Lending landscape

DEALERS SATISFACTION WITH LENDERS IS AT AN ALL TIME HIGH

Recently, J.D. Power & Associates released the findings of its 2013 Canadian Dealer Finance Satisfaction Study. The survey found that across the board, dealer satisfaction with the services lenders provide has increased significantly. In fact, this year, satisfaction across all four segments — prime retail credit, retail leasing, floorplanning and sub-prime was at its highest since the study first began, back in 1998.

Prime retail satisfaction was listed at 883 out of 1,000 points, while leasing ranked at 858, floorplanning at 910 and sub-prime at 846. This news comes from an automotive sector that has shown remarkable buoyancy over the last few years, following the Great Recession of 2008-09. Last year, 1.67 million new cars and trucks were sold in Canada and many industry observers believe that 2013 will witness strong results as well.

And yet, this follows on the heels of a recession that caused great upheaval in the auto industry. Two of the big three Detroit OEMs had to be restructured with U.S., Canadian and Ontario government assistance, while the third also went through its own reorganization.

On the retail side, new car sales saw sharp declines in 2009 and leasing, which in Canada was accounting for approximately 46 per cent of the market prior to the recession, plummeted to less than 10 per cent. And yet here we are, five years later, with sales close to record numbers and both dealers and lenders working together like never before. So what has happened and more importantly, will it continue?

Lubo Li, senior director and financial practice leader, J.D. Power & Associates

UNDERSTANDING NEEDS
Lubo Li, senior director and financial practice leader at J.D Power & Associates in Toronto, thinks the fact that business is currently going well in the auto retail sector is a key factor for the growth in lender satisfaction among dealers, though he says it has also been driven by a greater emphasis on providing better quality service. “Whether it is banks or captives, there is a greater focus on ‘people interaction,’ on reaching out to the dealers.”

Li says that lenders are understanding that it is important to build relationships with their dealer clients, to visit them frequently in the field and be able to provide them with the services they need, when they need them. “Whether its services relating to retail, training, auditing, program clarification — it is a number one priority.” He says there has also been a key emphasis on reaching out to dealer clients in remoter areas and that in itself has also been a key driver in the increase in satisfaction among lenders overall.

But what about risk? With longer and longer vehicle finance terms becoming the norm it seems, and the cost of acquiring inventory for many dealers, plus a multitude of factory imaging programs, which are requiring dealers to invest significantly in upgrading their facilities, should that be cause for concern among lenders and for that matter, dealers too?

Michael Hatch, chief economist with the Canadian Automobile Dealers Association says that while automotive retailing is a very capital intensive business and the stakes are high, so far the business seems to be strong, with no major concerns looming on the horizon.

LOW DEFAULT RATES
Although there’s been much talk about Canadian consumer debt reaching record levels and this is reflected in the auto sector, where a growing number of consumers now have negative equity in their vehicles, default rates on loans remain at historic lows. “Normally if the debt level keeps rising, default rates will start creeping up but we haven’t seen that yet,” says Hatch. He also notes that while super long payment terms and negative equity do get a lot of press, many buyers in the market today, still choose to stick with shorter more “traditional” financing terms for their vehicle purchases and continue to trade vehicles every few years, despite cars lasting longer than ever before.

So for both dealers and lenders, it appears there’s reason to be optimistic. And that’s perhaps reflected in some of the products being offered in the marketplace, including a growth in sub-prime auto financing. Michael Buckingham, Senior Director, Automotive Finance at J.D. Power & Associates in the U.S., says that while the sub-prime market is essentially saturated south of the border, in Canada, things are slightly different with a few of the major banks driving a lot of the business, along with some smaller players and captives.

GREATER DISCIPLINE
However, because cars tend to be depreciating assets, and loans are made on current rather than future asset values, there’s greater credit discipline when compared with the highly-publicized U.S. sub-prime housing market, where exotic mortgage loans tied in with asset-backed securities caused default rates to skyrocket, triggering an economic crisis.

Buckingham says that when it comes to sub-prime auto financing, there’s a continuing desire by lenders to provide solid support for their dealer clients. “I’ve met with a number of financial institutions in the last 60 days,” he said during a recent telephone interview with Canadian auto dealer “and there is a continuing appetite to provide that support to the dealers, whether it is through floorplanning, expansion or real estate loans, since it also helps them in other product sets and also general banking.”

Besides inventory, another key area where dealers are seeing significant cost increases concerns real estate. The desire by OEMs to push for image programs in addition to increased sales volumes, along with low interest rates, has helped fuel the growth in multiple franchise dealer groups over the last few years as dealers and lenders look to spread both risk and fixed costs. Buckingham says that while many of these groups see an increasing need to grow their business, the fact that market has been and continues to be healthy, has significantly bolstered dealership evaluations, which has actually slowed down the rate of store acquisitions in many cases.

Besides the bigger dealer groups, there has also been a growth in smaller operators seeing the value in expanding their operations too, perhaps acquiring one or two more stores and that’s been driven by dealership valuations and also lender support to acquire or build new facilities. “We’ve seen a lot of that,” says Buckingham, “both in Canada and the U.S. where dealers are adding a second or third franchise for size and scale.”