Global asset and auto finance sector on track to cement its recovery
The global asset and auto finance sector has been through turbulent times since the Great Recession, and the foundations for its recovery have looked fragile up till now, but 2015 is shaping up to be the year the industry cemented its recovery.
Growth in all the key markets has held steady in the past twelve months. In the US, where new business volumes plunged by almost a third in the immediate aftermath of the financial crisis, the equipment finance industry posted a 6.7% rise at the end of last year, marking the fifth consecutive year of improvement. While the 2014 growth rate is lower than the double-digit increases of the previous three years, it still comfortably surpasses the 2.4% rate of growth for the US economy as a whole.
US small businesses are emerging as the engine of economic growth, and are turning to asset finance to fund replacements for worn out equipment and to invest in new capacity. Consumer confidence is on the up, as evidenced by record levels of new car sales, which has sparked a strong uplift in auto lending.
It is a similarly positive picture for much of the European leasing market, where new business expanded by 8.4% in 2014, reaching its highest annual rate of growth in volume since 2007. Current predictions suggest that this trend will continue, driven in part by strong growth in eastern European markets. Both the Romanian and Polish financial leasing markets recorded 13% increases in new business volumes over the first half of 2015.
Of course, the powerhouse for asset finance is now shifting towards Asia. China’s financial leasing market is expected to hit CNY five trillion during the first half of 2016 and is on course to move up to the number one position globally, overtaking the US, according to recent research released by the China financial leasing association and its partners.
China’s government has given leasing the green light, introducing significant changes to banking regulations for both large scale operators, such as those in the burgeoning aviation sector, and those who offer funding to smaller and entrepreneurial businesses as the economy slows. In other countries in the region, however, red tape remains an issue, while auto finance lessors have been forced to trim their growth ambitions in countries such as Thailand and Vietnam as it takes longer than anticipated for a new class of consumer to emerge
It is a similarly mixed situation in South America. Brazil, which experienced explosive growth in leasing five years ago, has found it impossible to sustain this performance. In contrast, in the last two years Mexico has emerged as the economic star of the region, supporting the second largest equipment financing market.
But it is by no means all plain sailing. On the face of it, the list of potential problems is daunting: uncertainties about the US and UK economies and the direction in which interest rates are heading; continuing domestic unrest and political upheaval in parts of the Eurozone, most notably in Greece; ongoing worries about the impact of terrorist attacks; and new concerns about the impact of the migrant crisis on the economies of several European countries.
Then there the ripples from the slowdown in the Chinese economy. As well as the potential impact on the domestic market there, a contraction in Chinese industrial activity is likely to translate into a reduction in demand for mineral wealth and other commodities, which will impact on countries like the Philippines and the nascent leasing industry there, while reduced requirements for heavy machinery will hit order books and therefore leasing activity at UK and US manufacturers.
Rules and regulations
Globally, 2015 is also the year that the two main accounting standards bodies will agree a final version of the long-promised new leasing standard, which will see many more operating leases brought onto the balance sheet. Individual countries, fearful of allowing lending to run out of control, are tightening regulations. The US auto finance industry, in particular, has begun to feel the heavy hand of several regulatory agencies keen to prevent a buildup of lending to riskier sub-prime borrowers, for example.
But industry experts argue that many lenders in the asset finance industry have successfully made the transition to a “new normal”, where economic shocks, regulatory change and political uncertainty have become part of business life. Lessors have responded by keeping a firm control on costs, streamlining and upgrading operations and pushing forward with innovations. They have done much to get their own house in order, and rising volumes of new business in many key markets in 2015 have shown that the new approaches are working.
There are more insights about how the leasing market is developing across the world, along with much more data and analysis, in the latest White Clarke Group Global Asset & Auto Finance Survey, October 2015, which is free to download.