While the rest of the developed economies suffered the effects of the global financial crisis, Australia held relatively firm. No domestic financial institutions went under or had to be bailed out. Buoyed by the economy’s greater links with emerging markets, Australia’s banks maintained their underlying soundness and capitalisation levels while those in the US and eurozone retreated.

A prime contributory factor behind this was the boom in mining and undiminished demand for commodities during that period, in particular from China, which shielded Australia from the main impact of the recession. The Australian dollar strengthened, and remains far stronger than it was five years ago, leaving it in an enviable position.

However, in the last year growth in the Australian economy has slipped, as the mining boom has stalled and growth in China has slowed. The fact that the developed world is finally showing signs of economic recovery does not have the same potential to benefit Australia, where the emerging markets play a far more significant role.

Weaker demand has led to lower credit growth and flat balance sheets, and this is affecting asset finance companies as customers delay expenditure on replacement and renewal of equipment.

Asset finance challenges

Australia’s asset finance market, in terms of new business volumes, also rode the recession relatively unscathed, and although it did decline, indicators are that it has broadly returned to pre-recession levels at around A$43bn, according to the Australian Equipment Lessors’ Association (AELA) – a welcome state of affairs that is ahead of the situation in many other developed markets which are still well below pre-crisis volumes.

However, external pressures meant that a number of operators have exited the Australian equipment finance market, mainly owing to parent banks retrenching in order to bolster their capital base. These withdrawals have yet to be replaced, leaving the market constrained by the dominance of the ‘big four’ domestic banks and their leasing subsidiaries.

The Australian asset finance market differs in emphasis from other countries: in addition to standard finance and operating leasing and hire purchase, two important elements of the Australian market not so evident elsewhere are chattel mortgages and, specifically in the auto sector, novated leases. These finance options are important: in the year to end-June 2013, chattel mortgages accounted for nearly two-thirds of total equipment new business volume and novated leases represented more than a fifth of the total auto portfolio in terms of units.

Chattel mortgage deals are used for movable assets when the lender does not want responsibility of asset ownership, which in this instance passes to the purchaser at the time of purchase, who has secured a loan with a mortgage over the asset which is then repaid in instalments. Novated leases can be structured as either finance or operating leases and are offered by vehicle lessors as part of a salary package whereby the employee leases a vehicle from the lessor and the employer takes on the lessee’s obligations, making the payments and deducting the costs from the employee’s pre-tax income, and in return the employee sacrifices a portion of salary to cover the lease rental.

Positive developments

Whatever the current perceived weakness in the market, asset finance is still involved in around 40% of all capital expenditure on equipment in Australia, making the industry an integral component in the Australian economy. There have been positive signs in recent months, one of which is that business confidence is on the rise, indicating better prospects for investment.

The improvement in business sentiment is partly due to the lessening of political uncertainty, which had been another constraint on markets. The recent federal election should have helped resolve that, not least to the extent that the markets can look forward to a period of stability.

The auto and fleet finance markets also breathed a sigh of relief following the election of the new government, as this meant the reversal of a change to Fringe Benefits Tax that had begun to impact highly negatively on leasing by effectively putting an end to novated leases as well as affecting leased vehicles with an element of private use. With the repeal of the measure, the market rebounded. This illustrates the potential danger when government seems not to comprehend the benefits of asset finance, and demonstrates the need for a coordinated approach across the industry to keep government informed and on-message.

Small and medium-sized enterprises (SMEs) form the largest segment in the fleet leasing market, although the proportion has fallen as smaller companies have had to rein in costs. There has also been a trend in car leasing away from larger cars, with the small car segment increasing market share. Growth can be expected as the economy expands and business confidence rises.

On the regulatory front, the Personal Property Securities Register (PPSR) was introduced in January 2012 and brought about a fundamental change in the way security over personal property is created in Australia. It replaced various securities laws and registers with a unified national law and an online, searchable register of almost all security interests in personal property, relating to all property apart from land, including plant & machinery and leased equipment.

Although, as mentioned, the asset finance industry is dominated by the main four banks, while the number of independents and foreign-owned funders has decreased, there is still a considerable amount of business undertaken by the second tier of banks. In addition, a welcome development since the crisis is the return of captives, which now represent a significant element of the market and their influence is growing.

The return of consistent economic growth will be the main driver behind the revival of investment in assets, boosting confidence and the willingness to invest. The opportunities are there for lessors, and although the near-term outlook is for weak growth, the upward trend should regain momentum in the longer term.

The White Clarke Group Australia Asset and Auto Finance Country Survey, which gives in-depth background, comment and analysis, has just been published and is free to download herehttp://www.whiteclarkegroup.com/knowledge-centre/category/country_reports/australia_asset_and_auto_finance_country_survey_2013