2011 State of the Equipment Finance Industry
Executive Summary:
The SEFA analysis and the interviews we conduct with industry leaders uncover a number of major themes that describe the current focus of the equipment leasing and finance business. Exploring these themes is one of the core missions of this State of the Equipment Finance Industry Report.
In 2010 themes centered largely on the industry’s relatively poor performance related both to growth and portfolio quality. Related topics included the continued operating challenges and, a recurring theme, the many areas of uncertainty. Interviewees were searching for light at the end of the tunnel. Many anticipated greater clarity by mid-2011.
Of course, mid-2011 has come and gone, and the uncertainties remain. Significant challenges continue for the industry, and clarity remains elusive. This year, virtually every interviewee commented on continued uncertainties related to the economy, accounting, the regulatory environment, and other areas. However, almost uniformly, this year’s interviews expressed a much more positive view of the state of their companies and the overall industry. As we will discuss below, our themes and the interviewees comments indicate that lessors have successfully emerged from managing through many funding, portfolio management, and related issues. Most consider themselves to be well positioned for profitable new business growth this year and beyond. In addition to interviewee comments and anecdotal evidence, the industry’s recent operating performance demonstrates that the industry is moving ahead proactively and is effectively managing through near-term uncertainties. Beyond the near term, the industry participants express considerable enthusiasm about the opportunities ahead.
Some of the major themes arising from our interviews and analyses include:
- Economic snapshot: in the near term, the economy will continue to struggle. Our economic snapshot portrays an economy that may have bottomed out but has yet to set a clear upward direction.
- The worst is over for the industry. While the macroeconomic environment remains volatile, most, but not all, executives believe that the industry performance has stabilized and has begun to slowly rebound from its bottom. Those companies that have survived the last few years are operating with stronger fundamentals (for example, related to funding and portfolio quality) and are now once again able to focus on growth.
- Uncertainty remains for the foreseeable future. While most executives state that the industry has begun to lift from the bottom of the cycle, they continue to express concern and hesitancy about the future path and pace of growth. Most lessors view the ongoing economic environment as relatively flat with little opportunity for the industry to take advantage of organic growth and do not expect significant growth until 2012 or beyond.
- Portfolio quality has improved. Losses are slowly returning to pre-recession levels, directly improving the bottom line. Further, the industry is paying close attention to the lessons learned during the downturn, maintaining strong risk management procedures.
- Many banks now view equipment finance as a growth priority, a turnaround from the recent past. Two years ago few banks encouraged growth within their leasing groups. Now, it seems as if all are. Banks are now deposit heavy and struggling with how to deploy these deposits to generate higher earning assets. In many cases, senior bank executives see their equipment finance groups as one solution to increase earnings while, also shifting the commercial banking culture to a greater sales emphasis.
- Increased focus on execution. Many players emphasize their focus on relentless execution related to sales activities and customer service.
- Captives have improved their competitive position. During the recession, captives “stepped up” to support their customers. Their equipment knowledge, strong servicing, and pricing power provide them with some substantial advantages. However, some competitors believe that multiple manufacturers will end their financing activities in light of concerns by the parent company that its capital can be better applied elsewhere.
- As a group, Independents are stronger. The Independent segment’s performance improved in 2010 and continues to strengthen in 2011.Within that segment, some Independents have developed specialized market niches and value-added customer relationships that can effectively withstand competitors and lead to continued growth.
- Verticals provide a significant growth advantage. Many of the companies achieving strong growth are doing so by effectively exploiting specialized areas of expertise. Developing specializations appear to offer a significant advantage to lessors in several areas, including marketing effectiveness, pricing, and risk management. This year’s interviews suggest that more players are evaluating and entering an increasing number of specialties as a path to growth.
- Open accounting issues are approaching final resolution. By the end of 2012 accounting issues should be resolved. Managers are now anticipating and proactively evaluating what these changes mean for their companies. Only certain segments of the business will be affected.
- The impact of proposed regulatory changes is becoming clearer. Regulatory changes are impacting almost all companies, with increased management time spent in areas that managers view as economically unproductive.
- Overall, a longer-term positive view overtakes near-term concerns. Events during the last two years tested the strength and resiliency of the industry. While players continue to manage through the rocky current environment, the industry is emerging from it with enthusiasm for the future.
The Overview section will discuss each of these topics in detail. Following that section, our analysis of the 2011 SEFA results discusses changes in performance over the last year, updated with year-to-date information whenever possible.
Table of Contents:
Preface
- Introduction and Methodology
- Interviewees
- Definitions
- Study Purpose
Executive Summary
Overview of the Equipment Finance Industry
- Economic Snapshot: a struggling economy
- The worst is over for the industry
- Uncertainty remains for the future
- Portfolio quality has improved
- Equipment prices have rebounded
- Many banks now view equipment finance as a growth priority
- Increased focus on execution
- Captives have improved their competitive position
- Independents are stronger
- Spreads are eroding
- Accounting issues are approaching final resolution
- The impact of proposed regulatory changes is becoming clearer
- A longer-term positive view overtakes near-term concerns
- Other areas:
- International
- Funding
- Technology
- Third-party paper
- De novos
- Innovation and change
Analysis of the ELFA 2011 Survey of Equipment Finance Activity
- Financial Performance
- New Business Volume
- Portfolio Performance
- Yield and Funding
