The economic environment was very difficult for all areas of the UK economy in 2009. The lack of confidence and liquidity in the banking sector will continue into 2010 despite a number of key indicators confirming the worst of the recession is over.
The impact of the aftermath of the recession and the resultant losses is that the banking community is trying to repair its balance sheets. As a result, there remains a shortage of funds for all customers, irrespective of their quality and strength of covenant. In addition, a number of banks have withdrawn from segments of the leasing market and are concentrating on cross-selling a variety of products to their core customers.
The cost of capital has increased significantly over the past 12 months, and banks are clearly focused on achieving a higher level of return for their scarce capital. The clear objective is to ensure the return is commensurate with the risk.
The volume-driven pricing, which was evident prior to the recession, is unlikely to return in the medium-term. However, we are aware of examples over the past 12 months where certain customers have experienced three- to four-fold increases in margins. More recently there is evidence that the banks are marginally relaxing their pricing.
There is also a positive aspect to the current economic environment in that a number of companies consider there are real opportunities to grow their business, and we are engaged in identifying portfolio and company acquisition targets in a number of sectors.
Last year was a particularly difficult year for the vehicle sector, with the dramatic fall in second-hand vehicle prices of over 25 percent.
However, the market has improved in the second half of 2009 due to a shortage of second-hand vehicles and pent-up demand where customers were deferring changing their vehicles during the worst of the recession.
If the shortage of liquidity eases and customer demand returns, the vehicle sector should enjoy a more profitable 2010. We expect continued distress in 2010 for the rental sector, for all asset types including vehicles. Meanwhile, the large-ticket leasing market was almost nonexistent in 2009.
The consumer sector has resulted in a wide variety of engagements in the past year, and we see further opportunities in this market segment in 2010. Some of our clients are considering ways to improve their profitability and outsourcing of certain services such as cash collections or portfolio administration. As the economy comes out of recession, companies will be better placed to grow their business without a corresponding increase in their cost base.
The coming year will bring further challenges to the leasing sector with the proposed changes to the balance sheet treatment of leases.
There is a lot of uncertainty and discussion taking place and this will continue throughout the year. We hope there is clarification and a clear way forward before the target implementation in 2011.
The authors are associate directors of Grant Thornton