Question

Discuss the benefits to BMW North America of owning BMW Bank.

Answer 1

BMW North America is a industrial bank subsidiary of BMW Financial Services LLC which is part of the BMW group. The trend of car companeis having their own financial services arm started as early as in 1980s when traditional banks viewed auto loans as risky or when car companies found auto-financing through commercial banks cumbersome and several obstacles. This ultimately led to most of the major auto companies starting their own auto-financing financial services company which successfully led to a surprising phenomenon of auto-financing subsidiaries even overshadowing the profitability performance of parent auto companies itself. After few decades, the finance subsidiaries of car makers became one among the top most financial institutions in America. At some point of time, it was even thought that financing cars and trucks was a more profitable business than manufacturing cars themselves!

Coming to BMW group, it took the next ultimate step, that went beyond having its own financial services arm, in 1999 itself, by creating its own 'commercial bank' called BMW bank of North America. While BMW financial services, the parent company of BMW Bank specializes in car loans and leases for BMW customers that helps drive BMW's car sales, the BMW bank was created with potential to even obtain demand deposits from customers so that BMW customers can be provided with "full spectrum of banking services" - not just auto-financing alone - that includes even issue of credit cards.

The advantage of having banks as compared to financial services arms is that a 'bank license' by Fed gives FDIC protection which insures retail deposits. This can greatly reduce the cost of funds for financing auto-loans. Typically, financial services arms of auto makers pay high cost for their fund mobilization even though they make that up with high interest they earn from auto-financing options like leasing. However, BMW would have thought that by getting into a full fledged customer banking business, it can garner low cost demand deposits while at the same time providing a comprehensive online banking services to BMW customers of North America. BMW bank is one of the very few in US who offer automative credit cards that is backed by auto-maker itself. BMW's credit cards offer several features that are closely tied to auto businesses. It offers reward points for dollars spent on BMW center, fuel expenses, driving school related benefits and several other perks related to travel and automobiles.

At present, as per Moody's recent rating, BMW bank does not seem to have much assets that are related to credit cards (just 3%) and its size of retail demand deposits are also not very high. Its source of funds are mostly from brokered Certificate of Deposits which carry generally high interest rates, not very different mode of financing as compared to financial services arms.

BMW Financial Services however had tried to boost up the credit rating of BMW bank in order to attract better retail customer support by indemnifying certain auto-portfolio losses - signifying that financial services parent would bear any auto-loan based risks. BMW bank also sells its low quality auto loans to the parent BMW financial services arm which further boosts up its credit rating. It currently has good ratings like Aa2 for long term deposits and P1 for short term deposits. It has also been reporting very good financial performance with its asset size of more than $ 9 billion and better than average return on equity and capitalization ratios.

However, these good ratings does not seem to have translated into higher low cost retail demand deposits base. This is becuase its rating, as per Moody, is strongly tied to the financial position of its parent BMG group whose profitability rests on its auto business. This dependency will always make the bank look like a completely different kind of commercial bank as far as the retail customers are concerned. Hence, the bank's business is likely to be mostly coming from BMW 's customers.

Thus, BMW bank can only further the interests of BMW customers and hence businesses of BMW group which is not very different from the benefits of having the usual auto-financing subsidiaries of auto makers.

However, from the traditional angle of growing BMW's auto business, the bank subsidiary can still be providing help that can go beyond a usual auto-financing subsidiary. During periods of credit crisis, when traditional banks restrict their credit expansion, a bank subsidiary can still be leveraged to cater to automobile customers. Also, over a period of time, if BMW bank can prove its business model to be profitable even without parent's financial support or credit rating, it can grow into another profit center for BMW group, the way auto-financial subsidiaries emerged that way in the past.