A lack of liquidity and a collapse in residual values are
causing motor finance providers major headaches, even as PoS
penetration rates increase, Jo Tacon finds.
Motor finance is facing a difficult time. The issue is so big
that even the mainstream media have taken notice. The BBC reported:
“With car sales tumbling globally, manufacturers want a substantial
financial package from the government to help them through the
tough economic climate. They want a state-guaranteed credit
facility, more credit for manufacturers and suppliers, easier
access to cash for car finance firms and a delay in the rise in
vehicle excise duty.”
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And when the Society of Motor Manufacturers and Traders (SMMT)
unveiled the latest car sales figures for November, with a headline
37 per cent fall in new registrations compared with the same month
in 2007, Paul Everitt, chief executive, noted that “[u]rgent action
is now required to ease access to credit and finance, both to
support consumers and meet the cash-flow needs of the
industry.”
Motor finance, usually far down the news agenda – except when
the newspapers’ personal finance pages decide to give it an
undeserved kicking – finds itself centre stage in the unfolding
drama taking place in motor retail. There is a case to be made that
the sector is facing a ‘perfect storm’ – a once-in-a-generation
event brought about by a collapse in car sales, rock-bottom
consumer confidence, and not least of all an almost total lack of
liquidity.
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Spotlight: Arrears management
of crucial importance
Spotlight: Residual values
fall hurting finance houses
Showrooms fall silent
Starting on the retail side, the scale of the fall in new car
registrations speaks for itself. New car sales in the year to
November are down by nearly 11 per cent at 2.02m vehicles. In
January, the SMMT predicted 2008 would see only a modest fall in
new car sales, to 2.34m units. “There is little sign that the US
credit crisis or rising fuel prices have affected demand and we
foresee only limited changes through 2008,” Everitt said at the
time.
After a year in which unprecedented events have shaken the world
financial system to its very foundations, perhaps we should be
thankful that car sales have held up as well as they have.
Next year may be little better. Mike Allen, retail analyst at
stockbroker Panmure Gordon, predicts: “The new car market in 2009
will be very, very grim. The March ‘08 market was pretty flat but
March ‘09 could be down 30 per cent, which would cause
shockwaves.”
The problem, as he sees it, is at least partly down to consumer
confidence – or the widespread lack thereof: “Lack of confidence is
one factor restricting car sales, but not the only one – there’s a
lot of uncertainty out there. People aren’t buying cars as they are
worried about their jobs.”
The Bank of England’s recent decision to cut interest rates to 2
per cent in order to stimulate the retail sector will bring relief
to motor dealers, Allen says – but not immediately. “Aggressive
interest rate cuts will hit home but not in H1 2009 – it could take
a further six to eight months for the impact to filter through on
the consumer side. However, dealers will see relief as their loans
from manufacturers will get a little cheaper.”
The first four months of 2008 saw new registrations holding up
fairly well; indeed, the monthly figures for March and April were
higher than in the two previous years (see graph 1). But from May
onwards, new registrations suffered a marked slowdown.
The same broad pattern can be seen in used car registrations,
with sales in April 2008 higher than in the two previous years,
although March’s figure showed the impact of the slowing economy
(see graph 2). But the outlook for the used car market turned
distinctly darker in June, with about 50,000 fewer cars sold than
in June 2007, according to Experian.
PoS squeezed?
It has been widely reported in the national media that consumers
are finding it ever-harder to arrange funding for their vehicle
purchases, yet at the same time the penetration rate for
point-of-sale (PoS) finance is the highest it has been for some
years.
Paul Harrison, head of motor finance at the Finance &
Leasing Association (FLA) reports: “FLA stats are still not showing
the downturn. We have seen a steady increase in new car finance
penetration, which reached 52.9 per cent in the year to October.
However, new car sales have dropped significantly since May and we
would expect this reduced demand to eventually be reflected in our
own figures.”
Yet anecdotal evidence – especially from brokers – seems to
suggest that motor finance providers are tightening their lending
criteria, and rejecting more applications than was previously the
case.
Lenders interviewed by Motor Finance were, on the
whole, cagey about changes to their underwriting standards, but the
new difficulty in securing credit for sub-prime customers (see MF
Oct 08) tells its own tale, as does the recent decision by BMW
Financial Services to suspend temporarily new business at its
Alphera division, which provides finance for buyers of
non-BMW-badged cars (see MF Nov 08).
Managing director of Black Horse Motor Finance, Chris Sutton
confirms that the Lloyds TSB-owned finance house has seen new
business volumes fall – “but the fall is in single digits, meaning
we have not fallen by as much as the overall car sales market”, he
says. “In fact, we believe we are gaining market share, even though
volumes are down,” he adds.
Lenders who stick with the market may well come out of the other
side of the current storm with an improved market profile, Sutton
believes, and being bank-owned can be its own advantage: “Having
the backing of a triple-A rated institution gives us a solid
foundation and means we can commit to the market over the long
term.”
The retreat of the direct lenders is welcome news for PoS
finance providers, Sutton believes: “PoS penetration is increasing,
which is a reflection of the lack of available credit from direct
lenders, for example, and the continuing availability of credit in
showrooms, despite the fact that some providers have pulled out.
Even though the underlying sales market for new and used cars is
pretty dire, we believe there are some offsetting factors – the
difficult credit environment could actually benefit us in the long
term.”
For David Betteley, managing director of Toyota Financial
Services, meanwhile, competition from other finance sources is
still a factor. “The direct lenders are still reasonably active as
competitors to PoS finance, although it’s harder to get finance if
you fall into the non-prime category,” he comments.
The drying-up of non-prime and sub-prime finance has caused
acceptance rates at BMW Financial Services to fall, says managing
director Richard Schooling – but this is not because of tighter
underwriting.
“We’re still converting over 90 per cent of approved
applications, but it’s fair to say that we’re saying ‘yes’ to fewer
applications – although this is largely down to the fact that we
are seeing lower [credit] scores achieved by potential customers
than in the past. We are also being offered deals that would not
have come our way in the past, as other motor lenders have pulled
back from the market,” he notes.
New business volumes have fallen, Schooling adds, but not by as
much as the market as a whole: “If we look at where we are compared
with a year ago, we’re only 10 per cent down, whereas new car
registrations are down by much more than that.”
Janet Wilson, managing director of Close Motor Finance, confirms
the trend: “There has definitely been an increase in applications
as other providers withdraw from the market, although the quality
of applications has deteriorated as dealers try to place business
that would normally have gone to non prime lenders”, she says.
Schooling stresses that while lending criteria at BMW Financial
Services have not changed – “we haven’t put in a new scorecard or
anything like that” – underwriting is coming under the spotlight:
“As the credit crunch deepens, I predict we will underwrite more
business manually in response to customers’ changing
circumstances.”
Fraud detection and prevention is another area in which BMW
Financial Services is “taking more precautions”, he adds. Wilson
comments: “Our underwriting policy has always been one of low risk;
however, it is fair to say that as the recession has deepened and
the non prime lenders have exited the market we are taking extra
care in ensuring the business we are writing is an acceptable
risk.”
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