 while Daimler’s investments rose by 6.5% to €29.3 billion in the same period. At the same time, the securities portion of these holdings – the source of outsized returns in the past – have fallen.
As a result of these swollen cash piles, returns on investments have plunged. For example, VW earned interest income of €910 million in 2019 on gross liquidity of €44 billion at the end of 2018, equivalent to an interest rate of 2.16%. In the first six months of this year, that fell to just 0.25% or just 60 basis points above the Euribor benchmark.
Speaking on a Q2 2020 investor earnings call, Frank Witter, CFO at Volkswagen highlighted measures to build a wall of cash against the pandemic, such as issuing hybrid bond of €3 billion in Q2 and also receiving a dividend from its Chinese subsidiary. Witter warned about a second wave of covid-19, ‘significant amount of volatility in Europe’ and Latin America’s slow recovery compared to the rest of the world.
Now, with signs of recovery on the horizon, VW may be seeking to repay its emergency borrowing and reduce its cash pile again, echoing previous remarks by BMW.
Dr Nicolas Peter, Chief Financial Officer at BMW told investors that ‘if the situation continues to stabilize, group liquidity will return to pre-crisis levels by the end of the year’, implying that BMW’s liquidity increase is a cushion towards uncertain business conditions and not to be seen as a permanent liquidity level.
In a sign of its reduced risk appetite, BMW’s cash holdings have almost doubled from €9 billion in 2017 to €17 billion in H1 2020, outweighing a reduction in marketable securities holdings from €5.4 billion to €3.9 billion in the same period. The company’s effective interest rate fell from 1.1% in 2019 to a 0.64% annualised rate in 2020.
Other top consumer discretionary and industrial companies in Europe by cash and securities holdings saw a substantial drop in investment returns in 2020.
For example German industrial giant Siemens saw a marginal decrease in EIR compared to other companies. It dropped by 9bps to 1.91% in 2020 as its cash and securities dropped narrowly by €545 million which is lowest in terms of absolute value as well as percentage terms. Italian-based auto giant Fiat Chrysler even saw investment returns fall into negative territory, recording an effective interest rate of minus 0.2%.
The effective interest rate (EIR) is calculated by taking the cash and securities at the start of the period and dividing it by net interest earned by the company till the end of the period, excluding financial services income where this is disclosed. Volkswagen does not disclose its interest income in its interim filings, so the calculation was done taking the reported 2020 ‘interest result and other financial result’ and adding interest expense from 2019 with an assumption that interest expenses in 2020 were the same.
Or, to discover more insights into the automotive sector, attend The future of the automotive industry and its changing finance function on Tuesday 22 September at International Treasury Management Virtual Week.