Volvo 1997 Annual Report Download - page 36

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34
Board of Directors’ report
Different types
of finance contracts
Volvo customers are being offered
three types of finance contracts. These
contracts can be com bined with various
maintenance contracts and insurance
policies to create a “ package” that
meets a customer’s specific needs and
the conditions in a particular m arket.
Installm ent purchases are com m on
and constitute an important part of
Volvo’s total credit portfolio.
A distinguishing feature of financial
leasing is that paym ents for leasing,
except for interest costs, cover the
gradually declining m arket value of
the object being leased. The lessee
enjoys the financial benefits and risk s
attributable to the leased object but
does not acquire ownership rights to
it until the lease has expired.
In operational leasing, the leasing
period is shorter than the econom ic
life of the leased object. This means
that the leasing object has a residual
value when the leasing contract has
expired. This value is determ ined at
the tim e the leasing contract is sig-
ned. The lessor retains ownership of
the leasing object and also assum es
the residual-value risk.
Sales-financing companies also offer
inventory financing for Volvo’s dealers.
Income statements, Balance sheets and Cash flow analyses for Volvo’s sales financing are shown on pages 14-18.
Established sales-
financing companies
December 31, 1997
Other
North America
Australia
Brazil
Peru
Cars
Trucks
Sales financing
Volvo’s growing sales-financing operations include a broad range of services in
the form of installment and leasing plans as well as service and maintenance con-
tracts. The sales-financing operations are part of each business area. The level of
penetration, that is, the proportion of sales-financing contracts in relation to new
vehicle sales for cars and trucks varies by market and product but averaged
around 30% during 1997.
Operations expanded during 1997 as part of Volvo’s growth strategy and to
meet increased customer demands and strengthen competitiveness of the dea-
lers. The total assets of the sales-financing companies more than doubled during
the year. The credit portfolio amounted to SEK 44.2 billion and comprised
161,000 contracts. By value, dealer financing accounts for 20% and customer
funding for 80%. The customer financing portfolio comprised 34%
operational leasing, 27% financial leasing and 39% other customers
credits. See under headline “Different types of finance contracts.”
Funding of the sales-financing operations is coordinated by
Volvo’s internal bank, Volvo Group Finance.
Expanded sales financing in Europe and North America
Expansion in 1997 occurred mainly in Europe and North America. Car financing
in the U.S. and Great Britain, which was formerly carried out in joint ventures,
was managed during 1997 in wholly owned subsidiaries. New companies were
formed in France (cars) and in Sweden for markets in Eastern Europe (trucks).
In January 1998 Volvo Trucks’ acquisition of the truck-leasing business of the
British company, NFC Plc, was announced, which will strengthen Volvo Trucks’
position in the British market substantially.
Incom e
Operating income for Volvo’s sales financing amounted to SEK 202 M (146).
This includes establishment costs in a number of markets. In addition, operating
income was charged with the build-up of credit and residual value reserves. The
share of income in associated companies resulted in a loss of SEK 146 M, which
included the losses incurred in the Brazilian company Transbanco Banco de
Investimento.
Transbanco, which was 50% owned by Volvo during 1997, carries out sales
financing of Volvo trucks and buses in Brazil. The company has experienced sig-
nificant difficulties, necessitating comprehensive provisions for anticipated losses.
Volvo took over the remaining 50% of the shares and management responsibility
at the end of 1997 and Transbanco was consolidated as of December 31, 1997 in
the Volvo Group balance sheet. The loss related to Volvo’s holding in
Transbanco amounted to SEK 278 M.
Risk provisions
Excluding Transbanco, the credit portfolio amounted to SEK 43.3 billion at year-
end 1997. Specific provisions are made for those customers who cannot fulfill