Condition of asset finance market entering renewed debate

Thoughts of asset finance as the first domino to the next financial crisis may be overcooked.

Following the Financial Times article, ‘Banks warn about overheating UK asset finance market’, recent fluctuations around lessors’ margins have come under scrutiny. Of particular focus is the quote of an unnamed asset finance professional, who claimed that “people are doing exactly what they did in ‘06 and ‘07, you can smell it”. Like mainstream worries over car finance last year, it’s worth looking at what’s driving these concerns and what nuances may be being overlooked.

What is beyond dispute is that larger companies are altering strategy and businesses, while lessees are defaulting on certain large outstanding obligations. Last month, a debtor to Close Brothers, Leumi ABL and Amicus went into administration with around £4m (€4.5m) in total owed to the three lenders. In January, a Kent-based company owing almost £2.5m to Close Brothers Asset Finance entered liquidation.

In late 2017, Leasing Life spoke to industry figures about how increased competition in a growing broker market was putting pressure on lenders. Bibby Financial Services managing director Carol Roberts told Leasing Life that the funder was rebalancing towards direct sales in light of the significant changes to the broker landscape, with changes to the balance expected to come into force in 2018 after recruiting new personnel.

“We have deliberately moved that to a different model, so that we go directly to the customers and the vendors,” Roberts said.

Yet contractions and changes in the market do not equate to collapse, and overall levels of defaults are not at this time causing market-wide alarm. The Q1 2018 survey released by Leaseurope assessing overall market health showed both positives and negatives. While more business was written, aggregate pre-tax profit decreased by 5.0% in Q1 2018 year-on-year, though it remained at the elevated levels gained throughout last year.

There are also strong, positive signs coming asset finance players. For instance, Paragon Banking Group’s asset finance lending to small and medium-sized UK businesses in H1 2018 was up 54% to £164m against the same period last year. In the Leaseurope survey, new business volumes in the first half of 2018 remained positive, in line with previous Leaseurope