What the bank notes

The financial situation of many South African consumers and entities is not looking too good at the moment. GAVIN MYERS sits down with Standard Bank to discuss how this affects the vehicle finance market.

South Africa is in a tough space at the moment. This is the gloomy picture painted by Steven Barker, head of secured lending at Standard Bank South Africa, at a recent round-table discussion hosted by the bank.

“There are a few economic variables that indicate this,” Barker notes. “It’s looking a bit tough from an overall economy perspective; where gross domestic product (GDP) is currently and where it’s expected to go to. Things should get slightly better, but GDP will remain tight at the moment. We have at least a couple of quarters of negative news ahead.” Barker cautions that this is mainly a self-inflicted situation, as the country continues to grapple with toxic issues such as labour unrest.

Needless to say, then, that local consumers are delaying purchasing new vehicles, creating a gap for the used-vehicle market and causing new-vehicle dealers – especially those selling to private customers – much consternation.

He continues: “With inflation creeping past the six percent ‘comfort level’ set by the Reserve Bank, many potential car and commercial vehicle buyers could also be delaying purchasing decisions.

“Negative exchange rates also have a direct influence on interest rates, so watching the rand will be a trend going forward; it has a fundamental impact on this industry. As new vehicle prices move up it will give a bit of underpin to new car deals, but we see no improvements in the short term.”

Barker notes that, looking forward over the next 18 months, a tougher environment is to be expected, with further interest rate increases at some point. However, he worries what the impact of this will be while the economy is so depressed.

“History has shown that half a percent increase in the base interest rate results in vehicle sales dropping by about two percent,” adds Nicholas Nkosi, head of vehicle and asset finance at Standard Bank. “While this pressure has been avoided, the relief will undoubtedly prove to be temporary if inflation continues to cause concern to monetary authorities.”

“The market has become strongly driven by the individual consumer, and less so from the business market,” continues Barker, stating that the individual consumer accounted for 71 percent of the market sales in March 2014, and 67 percent of total 2013 sales. “That suggests that the tough time we’re seeing in vehicle sales will probably persist – we expect about a year of negative sales growth (down three percent by year end). Things shouldn’t get as drastic as we experienced with the financial downturn a few years ago – if overall growth starts to flatten it should be okay.”

So what has caused this? First, consumers are still highly indebted. In addition, vehicle affordability has been placed under pressure by the low value of the rand. Overall cost of ownership is also increasing – with the roll-out of open road tolling (limited to Gauteng, for now) and fluctuating fuel and maintenance costs.

“The cost of fuel (as an indicator of cost of ownership) shows that the actual cost of vehicle ownership is becoming much more than just the finance debt. This is especially true in the case of fleets,” says Barker. “In the fleet side you get a more clinical, number-driven approach, whereas in the consumer side there is still a lot of emotion – consumers still have a long way to go to get their minds around total cost of ownership.”

However, this doesn’t mean that it’s all roses and romance on the commercial vehicle side of the finance and sales equation – commercial vehicle sales are, as we know, also under pressure across all categories. Says Barker: “Fleets are getting older as replacement cycles are lengthened, and this has resulted in rapidly increasing vehicle maintenance costs. Fierce competition for loads between transport operators is also leading to reduced profit margins, placing further stress on the sector.

“When considering that fuel costs have increased considerably (and continue to fluctuate), insurance premiums are up, and wear and tear increases as vehicles exceed their replacement cycles (and their values depreciate), the pressures within the commercial sector become obvious.”

David Molapo, head of fleet management at Standard Bank South Africa, contextualises this, explaining that the average cost of filling up a (car’s) tank now stands at R890, up 73 percent from the average R515 in 2010. (The price of petrol has risen by 83 percent and diesel by 89 percent during this time.) “Fuel costs are the single biggest operating expense in fleet management; the staggering increase over the past four years has pushed the average cost of running a vehicle to over R4 000 per month.”

Likewise, average maintenance costs have increased by approximately 26 percent, from R2 600 in 2010, to R3 600 in 2014.

Further, Molapo says that toll fees, traditionally, account for nine percent of national fleet card spend by Standard Bank customers. The implementation of open road tolling in Gauteng adds about two percent when averaged across the entire country … “Fleets operating mainly in Gauteng are even harder hit, with some companies’ toll bill increasing by as much as 30 percent,” he cautions.

Barker advises that, while businesses are under strain, fleet managers must weigh up the increased costs of servicing older fleets (plus the increased down-time) against purchasing new vehicles. “When your maintenance costs outweigh the cost of a new vehicle, then the obvious choice of replacing becomes financially sound.”

Nkosi notes that there aren’t any real surprises on the commercial vehicle front; it’s still dominated by light commercial vehicles (LCVs). “The units are small though, nothing phenomenal. Together, passenger vehicles and LCVs account for 70 percent of sales,” he points out.

The average term of ownership, notes Nkosi, is also going to shift, with many financial institutions now offering 84-month terms. A perhaps unexpected influence on this will also be public transport. “As public transport gets better, we’ll see additional extended replacement cycles. People will make the trade-off decision to use public transport to the office and back and their cars on weekends,” he says.

It’s a gloomy picture indeed, but the bank is confident the situation is nothing consumers – both private and business – cannot weather. An interesting period lies ahead.