German Banks' Direct Exposure to Struggling Auto Sector is Limited, but Potential Spill-Over Effects Could Bite

The German automotive sector, which has historically played a vital role in the country's economy, has been facing numerous significant structural challenges and cyclical headwinds. These include stagnating production, declining sales growth and increasing competition. Here are Morningstar DBRS' key observations on how these challenges will affect the German economy and banks:

-- The German automotive sector faces significant structural challenges, which could lead to a downsizing of domestic production capacity and have negative implications for the wider economy.
-- This could translate into gradual asset quality deterioration as well as higher cost of risk for German Banks.
-- The Banks have relatively low direct exposures to the Sector, and they would remain largely resilient for potential risks given sound profitability and capital buffers.

"The potential spill-over effects of these challenges could lead to gradual asset quality deterioration as well as higher cost of risk in the medium-term", said Halil Senturk, Assistant Vice President, European Financial Institution Ratings, Morningstar DBRS. "Still, we expect the Banks to remain largely resilient for potential risks given improved profitability and adequate capital buffers".