We are hearing about profit warnings on an almost daily basis
and, coupled with this, is speculation that many banks will have
more bad news for their shareholders as the US sub-prime mortgages
work their way through the world’s financial systems. Are there
major implications for our equipment financing market and, if so,
how will they manifest themselves?
Like all news, there is some good and some bad depending on
where you are in the scheme of things. I imagine the likes of State
Securities and Close Brothers Leasing are delighted there are
organisations that will no longer fall into the ‘acceptable’ box of
the major lenders.
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These ‘marginal’ credits will, nevertheless, need continual
access to sources of finance for the acquisition of new equipment
if they are going to compete in an increasingly difficult market.
If balance sheets, cash flow, falling profit margins and a lack of
general confidence in the UK economy are all going to be with us
for some time, the ‘story’ part of the ‘story credit’ will have to
be a good one.
The intriguing part of all this is how well the major asset
financiers cope with the reduced confidence in the market and the
usual flight to ‘quality’ when the market is expecting a
downturn.
To what extent they also integrate the ‘story credits’ into
their credit process – and how much they charge for the privilege –
is also a major factor as the finance companies struggle to
maintain their profits.
In other words, will we see a credit compromise aided and
abetted by an increase in rates or can our industry be stony-faced
about the current situation and weather the storm? Most experiences
over the past two decades have been to weather the external storm –
this time around, the storm is also raging within the major banks
as sub-prime write-offs gather pace.
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By GlobalDataTo what extent the credit crunch will affect the wider economy
still remains to be seen. What is clear, however, is that there
needs to be much stronger emphasis on risk analysis tools, which
are becoming crucial to asset-finance activities, not only because
the industry is becoming more competitive, but also to fit in with
the increased regulatory initiatives and an uncertain global market
place. If asset finance providers are to be successful in coping
with increased risk, far greater levels of data accuracy, analysis,
process transparency and risk modelling are required. Many of the
smaller asset financiers have struggled with regards to risk
modelling, unlike the larger operators – mainly bank subsidiaries –
who have greater access to risk-focused technology because of the
huge variety of lending undertaken by their parents and the
well-embedded ‘portfolio management’ culture so favoured by the
supervisory authorities.
The most voiced industry issue in the latter half of 2007 and
into 2008 is the deepening credit crunch. It remains to be seen
just how the asset-finance industry will be affected, but it is
already clear it has highlighted the necessity for adequate risk
mitigation and business controls. With purse strings continuing to
tighten, asset financiers must ensure pricing and risk are based on
tried-and-tested processes and high-quality decision making. Let’s
remember, however, there will always be room for the well
researched story credit’.
