Question to Doug Moody:
Doug, what are your views on the availability of capital to
bank-owned captives? What are your predictions around future
interest rate movements, and what effect will they have on dealers,
and the rates offered to finance customers?
Doug Moody: The
crunch has made all of us – captive or not – take a look at the way
we lend money: where we’re lending it, how we’re lending it, and
what sort of return we expect at the end of it.
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When someone like Daimler or Toyota is facing
cash flow issues, that shows how serious the squeeze is – a few
years ago, no-one would have predicted that this would be the case.
As a consequence, you’ve got to make sure you’re lending on the
right products for the right reasons – as liquidity is available,
but you have to pay more for it.
Mercedes-Benz Financial Services has an
advantage in a credit crunch environment in that we can use
depositors’ money, as a subsidiary of Daimler Bank. Access to funds
from a different source is valuable – for example, Daimler Bank ran
an offer for savers in Germany which resulted in €1 billion [£890
million] being deposited in three weeks.
Although predicting interest rate movements is
notoriously difficult, I think the cost of funds will slightly
decrease over the next couple of months. We think the cost of funds
will decrease up to November, while the Bank of England may
increase interest rates by the end of the first quarter of 2010, by
25 or 50 basis points. Two or three year swap rates may also
increase by 40 or 50 basis points in the first quarter of 2010.
Peter de
Rousset-Hall: The times when general rates go up are the
times when motor lenders can repair their margins.
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By GlobalDataQuestion to Chris Sutton:
Chris, how would you say the market has changed in terms of
liquidity available to motor finance providers – especially given
the need for motor finance providers to be able to achieve
acceptable rates of return for what is a capital-intensive
business?
Chris Sutton: As an
outsider to the motor finance market coming in, it is clear to me
that for several years returns have been lower than could have been
achieved in other financial services businesses. There has been
oversupply in the past, but now we have virtually completely
flipped to the opposite situation. If demand does pick up, how is
that going to be satisfied?
The advantage over the last year to 18 months
has been the power of the distribution channel has moved – people
were quite happy to cut each other’s throats to get another slice
of volume. Too much has been skewed towards the dealer.
But you can’t have a business with one only
side. How do we create a sustainable long-term business in which
manufacturers, dealers and finance houses all make some money,
while giving a fair deal to the customer?
There is an acceptance that these are cyclical
businesses. It doesn’t make dealing with rising arrears any more
palatable – particularly in the down years. The advantage we have
this time around is that the new business margins are at an
all-time high and that has cushioned the impact of the
recession.
David Betteley: In
two or three years, when everything is rosy again, new entrants may
come in and offer high commissions in order to grab market share,
which could spark off a whole new round of extreme margin
pressure.
Chris Sutton: If
demand increases, there will need to be new entrants to the market
to satisfy demand. We could even see a new entrant gaining a top
three spot.
David Betteley: In
the UK, dealers depend on commissions for their bottom line.
Without them, the network would fold overnight. We need a
longer-term structural change to wean dealers off commission, not a
dramatic change.
And let us not forget that without dealers,
motor finance providers would be left without by far our largest
route to market – we both need each other.
