Fitch very bearish on 2009 Europe auto market

By Christiaan Hetzner

PARIS (Reuters) - The European auto market is facing a sharp downturn in the coming year and frozen credit markets could mean additional pressure should carmakers reduce their financing operations, a Fitch analyst said on Tuesday.

"We are very pessimistic about car sales for at least another 12 months," Emmanuel Bulle, Senior Director Corporates, told the Reuters Autos Summit in Paris.

Previous downturns have lasted about two to two-and-a-half years and can fall by about 20 percent on average from peak to trough, he said, so there is plenty of downside potential with the market entering a slump only about six months ago and correcting so far by just 5 percent.

"I'm not saying we will reach 20 percent -- it may be minus 15, minus 12, even minus 10. What it means is that minus 5 is not enough," he said.

The current financial markets crisis moreover will likely mean that carmakers will have more difficulty maintaining the level of activity at their captive financial service businesses which support sales through customer loans or operating leases.

"In the very short term we would be very much concerned about the ability of those captives to refinance," he said.

While some 70-80 percent of car sales in western Europe are financed in some fashion, the penetration rate for manufacturers' own captives is roughly 20-30 percent with premium brands generally more active than volume car makers.

"Bottom line, this means that 20-30 percent of sales are at risk in Europe if captives decide to stop financing. It's as simple as that," the Fitch analyst explained.

Beyond simply moving few cars, captives could see their profits melt due to an unexpected decline in used car prices, since leasing deals oblige them to buy back a vehicle at the end of a contract usually after three years at a price based on its original forecast of residual value.

European carmakers may be safe from the shift in market demand away from heavy trucks and pick-ups seen in the United States, but Bulle highlighted the possibility that customers in the future may avoid cars equipped with larger engines due to carbon emission regulations.

"The residual value risk may come from a change in powertrains: hybrids, electricity, fuel cell, everything -- you name it," he said, explaining that some buyers might eschew purchasing a second-hand car with a dirtier combustion engine that could be taxed more heavily.

(Reporting by Christiaan Hetzner; Editing by Jason Neely)