Lenders move to adjust risk profiles

It has been a potentially important week for UK .

Asset finance and motor finance lenders in the UK after a number of businesses announced changes to risk profiles, and as a result, trading operations.

Deteriorating growth predictions, currency fluctuations, and Brexit-related contingency planning have all been affecting lender outlook over the past half year.

Mainstream press attention to motor finance products and Bank of England warnings over alarming consumer lending levels have also affected risk weighting of lenders.

“Lenders reported that default rates on both credit cards and other unsecured lending to households were reported to have increased significantly in Q2 [of 2017]” said the Bank of England – although it said that default rates in motor finance were much lower.

The Financial Conduct Authority has also announced an exploratory review in the motor finance area and on remuneration across credit and lending.

Boardrooms across the country have been watching the volatility of the last six months in the UK and have in some cases acted on the uncertainty that really began on June 16th 2016.

Asset finance has had huge numbers of new entrants enter the market in the past two years, driving up the competition while driving down pricing, margins, and risk weighting.

Additionally, the Funding for Lending and Term Funding Schemes, which have heavily subsidised funding for lessors and SMEs alike, are due to finish early in 2018.

A retraction from sub-prime

Secure Trust Bank Group subsidiary Moneyway has stopped doing sub-prime motor finance, it announced in its results this week.

Instead, it is now focussing slightly higher up the credit curve, in the nonprime sector, which it said was higher volume and lower risk, but lower margin.

Secure Trust Bank chief executive Paul Lynam said that since 2016 the bank had considerably reduced its activities in higher risk consumer lending and did so before the recent warnings from the Bank of England and regulatory bodies.

Then Motor Finance reported that Zopa was also intending to move away from subprime lending given the changing credit conditions.

Zopa said between 2010 and 2016, the UK saw continually improving consumer credit conditions and low levels of bad debt.

The lender added that the publically available data showed consumer default and insolvency levels were reaching levels not seen since before 2010, and that default rates on both credit cards and other unsecured lending to households were reported to have increased significantly in Q2 of 2017.

Glory days of growth at an end for UK asset finance?

In a revealing statement, chair of Secure Trust Bank, Michael Forsyth explained that the board had decided the risk of a downturn in the economy was so great that it would stop 100% lending of value against secured assets, or lending at 100% of the asset’s value for leasing.

“The rationale is that in an economic downturn, business insolvencies rise, which drives an increase in asset repossessions. This increase in assets for sale, coinciding with reduced demand, invariably leads to a fall in value,” said Forsyth.

“For some assets these valuation adjustments can be quite marked. Whilst I do not necessarily foresee a big increase in business insolvencies, the reality is that the economy is slowing and the outlook is increasingly uncertain,” he added.

Forsyth stopped short of criticising other lenders for offering loans at 100% or more against the value of the asset, at ‘historicallly’ low margins, but explained that the lender’s asset finance business would contract throughout 2017 and 2018, as new business shrank but while loans were still repaid.

As all lenders are probably aware, he added that the bank would react should risk: reward dynamics change.

A tightening of belts?

For the industry, some may see this as incredibly bearish behaviour, although there have been alarm bells ringing from the Bank of England for a while now.

There might be something in the constituency of the lender market at the moment.

The new diversity of lenders has strengthened the asset finance markets. Smaller lenders and alternative lenders picked up the lending gap left by the big banks.

But as many of the alternative lenders, who did not suffer the events of 10 years ago and the aftermath, this diversity may prove a weakness.

And within motor finance, the idea is the same, if the practice is different.

On the BoE blogging site, four economists from the bank wrote: “Most car finance is provided by non-banks, which are not subject to prudential regulation in the way that banks are. These developments make the industry increasingly vulnerable to shocks.”