The UK asset finance market is mature and generally stable. Some might even say it’s slightly boring (but we don’t listen to them).
So, after the Financial Times ran a feature article, ‘Banks warn about overheating UK asset finance market’, reporting a view that rising competition in the UK’s asset finance market is “pushing down profit margins and encouraging increasingly risky practices in the loosely regulated sector”, it seems worth taking a step back to consider the claims.
The piece suggests that more firms are now chasing roughly the same demand in the market, with the market having reached its pre-financial crisis level.
It’s certainly the case that the market is back to about where it was 10 years ago, both in value terms (allowing for inflation) at around £32 billion origination per year, and as a percentage of total business investment, in the range 30-35%. That’s also roughly where the industry was at the end of the 1990’s, again in real terms.
It’s also true that things get a little more exciting towards the bottom end of the market, where the annual UK Asset Finance 50 ranking survey, published by Asset Finance Policy and Asset Finance International, has shown some fast growth rates of firms ranked in positions 40 to 50, or smaller firms outside of the top 50.
Much of this part of the market is brokered, with certain of the firms backed by private equity companies named in the FT article and others by the Government’s British Business Bank.
It seems very likely that that some more established broker channel funders have lost a little market share as a result (in practice, offset by a rise in vendor-introduced business for some).
But as a percentage of the overall broker channel and especially as part of the wider asset finance market, what’s happening here isn’t huge. This is also the most regulated part of the market. These are the lessors writing smaller deals with unincorporated businesses, tightly regulated (possibly unreasonably so) as consumer credit by the FCA.
Yes, there are signs that a few of the of the fastest growing firms in this part of the market have experienced high default rates or regulatory compliance failures, but firms learn from these expensive mistakes. It doesn’t take long for problems like this to be followed by underwriting and management changes.
Perhaps the most concerning part of the FT article is the suggestion that larger lenders are pushing funding out at unrealistic rates.
There’s an element of truth in that too, but it’s hardly a breaking news story. Ever since the Government launched its Funding for Lending Scheme in 2012, the largest banks have had strong incentives to maintain or grow their lending to businesses, including (from 2013) through leasing.
Furthermore, for those using advanced risk models for prudential regulation calculations, leasing returns can be more attractive than they might first look.
These large bank-specific factors have arguably distorted the market, but only for the lowest risk lessees and assets.
Possibly those most feeling the effects are captive funders of plant and equipment.
Given captives’ role is to help customers fund investment in their parents’ equipment, arguably it’s no great problem if low-cost finance is available from other sources.
It appears, then, that apart from a bit of a scrap for broker channel market share at the bottom of the market, not so much has changed to warrant the FT’s “overheating” headline.
In general, the asset finance industry is diverse, competitive, healthy and just back to its usual scale.
Asset finance is also far from loosely regulated, as most of the volume is provided by banks that don’t differentiate between regulated and unregulated business in their approach to lending (and they are now signing up to the new voluntary Ccde of practice on leasing from the Lending Standards Board).
Most other large firms are regulated by the FCA or are captives or supply channel partners for whom the incentives to avoid cutting any corners are persuasive.
As the FT article concludes by quoting a banker at one UK high-street bank, there’s should be no downside for the lessees from the cut and thrust of the asset finance market.
The stability of the market, as shown in the Asset Finance 50 surveys, might suggest the same is also true for most lessors who are taking a pragmatic and responsible long-term view and willing to accept realistic returns on investment.
* Julian Rose is director of consultancy Asset Finance Policy Limited and is author of the A-Z of Leasing and Asset Finance. For more information on the current market visit the 2018 UK Asset Finance 50.
