Germany’s decision to city authority bans on diesel vehicles poses a risk to auto finance companies in the country, rating agency Moody’s has warned.

It said the ruling by Germany’s Federal Administrative Court, giving city administrations the discretion to ban diesel cars, has added to uncertainty over diesel’s future, which is impacting demand and could lead to a “pronounced falloff” in residual values.

“The February 27 ruling … will hit auto finance companies and auto dealers in particular,” Moody’s said, citing the two segments’ reliance on lease contracts, which it said now covered 75% of all new cars registrations in Germany.

It added: “The fear of far-reaching diesel disincentives, including the possible elimination of tax breaks on diesel fuel, has reduced the appetite of German drivers to own even the latest generation of diesel cars.

“This will require close monitoring by the large captive finance firms of German automakers, which are particularly exposed to the residual values of younger-generation Euro 5 and Euro 6-compliant diesel cars, which also form the backbone of corporate car leasing fleets.”

The rating agency drew a parallel with the UK, saying it and Germany were “countries of particular concern” due to a combination of falling diesel values and high penetration of lease contracts.

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It said it expected auto manufacturers to “employ their financial and marketing strength” to stabilise used car values before it posed a risk to their stock. Additionally, it encouraged car finance lenders to adjust contracts to offset negative impacts.

The impact of the court decision, Moody’s said, will be affected by the “comfort” Germany drivers will take in regulatory proposals over diesel, such as the one put forward by the German environmental agency, which would allow for a labeling distinction between older and newer diesel cars.

“Unless [urban] customers can be sustainably reassured, dealers and their automakers will need to remarket these vehicles into more rural domestic areas or outside Germany where there are no driving restrictions,” it said, adding that this to happen only through steep discounts.

Some German leasing companies have already made plans to reduce exposure to diesel in the wake of the federal court ruling. Sixt Leasing said this week it would substantially reduce diesel car volumes in both the retail and fleet segment, as well as halven the portfolio of diesel vehicles not covered by a buyback agreement with suppliers.