Dr. Rob Wescott's presentation of the 2015 State of the Equipment Finance Industry
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Based on ELFA's Survey of Equipment Finance Activity, augmented with government and economic data, and incorporating insights from diverse industry executives, this is the comprehensive annual report on the health and future of the industry. The in-depth analysis contains market segment trends and benchmarking statistics to help you size up your place in the market.
Growth slowed in 2014 but remained above the 10-year industry average, as steep competition and moderate business investment limited expansion in the equipment finance industry. As measured by new business volume, industry growth decelerated from 9.3% in 2013 to 6.7% in 2014. Profitability remained healthy but not stand-out, as intense competition further compressed margins. Meanwhile, portfolio performance improved. Key findings from the 2015 State of the Equipment Finance Industry report include:
Continued Growth: New business volume growth slowed for the third consecutive year in 2014; however, at 6.7%, growth remained above the 10-year average of 4.4%. Independents outpaced Banks and Captives for the second straight year. At a robust 17.6%, Independents' new business volume growth was little changed from the previous year, while Banks' growth picked up from 6.2% to 7.4% in 2014, and Captives' growth fell sharply from 11.3% to 1.3%.
Intense Competition: As predicted last year, a hypercompetitive environment caused companies to compete on price and accept razor-thin margins, pushing spreads lower. The weighted average pre-tax spread slipped from 2.94% in 2013 to 2.80% in 2014. The Federal Reserve has kept interest rates at zero throughout 2014 and most of 2015. However, the Fed is expected to raise short-term rates in late 2015 or early 2016 â€” which will increase the cost of funds but also provide an opportunity to expand margins.
Record Portfolio Performance: A healthier economy and rising corporate profits allowed companies to maintain strong portfolios in 2014. Delinquencies, charge-offs, and non-accruals were little changed from 2013 levels. Additionally, industry players retained stringent credit standards last year, despite Keybridge's expectations for a slight loosening of standards.
Solid Financials: On net, profitability was stable in 2014, as operating profits ticked up from 35.2% to 36.2%. Return on Equity dipped, Return on Assets was unchanged, and Earnings Before Taxes increased. Low interest rates kept costs low, and interest expense as a share of both revenue and debt generally held steady.
Improved Productivity: New business volume per sales full-time equivalent ("FTE") increased nearly 4%, driven by gains in all three organization types. While competition has encouraged companies to maximize productivity and efficiency, it has also pushed them to develop competitive advantages. Banks tend to compete on price, while Independents offer niche services and more flexible deals to their customers.
A Mix of Uncertainties: The equipment finance industry faces several unknowns, both at home and abroad. Regulation is an ongoing concern, particularly for Banks, and government dysfunction (including threatened government shutdowns and debt ceiling fights) remains a threat on the horizon. Meanwhile, turmoil in the global economy could hurt growth in the U.S. and dampen business investment.
Incoming Accounting Standards: After decades of negotiations, the Financial Accounting Standards Board is set to finalize new lease accounting standards in the coming months. However, the standards are unlikely to be implemented before 2018, providing the industry time to adapt and prepare. Among other changes, the new accounting standards will move operating leases onto customers' balance sheets. While complying with these new rules may cause disruption for some industry members, at least initially, the new standards may also offer equipment lessors the opportunity to better advise and assist their customers.