Central European banks can withstand turmoil in the auto sector, Standard & Poor’s says

Written by Gergely Szakacs

BUDAPEST (Reuters) – Disturbances in Europe’s auto sector could hurt Central Europe’s economy and hurt banks’ asset quality, Standard & Poor’s Global said on Tuesday, but added that lenders were strong enough to withstand pressures in their auto portfolios.

Automakers across Europe have announced plant closures and massive layoffs as they grapple with weak demand, rising costs, competition from China and a slower-than-expected transition to electric vehicles.

This sector is the mainstay of economic growth in Central Europe, accounting for between 5% and 10% of the region’s GDP and 5% of employment, according to Standard & Poor’s.

“Although Central and Eastern European banks’ direct credit exposure to the automotive sector is relatively low, at around 3% to 5% of total corporate loans, a significant decline could weaken the region’s economy and banks’ asset quality,” it said.

Although major automakers have diversified their financing away from bank loans to capital markets, Standard & Poor’s said shocks to the industry could still have significant impacts.

The threat of US tariffs on European car imports, tightening EU emissions regulations from 2025 and intense competition from Chinese electric car makers could pose additional challenges, S&P said.

“While further pressure in the auto industry could lead to additional credit losses – primarily due to potential implications for suppliers – we believe CEE banks’ earnings and capital levels are strong enough to absorb the financial hit,” she said.

She added that global trade disruptions and the shift to electric vehicles could create opportunities for some countries, such as Hungary or Serbia, as large Chinese banks are actively monitoring investments and opportunities in the region.

Under Prime Minister Viktor Orbán, Hungary has become an important trade and investment partner for China, unlike some other EU countries that are considering becoming less dependent on the world’s second-largest economy.

“The Industrial and Commercial Bank of China established a bank in Austria in 2019 and from there they operate throughout Central and Eastern Europe, like other Chinese banks with branches in the region,” Standard & Poor’s analyst Jehan Duran said, also citing the Bank of China and China Construction Bank as examples. .

“There is a lot of interest in Hungary as one of the biggest markets where they are trying to partner with Chinese companies in Hungary, but also with Hungarian companies that have partnerships with Chinese investments and funds.”

(Reporting by Gergely Szakacs, Editing by Edwina Gibbs)