Expansion of its sales-financing operation is an important part of Volvo´s strategy for greater growth and for strengthening Group profitability. The operations play an important role in meeting the market´s growing need for increasingly complex financial solutions, individually or in combination with insurance and/or service contracts. It also strengthens the competitiveness of Volvo´s dealers. The operations are conducted in two distinct areas: Car Sales financing and commercialproducts Sales financing. However, these operations constitute an integral part of each business area's total responsibilities. The sales-financing operations comprise 32 (27) finance companies and an insurance company, which are consolidated in the above structures, as well as 4 (4) associated companies that are consolidated in accordance with the equity method. The sales financing of commercial products pertains mainly to trucks, but also - to an increasing degree - to buses and construction equipment. The supply covers financing services in the form of installment contracts, financial leasing, operational leasing and dealer financing. Insurance, service and maintenance contracts are also offered in most markets, separately or in combination with financing services. With the acquisition in 1998 of BRS Truck Rental and Hire, Volvo has significantly strengthened its operations for short-term leasing of commercial vehicles in the British market. Sales-financing activities involving both passenger cars and commercial products continued to expand strongly during 1998. The growth in the credit portfolio was attributable to operations in North America, Great Britain and Germany. During the year, a decision regarding establishment of a new finance company for commercial products in Mexico was made. A new branch of Volvo-owned Amazon Insurance was started up in France for Volvo Cars. At year-end the credit portfolio amounted to SEK 67 billion (44), of which 52% (47) pertained to Cars and the remaining 48% (53) to commercial products. The portfolio consisted of a total of 251,000 contracts (161,000), of which 169,000 (99,000) were for Cars and 82,000 (62,000) were for commercial products. The market penetration, the number of sales finance and service contracts relative to total new sales of cars and commercial products, varied sharply from market to market and from one product to another but was, on average, 31% (26) in 1998. The financing of sales-financing operations is coordinated by Volvo Group Finance, Volvo's internal bank, in accordance with established policies.
Credit portfolio, net, SEK M
1997 1998 Cars 20,610 34,593 Commercial Products 23,374 31,968 Total 43,984 66,561
Distribution of credit portfolio, net, %
1997 1998 Cars     Operational leasing 31 35 Financial leasing 12 11 Installment contracts 27 33 Dealer financing 25 19 Other customer credits 5 2 Commercial products     Operational leasing 25 26 Financial leasing 30 31 Installment contracts 26 26 Dealer financing 16 16 Other customer credits 3 1
Market penetration, %
Regarding new sales 1997 1998 Cars 25 32 Commercial Products 30 27 Total 26 31
Trend of income
Operating income from sales-financing companies amounted to SEK 470 M (202), of which SEK 272 M (89) was attributable to Cars and SEK 198 M (113) to the commercial products sector. The trend of operating income in the established salesfinance companies was positive with respect to both Cars and the commercial products sector. Return on shareholders´ equity for the established companies was in line with the return demands of the Volvo Group. Companies that began operations more recently and which have high rates of growth were also charged with start-up costs, as well as costs of building up the required credit and residual value reserves. Income from investments in associated companies totaled SEK 109 M (146), and consisted mainly of income from participations in AB Volvofinans. The income of Transbanco, which conducts sales financing of Volvo's trucks and buses in Brazil, improved during 1998. The number of new credit contracts signed was limited.
Operating income, SEK M
1997 1998 Cars 89 272 Commercial Products 113 198 Total 202 470
Return on shareholders´ equity, %
1997 1998 Cars 7.5 7.4 Commercial Products neg 2.6 Total neg 5.3 For companies established for more than four years, return on shareholders´ equity for Cars was 11.3% (13.2) and for Commercial Produ cts. 13.8% (14.5).
Assets, SEK M
1997 1998 Cars 22,396 38,086 Commercial Products 24,529 33,916 Total 46,925 72,002
Provision for risks
Provision is made for both credit risks and residual value risks to the degree that residual value risks are attributable to the sales-financing company. In the case of customers who cannot fulfill their contractual obligations, specific provisions, based on individual assessment, are made for credit and residual value risks. In addition, in accordance with established policies, general provisions are made for credit and residual value risks in each sales financing company, based on historical data and anticipated future risk. At year-end 1998, general provisions for credit and residual value risks in sales financing companies amounted to 2.2% (2.2) of the credit portfolio. Realized credit losses which were charged against operating income, amounted to 0.3% (0.2) of the credit portfolio in 1998. There are also provisions for residual value risks in a number of marketing companies that have made guarantees and/or have signed repurchasing contracts with sales-financing companies. Because the sales-financing operations involve substantial financial exposure in individual countries, a central provision of SEK 225 M (300) has also been built up. Allocations to and reversal of the central reserve were not charged against income from sales financing. Reversal of SEK 75 M during 1998 was justified by a more stable provisions level within the sales-financing companies. The central reserve amounted to 0.3% (0.7) of the credit portfolio at year-end 1998.
Risk exposure
Parts of the sales-finance operations give rise to specific credit and residual-value risks: Credit risk in sales financing The credit risk in sales financing is distributed among a large number of individual end-customers and dealers. Collateral is provided in the form of the products being financed. When issuing credit, an effort is made to balance risk exposure and expected yield. Operations are governed by common policies for credits and by rules for classifying customers. The credit portfolio should be distributed properly among different categories of customers and different industries. Credit risks are managed through active monitoring and follow-up procedures and, in appropriate cases, procedures for repossessing products. Allocations are also made to credit risk reserves. Residual-value risk in sales-financing Residual-value risk is attributable primarily to contracts involving operational leasing. It comprises the risk that the leasing object, at the end of the operational leasing contract, has another residual value than foreseen when the contract was concluded. This may force the lessor to dispose products at a loss. Residual-value risks are managed through solid knowledge of the market, knowledge of product and price trends, and programs supporting the value of second-hand products. Provisions are also made in residual-value reserves for any differences between anticipated and actual residual values. Interest-rate and liquidity risk in sales financing Changes in interest rates during the period covered by a contract can affect income. Therefore, efforts are made to match the fixed-interest-rate periods for borrowing and lending. The degree of matching at year-end 1998 was approximately 90%. In a corresponding manner, the maturity of the borrowing shall correlate with the maturity of the outstanding contracts. This degree of matching was also about 90% at year-end 1998.