The Asset Finance Outlook Report for H1 2024 from Asset Finance Connect provides critical insights into the auto and asset finance market, emphasizing key trends shaping the UK industry over the next six months.
While high interest rates and inflation might be waning, other significant challenges remain. These include escalating global conflicts, political and geopolitical uncertainties, regulatory and government policy interventions, and the potential impacts of a new government and election campaign on the industry's current direction. Additionally, the regulation-led marketplace continues to influence the UK auto and asset finance sector.
The report explores the outlook of the auto and asset finance community for the next six months. It presents findings from the half-yearly asset finance confidence survey, addressing the industry's lending and borrowing appetites, the asset types expected to thrive or falter, and funding concerns within the community, including potential issues arising from Basel 3.1. It also discusses the implications of higher operating costs due to staff, technology, and compliance, and the increasing risks the industry faces amid economic challenges.
Key findings
With falling inflation and the anticipation of interest rate cuts, confidence is growing that the UK economy and demand for borrowing are on the rise. After the disruptions of Brexit, Covid-19, the war in Ukraine, supply shortages, double-digit inflation, and political upheaval, lenders report that SMEs are beginning to show stronger signs of investment and growth. Captive and independent lenders exhibit a slightly greater willingness to lend than banks.
Green assets are highlighted as the fastest-growing sector of asset finance as companies invest in technologies that enhance sustainability, reduce carbon footprints, and mitigate exposure to energy price spikes. These developments benefit both the environment and lenders, though there is some concern over the residual values of assets without a used price history. Lenders are developing new business models to manage the entire lifecycle of assets as part of the circular economy. Banks are also keen to add green assets to their lending portfolios to meet their net-zero commitments, making asset finance a more attractive sector for support.
Despite these positive signs, the AFC asset finance outlook survey found that asset finance firms face rising cost pressures in all areas of operating expenditure, including compliance with regulatory changes, tech investments, and staff costs.
Regulatory interventions by the FOS and FCA, including the investigation into discretionary commission arrangements in motor finance, could have unintended consequences for the industry, warn asset finance firms.
The new Basel 3.1 regulation, requiring banks to hold more capital reserves against loans to SMEs, risks increasing finance costs for SMEs and testing banks’ commitment to the asset finance sector.
The risk of client defaults and administration is a significant concern among asset finance companies. Brokers are particularly worried about these risks, a concern supported by government data showing an 18 percent year-on-year increase in insolvencies in April.
The report includes commentary from leading asset financiers and technology providers, who share their perspectives on the survey findings and their outlook for the industry amid these challenging macroeconomic conditions.
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