Covid vaccine rollout drives hope for recovery

Goldie accepts that the coronavirus business interruption scheme (CBILS) helped to a degree and says the FLA’s feedback prompted the creation of the large business version of the scheme so that larger firms could benefit from the guarantee and right of assignment. 

However, he observes that guarantees are not the same as funding and that there is still a need for asset finance lenders to have direct access to government funding to level the playing field with their competitors. 

“We have seen pockets of growth in areas like IT equipment finance, which is unsurprising considering that many businesses have moved their internal operations online and are investing to increase their general business agility,” he says. “When we look back at 2020 as a whole we might see increased levels of funding for technology – a trend that has been accelerated by the pandemic.”

Goldie says the UK's vaccine rollout, currently underway, is likely to generate confidence in a relatively prompt return to business. “First comes the recovery and we want to see the chancellor put forward concrete proposals for levelling up the regional economies as part of that plan,” he adds.

Bibby Leasing operations director, Richard Marshall, notes that profitability is under pressure.

“They subsequently find customers in forbearance, putting a strain on capital resources and that means they can’t grow their portfolio.” Marshall suggests the chase for market share is ultimately leading to underperformance and that the disruption caused by coronavirus has brought this into sharper focus. However, he also says the pandemic has highlighted opportunities for the market to reassess how it operates to improve efficiencies. 

“Leasing companies are naturally taking a more prudent approach when lending,” he continues. “Underwriters are more cautious as leasing companies try to work out the effect of the pandemic on SMEs and the sectors in which they operate. The use of government stimulus support has been invaluable in aiding this more cautious approach, allowing companies to maintain lending to reasonable levels whilst minimising risk to their portfolio.”

This has led to firms becoming more inward facing, shifting focus to providing forbearance solutions for customers. Many have also focused on ensuring they have sufficient cash reserves to see them through the pandemic while balancing the requirements of the Financial Conduct Authority and the needs of customers.

Marshall refers to growth in contract hire/contract purchase schemes for consumers as well as businesses. “This allows customers to fund a new car at a much cheaper rate than the old fashioned 10% deposit balance over 3-4 years,” he says. “Refinance has also seen strong growth with several new funders now offering it.”

The funder supported vendor/sales aid schemes have suffered though. “They have typically been led by the manufacturing sector but are now much more likely to be with a broker,” says Marshall. “Many funders tried to build business on the back of vendors but struggle to give the ‘almost’ 100% acceptance rates. Materials handling has also weakened - it has become so rate-sensitive that it is unviable for many funders.”

Looking ahead, government support will eventually come to an end which should see a market adjustment and a return to more commercial profit margins for funders as liquidity falls. However, Bibby expects total volumes to increase as delays in customers replenishing assets this year assist the bounce back to pre-pandemic levels. With coronavirus immunisation underway the company is optimistic there will be an uptick in the market in the second half of 2021.

In addition to the dramatic reduction in new business volumes earlier this year, leasing companies have had to contend with the effect of forbearance on their existing customers – not only the associated impact on their finances, but also a greatly increased volume of customer contact via calls and e-mails.

These have had to be managed against a backdrop of staff working from home, which has provided additional management and customer service challenges says Richard Ryan, senior advisor Invigors EMEA.

“They have also been able to quickly respond to government initiatives in introducing new lending products.”

With vehicle lending comprising a major proportion of the UK asset finance market, this sector has had a major influence on the market as a whole. 

Data from the Society of Motor Manufacturers and Traders (SMMT) for October showed that the number of fleet and business new car registrations fell by 34.2% in the first 10 months of this year compared with the same period in 2019. New business volumes for the year to September appear to show a similar year-on-year decline.

The commercial vehicle sector has shown a similar decline in lending for the year to September, though actual registrations reported by SMMT increased sharply in October by 13.3% compared to the same month the previous year driven by operators expanding their fleets ahead of Christmas and the growth in home deliveries caused by the pandemic.

“The outlook for 2021 remains highly uncertain and will continue to be influenced by the course of the pandemic,” says Ryan.

He suggests lending is expected to remain subdued due to decreased economic activity resulting from both the pandemic and the end of the Brexit transition period and that as government support measures gradually unwind, leasing companies will face the challenges of rescheduling loans together with an increase in arrears and defaults, particularly from their SME customer base.

With ongoing changes in regulatory and accounting requirements, the role of the sales aid partner becomes increasingly focused on providing training and guidance to partners. 

That is the view of Jean-Michel Boyer, chief executive and UK country manager BNP Paribas Leasing Solutions, who notes that the farming market remains strong despite the pending challenges of Brexit. Farmers have to finance ways to diversify their activities to ensure ongoing profitability and this means we have needed to tweak our policies to ensure we are in a position to assist in the funding of different assets and investments outside of the traditional tractors and trailed implements sector,” he explains.

Looking ahead to next year, Boyer reckons there may be some retrenching of lending activities from a few lenders in the asset finance market, especially if not a core business sector or if their portfolios are relatively immature and potentially challenged from a risk perspective.

According to SGEF UK managing director, David Yates-Mercer, the level of work that has been required by all lease companies in the UK to deal with the huge influx of payment holiday requests has been staggering and it is a testament to the dedication and hard work of the staff engaged in processing them that it got done.

“Many of these companies had to deal with what probably amounted to several years' worth of work for the departments affected in a few months and it is impressive that throughout this the UK leasing industry has managed to continue to support those companies that wished to invest in new equipment or to refinance existing equipment to help free up working capital for them,” he says.

Yates-Mercer observes that prior to the pandemic there was a sense of some sort of return to normality (Brexit notwithstanding) with businesses increasing investment and appearing to be willing to take more risks, as could be evidenced by a feeling that cost of risk was moving to levels that until the financial crisis in 2008 would have been considered more normal.

“The move towards more sophisticated digital tools was already gathering momentum and the importance of this has been underlined over the course of the last few months,” he continues. 

“Best guess looking forward is that there will be greater emphasis on the importance of adapting systems to provide the ability for customers to have in-life service capabilities compared to pre-Covid, when many of the developments seem to have been concentrated more on the front end and customer onboarding.”

He agrees that the agricultural sector has generally been less impacted than others while construction has been faster to come back as it opened up sooner and, in the case of smaller building companies, managed to stay open pretty much throughout, though some experienced a shortage of certain construction materials.

“Elsewhere, although things continue to pick up there remains a sense that there is a high level of caution causing a reluctance to invest in new equipment,” says Yates-Mercer. 

Gareth Stockton, head of sales for ABN Amro Lease UK observes that requests for payment holidays have tailed off since the end of the summer and businesses seem to be adapting to the ‘new normal’.

“They have taken a look at their strategy, their cost base and the government support schemes on offer and are planning their way through,” he says. 

“Sustainability is now the key for businesses. There is still a lot of uncertainty and the national picture is far from clear, but even with economic conditions in the balance we are seeing businesses that have adapted and have their own sense of what they want to do next. More businesses are focused on forecasting and where there is a pipeline of work they are taking investment decisions.”

He agrees that it has been encouraging to see activity in construction and that even with limitations in place projects have typically been able to continue. Contract hire, rental and transport - especially parcels and online delivery - are other areas where he is seeing demand from clients.

“Key for many businesses is the ability to invest in vehicles and equipment to meet demand while maintaining optionality and financial ‘dry powder’ – that is where leasing is so useful,” concludes Stockton. 

“If there is one lesson we have taken out of 2020 – one that many businesses will share – it is that having more varied and flexible forms of finance is a great way to ride through uncertain times.” 

Paul Golden is a features writer for Leasing Life