Central banks globally are looking to control soaring inflation by raising interest rates.
How will rapid rate hikes affect asset finance lessors, customers and balance sheets?
6 IMPACTS OF RISING INTEREST RATES
ASSET FINANCE TREND SHEET
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While traditional lending models are becoming costlier, new models for salary sacrifice and electric vehicles will not be available or affordable for all. With on-road costs rocketing too, consumers could opt more for
pay-per-use instead of owning cars which will put assets on their financiers' balance sheets.
To offset costs with tax benefits, businesses might consider operating leases rather than finance leases. So, financiers must also prepare to get more involved in the asset lifecycle.
HIGHER BORROWING COSTS
Hikes on floating rate contracts could increase credit defaults and give finance providers cash management challenges. As well as strategies to assist customers, firms will need a better understanding of how payment holidays will impact their business.
Now that the post-pandemic “auto bubble” also looks set to “pop” in the U.S., car prices are finally coming down. As millions of lessees could owe thousands of dollars more than the value of their vehicles, further delinquencies are sure to follow.
MORE DEFAULTS
Higher interest rates should equal bigger profits for banks. But competitive pressures, a rise in provision levels and non-performing loans and leases all reduce earnings – and full-service financing affects budgets and profitability.
Mindful of current capital costs, some lenders are looking to rebalance their portfolios by selling their asset finance books to private equity companies. But with traditional banks seen to be more stable, it may prove difficult to tempt borrowers away to startups.
MARGIN PRESSURE
Credit risk profiles are likely to change significantly. Beyond usual reviews, asset finance firms will need to re-evaluate prices and revalidate scorecard cut-off models in light of the higher cost of risk.
The emphasis will be on detailed portfolio analysis – especially of the impacts of change on customers with fixed rate contracts – and more regular reviews of credit quality. Plus, capital regulatory scrutiny will make it more challenging for small to mid-size bank lessors to be competitive.
GREATER SCRUTINY
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FIS is a leading provider of technology solutions for financial institutions and businesses of all sizes and across any industry globally. We enable the movement of commerce by unlocking the financial technology that powers the world’s economy. Our employees are dedicated to advancing the way the world pays, banks and invests through our trusted innovation, system performance and flexible architecture. We help our clients use technology in innovative ways to solve business-critical challenges and deliver superior experiences for their customers. Headquartered in Jacksonville, Florida, FIS is a member of the Fortune 500® and the Standard & Poor’s 500® Index. To learn more, visit www.fisglobal.com. Follow FIS on Facebook, LinkedIn and Twitter (@FISGlobal).
About FIS
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FIS is a leading provider of technology solutions for merchants, banks and capital markets firms globally. Our more than 55,000 people are dedicated to advancing the way the world pays, banks and invests by applying our scale, deep expertise and data-driven insights. We help our clients use technology in innovative ways to solve business-critical challenges and deliver superior experiences for their customers. Headquartered in Jacksonville, Florida, FIS is a Fortune 500® company and is a member of Standard & Poor’s 500® Index.
About FIS
Cost-conscious consumers
Changing business behavior
Negative equity
Reduced cash flow
High capital costs
Lower revenue
Deeper analytics
Rising credit risk
Innovative solutions
Unprecedented challenges
Some lessors will need to review their funding and hedging strategies. If their finance has historically been variable, their balance sheet will be more exposed to rate rises.
Less access to cheap funding lines could make it equally difficult for non-bank lessors to restructure debt facilities and more expensive to get wholesale market funding than for bank financiers. With swap rates on the rise and block discounting as high
as 6%, there will be a lot of refinancing in the short to medium term.
FUNDING CHALLENGES
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Shift toward outsourcing
Stretched in-house resources
Within asset finance firms themselves, the combination of rising interest rates and inflation is taking its toll on internal resources. In the fight to attract and retain talented employees, firms are under pressure to raise pay and therefore increase their costs.
With talent now in shorter supply than ever, in the wake of the Great Resignation,
we could see even more organizations filling the gap with outsourcing, managed services and business process as a service solutions.
OPERATIONAL CONSTRAINTS
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Access new markets
Improve connectivity
Some lessors will need to review their funding and hedging strategies. If their finance has historically been variable, their balance sheet will be more exposed to rate rises.
Less access to cheap funding lines could make it equally difficult for non-bank lessors to restructure debt facilities and more expensive to get wholesale market funding than for bank financiers. With swap rates on the rise and block discounting as high as 6%, there will be a lot of refinancing in the short to
medium term.
FUNDING
CHALLENGES
Reduce delays
Increase visibility
Within asset finance firms themselves, the combination of rising interest rates and inflation is taking its toll on internal resources. In the fight to attract and retain talented employees, firms are under pressure to raise pay and therefore increase their costs.
With talent now in shorter supply than ever, in the wake of the Great Resignation, we could see even more organizations filling the gap with outsourcing, managed services and business process as a service solutions.
OPERATIONAL CONSTRAINTS
