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January 4, 2011updated 12 Apr 2017 4:17pm

Drive asset demand to stimulate volume

Peter Hunt analyses the FLA market statistics for the year 2010 to 31 October. It is concerning to see that at £1.44bn (1.7bn), business finance excluding big ticket transactions was down 4% in October, against a weak comparable month in 2009. At £406m, big ticket volumes for October were the second highest of any month in 2010, continuing the mini-revival since the August low point of £46m

By Peter Hunt

Peter Hunt analyses the FLA market statistics for the year 2010 to 31 October.

 

It is concerning to see that at £1.44bn (€1.7bn), business finance excluding big ticket transactions was down 4% in October, against a weak comparable month in 2009.

At £406m, big ticket volumes for October were the second highest of any month in 2010, continuing the mini-revival since the August low point of £46m. The big ticket market is naturally erratic so little should be read into a single month’s data. Having entered the downturn later than other parts of the business finance market, the big ticket market remains 43% down year-to-date on last year.

Consumer finance continues to look weak, with three-month moving averages staying stubbornly below 2009 figures and year-to-date volumes down 6% on last year.

For the year-to-date, business finance (excluding big ticket) shows marginal growth of 1%, but this potentially hides a disturbing weakness in demand.

The growth has been driven by business car finance, up 9% for the year-to-date, while other assets are still 3% below last year’s volumes.

This weakness continues to apply across all major asset categories (see charts, right).

After strong year-on-year gains in the early part of 2010 (in part stimulated by government incentives), business car finance has now weakened and may be in the process of normalising alongside other asset classes. The three-month moving average for business car finance has now become negative at -2.5% year-on-year; and the overall market showed a year-on-year drop for the three months to 31 October.

If weakness in car finance continues and there are no material improvements in other asset categories, the business finance market may in effect experience an investment double dip.

Though with the year-to-date market still 32% below its 2008 figures, volumes over the coming months are more likely to seem like a continuation of ongoing poor trading conditions.

The latest Bank of England Agents Report highlights increasing investment intentions, in particular among larger companies, but also continued deleveraging and cash piling during current economic uncertainty.

These counterbalancing forces are likely to remain in place and could continue to subdue investment funding demand. Most companies reported investment related to replacement cycles, notably in cars and IT.

There has been a shift in 2010 in terms of the business funding of new cars, with a 3% drop in operating leasing and a 43% rise in hire/lease purchase.

If this signifies increased caution in taking residual value positions, it would also represent a growing distinction between finance providers and the more value-adding, fleet management industry.

 

Comment

Continued low trading volumes without any material recovery will lead to ongoing shrinkage of portfolios.

While profits will be protected by high margins achieved on more recent business, there may be opportunities (or even an imperative) for further efficiency improvements in the sector.

At this point, business owners – especially those with a strong operating platform but weak new business volumes or funding capability – may wish to reconsider divestment options.

The spike in car finance in early 2010 suggests that well-positioned government incentives can stimulate investment; and that the greatest driver of new business volumes for finance companies is stimulation of asset demand.

A key question would be how to gain political acceptance for future incentive programmes against a tide of public spending austerity, and would most likely require alliances with specific asset-related trade bodies that align with the coalition’s industrial strategy.

The author is a partner at the consulting and services firm Invigors, peter.hunt@invigors.com

Two charts showing UK new business finance – October 2010

Table showing FLA new business finance – October 2010

 

 

 

 

 

 

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