Asset finance: growing too fast?

Speaking at Leasing Life’s Chief Executives Lending Forum, Richard Jones looks at what could happen to the industry once the good times of low unemployment and low rates end. Lorenzo Migliorato reports.

Like most other lending segments in the UK, asset finance, both consumer- and business-oriented, benefitted enormously for the boom in credit demand that followed the 2008 crash. Finance and Leasing Association (FLA) members alone accounted for £32bn of new business in 2017, up by more than a quarter in three years.

The pace of growth for the sector is striking if compared to that of the UK’s economy: the country’s GDP has grown less than 4% over the same period. “Growth rates in lending have far outstripped anything that GDP could supply,” 

Richard Jones, Black Horse managing director and FLA chairman, told the audience at Leasing Life’s 2017 Chief Executives Lending Forum. His comments beg the questions: where has the extra demand come from – and is there reason for worry?

For Jones, a lot of the new demand for asset finance has come from a switch away from other types of facilities. 

“Asset-based lending has taken over other forms of lending for many companies, and that, I think, is a massive success story,” Jones said.

“Companies recognise the value of lending against assets, and it is the same for consumers.”

Jones called this “good growth”, which the country was able to achieve thanks to a benign environment: interest rates close to zero, GDP stable if sluggish, and low unemployment. In light of this, lenders should be careful about the future, which might not be as rosy as the last decade.

“The thing we may be lacking in terms of institutional memory is a high-unemployment recession,” Jones said. “That is the big question: we have not had one for a long time – 20 or 25 years.”

Consumer debt-to-income ratio has been low compared to historical levels, especially pre-crisis: it was 15% on average in 2017, well below the record 20% of 2014. However, that ratio keeps rising, and could resonate badly with a macroeconomic shock. “The debt servicing level of UK environment is very stable, but it has relied on a low-interest rate environment,” said Jones. But once interest rates start hiking to 1%, or 2% – which the Bank of England has signalled will eventually happen – “that picture starts to look very different”.

In the worst case scenario, such an economic shock could spell trouble for some pockets of the UK lending landscape. Regulators like the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority understand this, and have been carefully looking at where risks have been concentrating during lending growth. “I think one of the big themes that we will have going forward is, where is the risk sitting?” says Jones.

He says that whereas the big historical lenders have had to shift to savings and deposits as their main funding line, a lot of entrants are instead relying on private equity and securitisation. Those two elements are a good way of accelerating competition growth, but rely on a stable financial environment and liquid money.

“Those sorts of things are going to come under strain if the economy starts to suffer and consumer servicing ratios start to go north,” Jones says.

“I would not want to see competitors’ model collapse because they have not thought about where the risk is.”