SEOUL, Oct. 22 (Yonhap) — Moody’s Investors Service said Thursday that Hyundai Motor Group’s 3.4 trillion-won (US$3 billion) quality-related provisions will be credit negative for the South Korean carmaker.

In its recent report, Moody’s said the sizable provisions for engine recalls and quality management highlights the continued quality-control challenges facing Hyundai and will hit the carmaker’s profitability this year.

Hyundai Motor Co. and its affiliate Kia Motors Corp. put aside 2.1 trillion won and 1.26 trillion won in provisions for additional costs for the recall of a faulty engine and preemptive measures for quality management, in the July-September quarter, respectively.

Late last year, Hyundai Motor Group reached a settlement with car owners over its Theta II gasoline direct injection (GDi) engine for problems, such as stalling engines and non-collision fires, in the United States.

“These expenses will significantly weaken the two companies’ profitability in 2020 and lead to cash outlays over the next one to two years, and come on the back of similar large expenses over the past two years,” Moody’s Vice President and Senior Credit Officer Yoo Wan-hee said in the report.

If Hyundai and Kia continue to report similar large expenses in coming years, it could further increase concerns over product quality and undermine brand equity, which in turn could pressure the ratings, the executive said.

The additional expenses were mainly due to an increase in the projected costs related with lifetime warranties provided in 2019 mainly for 2011-18 models equipped with the Theta II GDI engines in the U.S., to reflect higher-than-expected engine replacement rates and longer than previously assumed vehicle life cycles, Hyundai said.