The banks are back – with caution

Vehicle financing criteria for cars and light commercial vehicles appear to be more relaxed again, but credit applications for heavier commercial vehicles will still have to meet additional, sometimes very stringent criteria before a loan is approved, writes UDO RYPSTRA.

Wesbank’s announcement last month that vehicle repossessions had decreased by more than half, while credit applications and credit approvals had increased, bodes well for companies and entrepreneurs planning to purchase a car, pick-up, van or minibus to conduct their business. Sales statistics supplied by the automotive industry have increased – even in the medium, heavy and extra-heavy commercial vehicle sector, where sales dropped by up to 60% during the recession.

Wesbank, which is now involved in financing deals across the board, confirmed as much when sales and marketing executive Chris de Kock said that confidence levels in the three-and-a-half year history of its Vehicle Sales Confidence Indicator had reached 6,5 out of 10 among vehicle dealers in January, up from 5,7 in October 2010. The indicator reached a low of 4,2 points out of 10 in April 2009.

It also follows similar, quarterly surveys that Wesbank conducted after the 2010 FIFA World Cup which showed that there was a big decrease in the number of dealers reporting little market activity and an increase in the number of those reporting significant market activity. It also confirms a trend, confirmed by monthly statistics from the National Association of Vehicle Manufacturers of South Africa (Naamsa) that more buyers have been moving towards buying new vehicles rather than used vehicles, reversing the sales trend recorded throughout the recession. This also applied to the upper, heavy end of the market, with Naamsa and OEMS confirming that banks once again are participating.

Wesbank, which has more than 4 000 corporate clients on its books, reports it has also seen a significant improvement in the number of credit applications, which jumped to 4 350 per day, compared with a low of 3 200 per day during the recession.

At the same time, Wesbank’s repossession numbers have been shrinking, down from 2 300 a month, to less than a 1 000 vehicles a month. This compares with general repossessions in the South African vehicle market which had also come down from 7 000 a month, to around 3 000 vehicles a month.

More importantly for those seeking credit, Wesbank’s credit approval rate has increased by 11% since October 2010, De Kock said. “We have almost returned to the levels seen in the boom period.” The fact that Wesbank’s credit approval rate has increased by only 11% while credit applications have increased by more than 35% indicates that banks are still cautious about granting loans. But they also know that the creditworthiness of companies and people has improved, that liquidations and sequestrations have decreased. According to De Kock, the number of South African consumers with impaired credit records has declined for the first time since June 2007, with the number of credit-active consumers continuing to grow. “This turning point is quite a relief,” he said.

Big transport groups like Imperial and Super Group have shown that fortunes can be made in the freight industry. In fact, banks became so relaxed (or greedy?) during the build up to the Soccer World Cup that they were virtually “dishing out the money”, as De Kock put it. But big fortunes can also be lost as shown during previous recessions and the demise of big transport companies like the Roadcorp group in 2000 at the start of a three-year recession, and then Coal Trans in 2004.

History began to repeat itself in 2008 when the global recession struck. New projects diminished, vehicle sales took a nose dive, and fleet operators started losing money. In fact, finding the transport industry too risky, several banks and other asset financing companies retreated from the market, or only considered loan applications if the haulage contract was guaranteed over the length of the pay-back period and the vehicle manufacturer provided the necessary buy-back guarantees.

But even with risk-sharing in place, things can go horribly wrong. Roadcorp (which once owned Rauties Transport and Rent-a-Bakkie), disintegrated after disagreement among its directors and an email that ensured a drop in the share price to nearly zero, and consequently the group going into liquidation.

Coal Trans, with its “solid” Sasol contract and credit lines for a brand new trucking fleet, disappeared from the map after revelations of a R9,5 million kickback to a Sasol employee which ended in a conviction of fraud, a suspended eight-year sentence and a R20 million fine for its sole director.

Group subsidiaries can be sold and a fleet of trucks can be auctioned off (in batches, over time, so as not to flood the used truck market), to reduce losses, but it still takes time to do so, as demonstrated in the Roadcorp case where the third and final liquidation and distribution account was gazetted only last year – ten years later!

The question whether the financial sector overreacted by almost turning off the credit pump could be debated at length, but it has seen some positive side-effects. It has witnessed vehicle manufacturers strengthening their financial divisions and financing deals themselves. A case in point is the financial division of Mercedes-Benz South Africa, which financed almost 50% of its transactions a year ago, including 500 coaches for the Soccer World Cup.

Upturn
Truck sales typically lag behind passenger car sales by a few months through up- and downturns, and the upturn occurred in mid-2009 when passenger car sales started to pick up again. By August 2009, things started to improve for the truck market as well, with Mercedes-Benz South Africa (MBSA) commercial vehicles vice-president Kobus van Zyl being among the first to acknowledge that the country’s large banks had started to return to the market.

“We are not where we were before the crisis, but the banks are definitely playing the market again. Banks are moving back.” he explained.

A relative newcomer in this respect is Wesbank, which last year announced an “aggressive strategy” to play the commercial vehicle market. It has signed finance deals with OEMs like Volvo trucks, UD Trucks, Babcock Capital Equipment, and also joined hands with automotive and logistics group Imperial to form a business known as Imperial Fleet Management. Announcing its strategy, De Kock stated that the general trucking finance business model had always seen the bank taking the knock when a small operator failed, and not the vehicle seller or the company which had issued the operator with a transport contract. “Those days are now finally over as banks refuse to carry all the risks themselves and their new strategy where partnerships are forged at the point of sale, so the risk is shared by all.

This more cautious approach was unlikely to deliver “volumes similar to those before the economic crisis”. The new vehicle market is expected to continue growing by between10% and 12% in South Africa for 2011.

Dr Casper Kruger, vice president of Hino in South Africa is also positive. Commenting on January 2011 sales figures and low vehicle stocks, he said, “local financial conditions facing the supply industry, low interest rates, access to asset financing better than it was a year ago, and the rand holding up well against significant foreign currencies, should add further encouragement when fresh indents are placed on overseas source plants”.