16 July 2018

Financial Times: Banks warn about overheating UK asset finance market

Executives and senior bankers at some of the UK’s biggest lenders have warned about overheating in the £32bn asset finance market, as rising competition pushes down profit margins and encourages increasingly risky practices in the loosely regulated sector.

Asset finance — where businesses pay for expensive equipment such as vehicles and machinery through leasing or hire-purchase arrangements — has been a rare bright spot in a business lending market that has struggled to gain momentum in recent years.

However, executives at four banks, along with senior brokers and one of the most active private equity groups in the market have raised concern about the sustainability of recent growth at some lenders.

A lack of regulation and a large network of brokers who can connect lenders to borrowers means there are low barriers to entry, allowing established groups to easily expand into new areas and encouraging an influx of new lenders from fintech start-ups to HPS, a $45bn investment group spun out of JPMorgan.

In response, lenders have cut interest rates and increased the fees they pay to brokers to build market share. “It’s leading to an arms race to be the biggest, not the best,” said one executive.

Mike Geddes, compliance director at asset finance broker AFS and a board member at the National Association of Commercial Finance Brokers said: “You no longer have distinct categories of funder, they’re playing in each other’s back gardens. Everybody will point the finger at somebody else but they’re all playing the same game, because there’s so much cash in the market and its all chasing the same deals.”

Banks including Paragon, Secure Trust and Close Brothers have already noted the impact in their recent financial results. Close Brothers said earlier this year that it was relying on more specialist products to generate growth due to competition in its core business, while Secure Trust said it would cut back on some lending because “we are not prepared to compromise on risk or price simply to achieve short-term net balance sheet growth”.

The effects are also being felt at larger lenders, despite their access to cheaper funding. A senior banker at a big UK high-street bank said: “We often find ourselves having to walk away from transactions because we just can’t get close [to the prices on offer] — there’s a little bit too much liquidity out there.”

Full article on Financial Times (subscription required)

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