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European companies prioritise liquidity over income as cash returns fall

Feature-image

Volkswagen and BMW are earning less on cash and securities portfolios while Siemens, Daimler and Total have held their ground.

by Manpreet Singh

Published: June 30th 2020

For the past few years Europe’s benchmark Euribor rate has been in negative territory, hampering the ability of treasurers in the region to earn an income on cash balances. This year, the top five European companies – VW Group, Daimer, Siemens, Total & BMW- as measured by their cash and securities holdings managed to earn an effective interest rate well above Euribor rates.

In 2019, EuroFinance reported that treasurers at VW group, BMW & Siemens had found innovative ways to beat Europe’s negative interest rates using opaque fund strategies and derivatives. As the Covid-19 pandemic spread in early 2020, they still managed to do so but with lesser margins, and with differing approaches to risk.

Industrial giant Siemens took the boldest approach to risk, achieving an effective interest rate of 1.94% in 2020 according to EuroFinance analysis, beating all its counterparts such as Daimler, BMW, Total and Volkswagen Group. The company achieved this while reducing cash and cash equivalent holdings from €12.3 billion in 2019 to €9.05 billion at the end of March 2020.

However, Siemens warned that losses on financial assets – which include loans made by its financial services business – could increase if the economic impact of the pandemic worsened. “Should the current Covid-19 situation result in a longer-term deep recession, valuation allowances for expected credit losses on financial assets at amortised cost could increase by a lower to middle three-digit million €-amount,” the company said in a filing.

Effective interest rate on cash & securities holding

Risk reduction

European carmakers VW and BMW took a more risk-averse approach, steadily increasing their liquidity from 2018 up to the end of March 2020. VW saw its effective interest rate decline from 2.18% in 2018 to 1.72% in 2019. The company’s 2020 figures can’t be calculated because it doesn’t disclose quarterly interest income data. But the company’s gross liquidity went up from €53.4 billion in 2019 to €57.2 billion in Q1 2020 while cash holdings grew from €13.5 billion in 2017 to €26.8 billion at the end of Q1 2020.

Cash & securities holdings

The biggest reversal was seen at BMW, whose effective interest rate slipped from 2.74% in 2018 to the sub-one per cent category at 0.62% in 2020. This has come at a time when the company’s cash and securities holdings have gone up from €14.4 billion in 2017 to €19.3 billion at the end of 2020.

Nicolas Peter, CFO of German luxury carmaker BMW
Nicolas Peter, CFO, BMW. REUTERS/Michael Dalder

“Particularly in a crisis situation, liquidity is essential. The BMW Group further increased its already strong liquidity position to almost €19 billion at the end of the quarter,” said Nicolas Peter, Chief Financial Officer at BMW. “We still have the best rating of any European car manufacturer and the second best worldwide. Because of our solid credit rating, we continue to enjoy good access to international capital markets.”

The company’s cash holdings have gone up from €9 billion in 2017 to €13.9 billion at the end of Q1 2020 while its marketable securities have risen slightly from €5.4 billion in 2017 to €5.8 billion at the end of Q1 2020. This suggests that the company’s decision to invest more in cash holdings has attracted less interest income and thus caused the decline in effective interest rates.

Positive US rates boost cash returns

Meanwhile, US companies have achieved a higher better effective interest rate than top European companies, helped by the positive US interest rate environment. Particularly, US tech companies achieved an EIR more than 2% in Q1 2020 while US automakers such as Ford and General Motor earned an EIR of 1.7% and 1.0% respectively in Q1 2020.

Even if the Covid-19 situation is taken out of the picture, the effective interest rate at the European companies taken in the account had fallen in 2019 as compared to 2018. Leaving Total S.A. aside, all other companies – VW, Siemens, BMW and Daimler – saw a drop of EIR between 10bps to 164 bps in 2019.

Effective interest rate is calculated by taking the cash and securities at the start of the period and dividing it by the interest income earned by the company until the end of the period. For the companies analysed by EuroFinance, financial services income is excluded from the EIR calculation.

Siemens doesn’t break out the non-financial services proportion of interest income earned in quarterly reports so for the calculation of effective interest rate, EuroFinance took the equivalent ratio obtained from the 2019 annual report and calculated it for Q1 2020, deducting the Siemens Financial Services interest income earned in Q1 2020.