TRIS Rating holds a stable outlook for the automobile hired-purchase (HP) industry. The automobile HP industry in Thailand tracks the automobile industry. Sales of new cars began to recover in 2017. As the result, we are more optimistic about the performances of companies which offer automobile financing in 2017 and years ahead. During the first half of 2017, new car sales grew by 11% to 409,980 vehicles. According to Toyota Motor (Thailand), sales of new cars will reach 830,000 units in 2017 up, for the first time in 4 years, by 8% from 2016.
TRIS Rating expects non-performing loans across the industry and at rated companies to decline further over the next 18 months. The interest rates are likely to remain low for the near future. As a result, we expect most HP financiers to be able to maintain their loan margins and financial performance over the next 18 months.
In addition, we expect that automobile HP lenders will be affected by the implementation of a new accounting standard so-called the International Financial Reporting Standards 9 (IFRS9) which will be effective after 1 January 2019. According to IFRS9, the ‘incurred loss’ model used in the old IAS 39 standard will be replaced with an ‘expected credit loss’ model. This change means that financial institutions and non-bank creditors must set provisions for the present and future expected credit losses before the loss event occurs. TRIS Rating expects to see higher provisions for loan losses at automobile HP lenders. The higher provisions will squeeze HP operators’ profitability over few years.
Industry Risks Faced by Automobile Hire-Purchase Companies
Automobile HP services in Thailand are offered by banks, captive finance companies, and other local finance companies. In addition to financing purchases of new cars, some of these companies also provide loans to retail customers who purchase used cars, motorcycles, or commercial vehicles.
As of the end of June 2017, the number of registered vehicles in Thailand (excluding motorcycles) totaled 17.23 million units. New car sales in Thailand grew by an average of 21% per year between 2000 and 2005. Car sales dropped between 2006 and 2009 because of an economic slowdown spanning these years, then grew in 2010, but slumped again in 2011 because of the great flood. Sales of new cars have whipsawed since the government implemented a tax incentive program for first-time car buyers. The program affected car sold between 2012 and mid-2013. Demands for passenger vehicles jumped when the program took effect, but declined after mid-2013 because the tax incentive just pulled forward future sales. New car sales shrank by 13% on average per annum between 2013 and 2016.
The automobile HP industry also suffered from sluggish demand for automobiles during 2014 to 2016. The value of outstanding automobile HP loans declined for the eight rated issuers and the industry, as represented by the 19 companies. As the value of loans slumped, the ratio of non-performing automobile HP loans (NPLs) rose in 2013 and 2014. The ratio stayed high, holding over 1.7% in 2016. A huge supply of repossessed vehicles significantly depressed the market prices of used cars. Prices slid by more than 30% on average in the second half of 2013 and in 2014. The effects of the first–time car buyer tax incentive program, as well as unfavorable market conditions and a sluggish economic squeezed profits across the industry during 2013 to 2014. Lenders made huge loan loss provisions and saw higher losses from the sales of repossessed vehicles.
Margins rise as funding costs decline
Across the industry, as represented by 19 automobile HP companies, funding costs dropped. The drops were attributed chiefly to the low costs of funding attainable because interest rates have remained low. The average return on average assets (ROAA) and the spread rose consistently from 2013 through the first quarter of 2017.The average yield of automobile HP loans declined slightly between 2013 and 2015 for the eight rated companies and the industry proxy of 19 automobile HP lenders.
Yields and spreads vary by product
The credit risks and the financial risks in the automobile HP industry vary by the type of product offered and by customer type. HP lenders that focus on new passenger cars, produced by the popular auto makers, are more likely to control the credit risk of their customers more easily than the HP lenders which focus on used vehicles. TRIS Rating believes that the demand for passenger cars is more stable than the demand for commercial vehicles. Demand for commercial vehicles is influenced to a greater extent by the economy and business conditions. Demand for passenger cars is derived by population growth, household income, consumer confidence, and other factors such as personal values and tastes.
Local automobile HP and non-bank financiers face a disadvantage against bank-based peers, as the latter are able to access lower funding costs, mostly through deposits. From 2015 through 2016, the average funding cost of bank-based automobile HP lenders ranged between 2% and 3%. By comparison, local HP lenders carried funding costs ranging from 2.8% and 5.2%. The local HP lenders have an incentive to provide services to riskier customers and offer products which yield higher returns (yields). The average yield of local automobile HP lenders ranged between 8% to 17% during 2015 and 2016. Interest yields for bank-based lenders ranged between 6% and 7.5%.