Martin Nixon of United Trust Bank tells Jonathan Minter about the advantages of using brokers, and how United Trust Bank’s measured approach to growth has resulted in consistent growth

Since 2011 United Trust Bank’s (UTB)asset finance department has grown to about five times its original size, and is on course to have grown by 40% again in 2014. Yet according to Martin Nixon, head of asset finance at UTB, this percentage could be misleading due to the initially small size of the books.

Despite this, he describes last year’s performance as "very good," and the current year as "exceptional".

When Nixon first joined UTB, the asset finance department was just a joint venture with an agricultural funder. Nixon said when he first joined "both parties thought at the time [the asset finance department] wasn’t going anywhere: it was a small book, and it was purely agricultural, which restricted growth."

Nixon was brought on board to branch out from these agricultural roots and move into other areas.

He had already worked in asset finance for nearly 30 years, having started at an American operation called The Associates, owned by Gulf and Western, Ford and then City Capital, in 1983. He stayed there for 16 years, working with a book of around £200m (€252.7m).

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In 1999 he moved to IBJ Leasing where he restarted the bank’s asset finance business. He stayed in this role until being recruited by UTB, to head its planned asset finance expansion.

One of the two changes Nixon introduced at both the Industrial Bank of Japan and at UTB was to make them exclusively broker-based.

"It was very clear to me from early on that the broker business we were doing was more profitable and cleaner," said Nixon.
"At the time we had sales people and then the broker side, which was coming in straight to the office. When we compared the two we realised we were making more money from the broker business because of the returns, and it was cleaner.

"Normally if you’re making a bigger margin, you expect it to be more troublesome, but that wasn’t the case. So I was convinced from a very early stage."

Brokers are a particular feature of British business, and this caused some initial difficulties working for foreign companies.

"When I first started in 1983 there were very few funders doing broker business, and I was working for an American business," says Nixon. "So it was totally alien to them [The Associates] because brokers in the US just didn’t exist. You had to convince them that this was the model that we should be using."

Winning formula

It’s clear that Nixon has found success in the broker model, and he’s equally clear he doesn’t intend to change a winning formula. However he has noticed a recent change in market conditions.

"There’s more direct business being done," he says. "More operations are building up their direct teams, so brokers have found a lot more competition from direct funders than they’ve been used to. That’s certainly been the case with brokers I’ve spoken to."

On top of this the Financial Conduct Authority has "shaken things up" in the market.

"A lot of brokers have had to change the way they do business, and I’m sure it means some will move out of the sector," Nixon says. "If some are on the edge it might just push them away thanks to the costs and the extra legislation. Others have joined bigger broker groups so that they don’t have to have quite such onerous tasks in terms of what they need to go through."

These new, larger brokers operate in a variety of models, from tight-knit companies where the brokers are almost employees to a looser model where they’re still independent.

Another problem facing a lot of brokers is their demographic. Nixon points out there are a number of people who previously worked for a bank’s asset finance division, which were cut or reduced in the 1990s. As a result, he says, a lot of brokers are from this generation and in their 50s or 60s.

The issue of an aging workforce stretches across much of the industry, including brokers, which Nixon highlights as "a big problem". The market has been in need of new blood "for a number of years", he said.

Nixon highlights two possible reasons for the shortage: "When banks closed offices, a lot of experience was lost to the market, and there is now not enough training. You used to have all sorts of qualifications that you could get, but that has fallen away."

In order to combat a possible future talent gap, UTB is willing to hire people with no previous asset finance experience. "They’re going to be office-based for a number of years, but going forward there will be opportunities to be a business development manager who goes out and has his or her own patch to attract broker business.

"Our recent hires, internally, have very little or no experience in asset finance, but you can mould them into what you want them to be."

UTB also recruited from ING leaving the market, but this didn’t affect Nixon’s growth plans. "We already had plans in place," he says. "If you look at our growth plans prior to ING pulling out, they haven’t changed at all – we haven’t readjusted. We knew where we wanted to be."

According to Nixon, this more cautious approach is in line with the bank’s general philosophy, a philosophy he claims helped steer it clear of danger during the recession, when the bank was predominantly a property development company.

"What the Bank were doing in 2007-8 was less adventurous than others. During the recession, that market was absolutely decimated in terms of funders, and it was one of the few independents left standing in the market. So that stood it in good stead, and it is not a lesson you forget.

"UTB also takes this more measured approach when entering a new market, something it has done repeatedly since 2011, most recently into engineering leasing. In this example, UTB had taken on a number of credit people who had a lot of experience in the market.

"So what we’ve done is start out slowly in these markets, with some specialist brokers, taking things one step at a time, doing some transactions, and gradually moving forward," explains Nixon. "So it’s still early stages in those markets."

This is how UTB’s asset finance division has approached other markets: "First you need the experienced people, who know those sectors really well. Then you need to make sure you’re dealing with brokers who know that sector inside out, and take it slowly."

Possible acquisition

One alternative method for growth is through acquisition, Nixon says: "You shouldn’t rule out an acquisition at some point in the next year or two.

"We’ve looked at one or two recently which didn’t happen, but people know the bank is actively interested in any that do come along. It’s something we’re looking to do for the right price."

Given the consistent, rapid, growth this steady approach has achieved, does Nixon think this is a model new entrants could follow?
"It depends on what their agenda is and what their backing is. Are they in it to make some money and get out again, or are they committed to the sector long term? If you look over the past 10 years, there have been a number of businesses in and out," Nixon says.

While the former option may seem appealing, he claims this could cause these companies longer-term issues: "Brokers know there are funders that will be keen on broker business at one point, then out, then in. You could find yourself with a credibility issue this way."

Despite the increasing numbers of new entrants to the market over the past few months, Nixon remains relatively calm about the potential new competition: "Some of the larger new entrants are going very much on prime, big to middle-ticket, which isn’t our bag; we’re small to medium-ticket side.

"Other new entrants have specialised in other sectors. Clearly there are more opportunities for a customer to find a funder, and it will put some pressure on margins. The brokers are finding that, where they are under pressure from direct funders.

"So it does get tougher, but if you’re confident you have a good offering to a broker, from our point of view – you have to constantly make sure you rates are competitive."

Even with the added competition across the market, Nixon notes: "For the first time in a very long time, some of the prime funders have started to put their rates up. This hasn’t happened for quite a few years now, and it focuses the mind a little bit." One possible reason for this he suggests is funding for lending is more restricted than it was previously.

Even with some rates beginning to go up, it’s clear asset finance is a growing industry.

Part of the reason for this is the industry benefitting from customers turning to them as a result of banks tightening lending. Nixon suggests this has led to a number of businesses having to discover other forms of funding.

"And it’s probably opened their eyes to the fact that they don’t need to go cap in hand to their bank, and that it is probably not a good idea to have all your eggs in one basket," Nixon adds.

Even beyond restricting lending, banks suffered reputational damage during the credit crisis. Nixon says. "There has been a bit of a change in the reputation of banks, and businesses are a bit more switched on in terms of what is out there."

Despite a number of new players coming into the market, and lending volumes growing every month, Nixon does not feel the industry is in a bubble. He does warn, though, that new lenders, and lenders pricing aggressively could combine to put pressure on margins.
While this may be a slight cause for concern in the future, in the medium term at least UTB remain positive, with Nixon noting as long as the bank continues its policy of understanding the market and getting the right individuals then "there are opportunities out there".