Gwen Moran 2016-03-14 13:20:50
Indicators point to slow growth, concerns for 2016
What a difference a year makes. While strong projections and optimism were reported from ELFA members heading into 2015, projections for 2016 are somewhat less rosy. Both the association’s December 2015 Monthly Leasing and Finance Index (MLFI) and the Equipment Leasing & Finance Foundation’s 2016 Equipment Leasing & Finance U.S. Economic Outlook Report showed indicators that recent strong growth trends may be slowing, amid global economic concerns and other factors.
Mixed News from Members
The year-end MLFI reported economic activity from 25 companies representing a cross-section equipment finance sector, which topped $1 trillion in transaction revenue in 2015. However, the index showed that while overall new business volume was up 105% from November to December 2015 in a typical year-end spike, new business volume was down 5% from the year before. This is a stark contrast to the 20% increase between December 2014 and December 2013. Cumulative new business volume was relatively stable for 2015 overall compared to 2014, rising just 0.4%.
The Foundation’s Economic Outlook Report, produced in partnership with Keybridge Research, also showed mixed news. According to the Outlook, investment in equipment and soft ware is expected to grow at a moderate 4.4% in 2016, down slightly from the 6% annual growth projection for 2015. The report, which is released in December and updated quarterly throughout the year, forecasts both investment and capital spending on equipment and analyzes factors likely to affect growth. The moderate growth forecast reflects concerns that economic weakness in the global economy, especially in China, low commodity prices and strong dollar are all reducing businesses’ appetite for investment, even as the U.S. economy strengthens and there is an elevated propensity to finance.
“In our committee’s last update call, everyone saw a decent December, a slight uptick in January and then steady continuation into the new year.”
–Conrad Eimers, Vision Financial Group, Inc.
Separately, the Foundation’s Monthly Confidence Index (MCI-EFI) for January was 54, which was down from the December 2015’s index of 60. 2, marking a two-year low, well below last January’s three-year high of 66.1. A variety of factors seem to be casting a shadow over projections for the coming year—not enough to snuff them out, but enough to cause some concern. The data and outlook also seem to be largely in alignment with what the Business Council Steering Committee (BCSC) chairs are seeing from their sectors.
“We’re cautiously optimistic,” said Conrad Eimers, Chair, Independent Middle Market BCSC and President and COO of Vision Financial Group, Inc. in Pittsburgh, Pennsylvania. “In our committee’s last update call, everyone saw a decent December, a slight uptick in January and then steady continuation into the new year. Outside of the macroeconomic factors, such as the Federal Reserve [increasing interest rates] and China, I think everyone is looking at this being a strong year.”
Eimers and three other BCSC Chairs reviewed the MLFI and Economic Outlook Report data and discussed their thoughts on the data and what they’re seeing in their own businesses and sectors.
“We’re all reminding ourselves that, yes, these numbers have gone up, but let’s look at the actual percentages. They’re still very low.”
–Kris Darby, Western Equipment Finance
Strong Indicators
Financial indicators remain strong. According to the MLFI, credit approvals totaled 80.2% in December 2015, up from 79% in November 2015, and total headcount was up 3.5% year over year. While December’s receivables over 30 days were 1.1%—unchanged from the previous month and up from 0.96% during the same period in 2014—they remained near historic lows. Charge-off s ticked up slightly to 0.41% from 0.30% the previous month.
Kris Darby, Vice President of Risk Management at Western Equipment Finance in Devils Lake, North Dakota, and Chair of the Small Ticket BCSC, said that an uptick in delinquencies and losses was a topic on her BCSC’s last call. She noted that members in her sector also reported a soft ending to the year—growth for many was in single-digits. In her business, she said, some of the delinquencies were attributable to a soft agricultural sector, an area of specialization. However, she noted that it’s important to keep those metrics in perspective.
“We’re all reminding ourselves that, yes, these numbers have gone up, but let’s look at the actual percentages,” said Darby. “They’re still very low.” She added that small-ticket sector has reported a slow start to the year and is braced for modest growth, mostly in the second half of the year.
Michael Sweeney, Chair of the Captive and Vendor Finance BCSC and Senior Vice President Originations, Vendor Finance at EverBank Commercial Finance, Inc. in Parsippany, New Jersey, agreed that the indicators overall are strong. “Any of us who have been in the business a long time are still somewhat overwhelmed by how strong the portfolio performance has been in the post-recession era,” he said.
Market-Based Opportunities
The Foundation-Keybridge U.S. Equipment & Soft ware Investment Momentum Monitor, which was included in the 2016 Economic Outlook Report, found that the 12 individual equipment and soft ware verticals tracked have markedly different performance profiles. Growth in industrial equipment, aircraft , medical equipment and computers were expected to remain stable to strong. However, agricultural machinery and mining and oilfield machinery were expected to slow or experience negative growth, given the decline in oil prices.
Eimers’ team continues to see growth in construction and trucking, although indicators seem to indicate a slowdown in those sectors, he says. Sweeney sees opportunity in healthcare technology and soft ware and various industrial equipment sectors. Darby sees technology, soft ware and construction as areas with opportunities for modest growth.
Alan Sikora, Chair of the Financial Institutions BCSC and CEO of First American Equipment Finance, a City National Bank Company based in Fairport, New York, sees strong growth in the aircraft sector, where his company specializes. However, he also sees opportunity in soft ware, which is another area of focus for his company. However, the Momentum Monitor warns that soft ware investment will likely see a slight moderation in growth over the next three to six months.
“[We’re] …still somewhat overwhelmed by how strong the portfolio peformance has been in the post-recession era.”
–Michael Sweeney, EverBank Commercial Finance, Inc.
Don't miss the latest data from ELFA and the Foundation:
Access ELFA's Monthly Leasing & Finance Index and Quarterly Beige Book at www.elfaonline.org/Data/MLFI/.
Download the Foundation's monthly Momentum Monitor, Monthly Confidence Index and quarterly Economic Outlook Report at www.LeaseFoundation.org.
“We’ve seen strong growth across the board in our soft - ware, technology and aircraft finance businesses,” said Sikora. “At First American, our organic new business growth volume was up 25% for the second straight year. In the markets we serve, we’re seeing both replacement of outdated equipment as well as expansion.” Other BCSC Chairs indicated that they’re seeing customers mostly in replacement mode at this time.
The Year Ahead
The coming year has a number of wild cards that the Chairs are watching. Economic weakness in China, low commodity prices and softness in the energy sector are concerns that could cause overall economic drag, possibly affecting the industry. Sikora said he isn’t worried—he believes the equipment finance industry is strong and the market opportunity is “so massive that for mid-sized financial institutions that can deliver on the needs of clients, 2016 will likely be a good year.”
Sweeney says that economic softness in China is affecting certain parts of the equipment finance business and credits the Equipment Leasing & Finance Foundation for pinpointing this as a potential problem months before many realized it would be. “I don’t think anyone foresaw what a dramatic effect it would have on U.S. markets,” he said.
Interest rate hikes are another concern. But, Eimers says the Federal Reserve is showing restraint in raising rates, watching carefully to see the economic impact of higher interest rates. Also looming on the horizon is the November 2016 Presidential election, which has the potential to slow purchasing later in the year. Darby says there was a slowdown during the last election cycle. Uncertainty is never good for business, she notes.
“In the markets we serve, we’re seeing both replacement of outdated equipment as well as expansion.”
–Alan Sikora, First American Equipment Finance, a City National Bank Company
Fueled by a strengthening U.S. economy, but facing obstacles on several fronts, 2016 will be a year to watch, most agree. While growth is expected, apparently it won’t come without challenges or at the fast-paced rate of recent postrecession years.
Gwen Moran is a New Jersey-based freelance business and finance writer.
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