Are banks to blame for weaker car sales?

This article first appeared in The Edge Malaysia Weekly, on November 6, 2017 - November 12, 2017.
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THE number of vehicles sold in Malaysia annually has come down from the peak seen in 2015 and carmakers, particularly local ones, say one of the key reasons that has made boosting sales volume difficult is banks’ more stringent hire purchase loan approvals.

The country’s largest carmaker by volume, Perusahaan Otomobil Kedua Sdn Bhd (Perodua), recently said that this continues to be one of the industry’s biggest challenges.

“Approvals for hire purchase loans continue to be a big challenge for us because the majority of our customers — about 85% to 90% — rely on loans to buy cars. While bookings for our vehicles are still relatively good, the conversion rate (from booking to registration) is less than 50%. The conversion rate used to be in the 60% to 70% [range] … now, it’s only 48% on average,” its president and CEO, Datuk Aminar Rashid Salleh, told reporters two weeks ago.

While there could be other reasons for the lower conversion rate — such as keener competition from rivals and weaker consumer sentiment — loan approvals play a big part, he remarked. He said it would help if banks showed flexibility in approving loans that the carmakers themselves think have merits for the lenders’ consideration.

“It (the approval for loans) is even more stringent than before,” Malaysian Automotive Association (MAA) president Datuk Aishah Ahmad tells The Edge in a phone interview.

She says with the MFRS 9 accounting standard kicking in for financial institutions next year, banks are going to be even more cautious about the new loans they extend as they would be hit with much higher provisioning should the loans turn sour.

In a nutshell, the new accounting standard requires banks to make provisions over the entire lifetime of a loan should it become non-performing.

“So they are more cautious now … they want to make sure that whatever loans they extend will not turn non-performing” Aishah remarks.

She says it is not just the national carmakers that are feeling the effect of the tighter loan approval process. “It’s all of them, it’s across the board.” MAA is the association that represents the interest of the automotive industry.

According to MAA’s sales data, total industry volume (TIV) fell 13% to 580,124 last year from a record 666,677 in 2015. It was the first year-on-year decline after six consecutive years of growth. It was also the first time in six years that the TIV fell below the 600,000 mark. The last time was in 2009, when the TIV came in at 536,905 units.

This year, MAA is projecting a moderate growth of 1.7% to 590,000 units, which is still below the 600,000 mark. So far, for the first nine months, the TIV stood at 425,711, which is a 1.78% growth over the same period last year.

Among the factors that MAA took into consideration when making its sales volume forecast for this year were the more challenging global economic environment, a depreciating ringgit, the continuation of stringent approvals on hire purchase by banks, the popular usage of Uber and Grab services, and moderation in consumer spending.

But is there merit to the automotive industry’s claim that banks are being more stringent in their approvals?

Based on Bank Negara Malaysia’s monthly banking statistics, the average approval rate — that is, loans approved divided by loans applied — for automotive loans within the banking system stood at 54% as at September, on a three-month moving average basis.

This compares with 55% exactly a year ago in 2016, 56% in 2015 and 54% in 2014.  

This suggests that the lenders’ approval rates have not really come down by much.

“But this doesn’t necessarily mean that what the carmakers say is not true. There are two things happening today. First, is the fact that some banks are finding auto financing not too profitable a business to do because it’s too competitive in terms of the rates. When you take into consideration the credit costs and all that, the margins are too thin, so some banks are shying away from auto financing,” a banking analyst observes.

“Second, is that the customers coming onstream these days are poorer credit quality borrowers, and therefore, it’s very difficult for banks to approve the loan because the average consumer is quite geared up. These are the two main reasons that are hindering the market right now. So, in some cases, what the carmakers say is true — customers that went to banks that are trying to trim back on their auto financing portfolio probably faced more stringent approval processes. But it doesn’t apply across the board for all banks.”

He went on to say that earlier this year, some banks tried to raise their auto financing rates but competition was so tight that the rates have since been driven back down again. Auto loans are mainly fixed rate loans.

“To be fair, banks may, to some extent, want to shy away from auto financing. When we talk about a Basel III risk-weighted capital framework and all that, it may not be a comfortable segment for them to do. And with MFRS 9 coming, I wouldn’t be surprised if banks are being extra cautious … because the default rate profile tends to be higher for auto loans, so it’s something they have to be careful of,” the analyst adds.

That said, the gross impaired loan ratio for auto loans is low, at 0.92% as at September, compared with 1.12% for residential property loans. It should be noted that applications for passenger car loan have been volatile, falling 14% year on year in September after a 6% contraction in August and a 20% growth in July.

Meanwhile, the head of a local bank’s consumer banking operations says loan approvals depend on customer affordability. “Some banks are stricter than others in their approval processes, but it all boils down to affordability.” He adds that it is wrong to assume that banks favour loan disbursements to non-national cars.

“In our case, we do not discriminate between the two simply because we have risk-based pricing applied in our credit scoring, in the sense that if your risk grade is better — regardless of whether you’re buying a national or non-national car — you’ll get a better pricing. We do not look at whether you’re buying a national car or non-national car but rather, we look at the individual buying,” he remarks.