Worsening outlook for motor
finance

Maryann Tan takes a look at the year-end picture for motor
lenders and lessors against the backdrop of the worsening ‘credit
crunch’
 
 
 

The final month of the year should typically be filled with a
sense of optimism as businesses unwind and take stock of their
accomplishments, but this year’s festive mood has been dampened by
general uneasiness regarding the year ahead.

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Turmoil in the financial markets, casually brushed off only months
ago as an incident from which the motor finance market was fairly
insulated, is beginning to have knock-on effects on the
sector.

A deflating housing bubble, coupled with anticipated job cuts in
the financial sector, is hurting confidence and holding back the
once spendthrift consumer. While the music may not have abruptly
stopped, the rhythm is surely beating a little more slowly and this
could mean bad news for sale of big ticket items like cars.

 Although consumer motor and corporate fleet finance companies
say they have not suffered too badly thus far under conditions of
soaring inter-bank lending rates, the unwelcome effects of the
credit crisis could hit them at the front door if consumers are
forced to tighten their belts.

“I think it’s fair to say that historically, success or otherwise
of motor finance companies have been linked to house prices,
because it’s about consumers feeling good about the equity in their
houses. So it will have an effect on consumer confidence,” said
Doug Moody, chairman of the Finance & Leasing Association
(FLA)’s Motor Finance division, and sales and marketing manager at
Daimler Financial Services UK.

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 It was no surprise then, that bosses of motor finance
companies were relieved to see the Bank of England soften its hard
line stance against inflation to cut its official lending rate by
25 basis points earlier this month (see p5).

The move may help ease things for households faced with a reset on
their monthly payments under adjustable rate mortgages. However,
market analysts are not sure if other lenders will be as keen to
pass on the lower rates to borrowers. Three-month sterling Libor
(London interbank offered rate), which reached record levels in
September, was still quoted at a very high 6.651 per cent as at
December 10, indicating banks’ tight hold on funds.

Money costs more

This of course, has kept the cost of funds high for many lenders.
“Rising Libor rates have had an effect and we’ve had to make the
appropriate increases and pass those on to our dealers and
customers in the same way that other lenders have done,” said Nigel
Williams, business development manager of Black Horse Motor
Finance.

 If anything the BoE’s move is seen as a confidence building
measure and a signal for a new cycle of looser monetary policy.
“For me the underlying thing in the economy is confidence. If
there’s a lack of it that will cause issues in the motor sector,”
Williams added.

While still holding a cautious mood, financiers in the consumer
motor segment are stopping short of predicting declines in business
volume next year. Blue Motor Finance, one of the larger players in
the non-prime segment, has not seen the need to adjust its growth
forecast for 2008 while delinquency ratios, said sales director
Peter Critchley, were well within its targets.

“We’re planning to double our balances by the end of next year,”
said Critchley of Blue’s loans growth. Having only begun its
point-of-sale (PoS) lending business in April 2006, Blue easily
tripled its loan book in 12 months.

 Reiterating his view, since Motor Finance spoke to him in
October, Critchley expects more opportunities in the non-prime
segment as well as in PoS car financing, as a result of the
slowdown in credit extension in the conventional loans
segment.

“In the near-prime market, it has a very perverse effect because it
doesn’t actually affect us that much. We’re not looking at the
sub-prime with the genuinely difficult customers but we’re actually
looking at people with a modestly flawed credit history. As prime
finance companies tighten that will mean there’ll be a lot more of
these people around and that’s the market in which Blue Motor
Finance sits,” he said.

Critchley also hinted that dealers may have to prepare for reduced
commissions if business conditions worsen in the months ahead. “We
pay fairly large commissions to dealers; however, if it’s just
purely to do volume with no profit then that’s a very difficult
relationship.

“Obviously PoS is a huge profits contributor to the motor industry
and funders also need to be profitable organisations going forward,
to ensure they are still there to service that need and I think
that relationship may be tested over the next 12 months,” Critchley
said.

The looming mortgage problem

“I think over the next nine months there will be a lot of consumers
coming out of two- and three-year fixed mortgages and that’s going
to put their monthly repayments up considerably and that will mean
increased pressure on household budgets,” Moody said. “So I can’t
see the situation getting any better in the next 12 months but I
would suggest that most of our members certainly will be looking at
increasing their bad debt provisions.”

The Society of Motor Manufacturers and Traders (SMMT) has forecast
a decline of about 2 per cent over this year’s expected new car
sales of 2.4m. “Consumer disposable income is being eroded and that
is why moving forward we are a bit more cautious on the outlook and
potentially the forecast that we have, of 2 per cent reduction, may
be overly optimistic,” said Matthew Croucher, economist at the
SMMT.

The decline may be extended to the used car market as well, and
this will be closely watched by fleet leasing companies, which are,
compared with their consumer finance counterparts, probably a
little more removed from the effects of a fall in consumer
confidence.

“I think the impact is more at the end of our process, where we are
disposing of motor vehicles out of our fleet book and it we need to
understand how that market may be affected,” explained Alan Lunt,
finance director of Lloyds TSB autolease.

 If prices in the used car market collapse from prolonged weak
consumer demand, then fleet financiers may have to adjust lease
rates upwards to factor in lower residual values of their assets.
Echoing the cautious sentiment, Lunt thinks the effects of the
credit squeeze may take at least a further six months to bottom
out. What began as simply American households missing out on
mortgage payments over the summer is now demonstrating its
far-reaching consequences