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Australia: The Finance and Leasing Landscape

Australia: The Finance and Leasing Landscape

By Farooq Ghauri, NETSOL Technologies Australia on 04-03-2021

Australia has maintained itself as a dominant force in the Asia Pacific region, and prior to the unprecedented crisis of COVID-19, its economy sustained uninterrupted, recession free growth for nearly three decades. In 2019, Australia's GDP was worth US$1392.70bn, as per official data released by the World Bank. According to the Australian Bureau of Statistics, the country's economy plummeted 7% from April to June 2020 due to the pandemic.

With a large mixed-market economy, Australia is part of the top 15 economies across the globe. The 2018 World Economic League Table, published by the London-based Centre for Economics and Business Research, projected that Australia will rise from the 13th largest economy in the world to the 11th by 2025.

The current crisis has had devastating effects globally and has brought unparalleled consequences upon economies worldwide. According to the International Monetary Fund (IMF), it is the worst recession in a century. However, with lockdown restrictions being lifted and many businesses reopening, Australia has started to slowly get back on track.

Last year, Fitch revised Australia's 2020 GDP forecast to a reduction of 2.7% from a decline of 5% previously, displaying better-than-anticipated economic data and relative achievements in combatting COVID-19.

Australia has a powerful, sophisticated and competitive financial services sector, which is seen as the highest contributor to the national economy. Coupled with a strong regulatory system, the sector has maintained itself as a primary driver of economic growth and will likely remain as the most significant sector for the country in the future.

Australia has a diverse array of financial products and a large, broad range of financial service providers that continue to provide more opportunities and stimulate growth and development in the country. Leasing is a mature product in Australia having been offered as part of a portfolio of finance methods for over five decades in the country.

Equipment Leasing

According to the Australian Bureau of Statistics, equipment financing and leasing account for around 40% of total capital expenditure in Australia. It is anticipated that the financial services sector will continue to be well positioned to play its vital role in supporting the Australian economy's productive base in the years ahead. Primary providers of finance and leasing facilities in Australia were conventionally banks and finance companies (including bank-owned lenders, general financiers and captives). Over the last 10 years, nearly all the bank owned finance organizations have been assimilated into their parent companies. While banks have been the main source for leasing and other equipment finance, improved access to financing has increased the share of captives and independents.

It was estimated by the Australian Finance Industry Association that at the end of the financial year 2019, total new equipment finance (inclusive of fleet leasing) was A$47.7bn - compared with year end 2018, which was A$47.2bn. Excluding fleet leasing, equipment finance represented A$40.4bn, compared with year-end 2018, which was A$40.3bn.

From this, A$8.7bn accounted for finance leases, A$5.7bn for operating leases (inclusive of fleets), A$1.9bn for hire-purchase and A$31.3bn for chattel mortgages. Not including the fleet leasing sector, 36% was for motor cars and light commercials, 18% for trucks, trailers and buses, 3% for aircraft and other transport equipment, 6% for agricultural machinery, 5% for EDP and office machines, 4% for manufacturing equipment, 14% for mining and construction and 13% for other items.

Net receivables have been displaying growth since 2015, and to June 2019, increased to A$112bn from A$107bn the previous year.

Impact of COVID-19 on the Australian Automotive Sector

As the unprecedented crisis of COVID-19 spread across the world, businesses across all industries globally were severely impacted. Australia was no exception, and the pandemic has adversely affected the Australian automotive sector.

New vehicle sales in Australia include passenger cars, SUVs, light and heavy commercial vehicles. As the pandemic impacted the automotive industry, in March 2020, new car sales dropped by approximately 18%. According to the Federal Chamber of Automotive Industries, 81,690 new vehicles were sold in March 2020, a reduction of 17.9% from March 2019.

Additionally, this also represented a decline compared to previous months.

Further statistics for April 2020 suggest that in Australia, at least A$1bn more was spent on purchasing new vehicles in April 2019, compared with April 2020. These decreases in vehicle sales can be attributed to the transition to working from home, adhering to social movement restrictions, reduced consumer confidence leading to Australian's deciding to save rather than spend in light of the pandemic and the increase in unemployment in the country. New vehicle sales data for May 2020 showed some signs of recovery when compared to April.

However, despite a hard-hitting three months, new vehicle sales unexpectedly surged in June 2020, providing an unsurpassed result in the last 12 months. The number of new vehicles sold in June signified a reduction of only 6.4% when contrasted with June for the previous year, alongside a huge difference to the 17.9%, 48.5% and 35.3% decreases in March, April and May respectively.

The Federal Chamber of Automotive Industries termed vehicle sales in June being down just 6.4% year-on-year as 'the strongest result since the initiation of the COVID-19 crisis'. The recovery has been attributed to a number of key factors, including restrictions being lifted, an extension of the government's instant asset write-off scheme and an increase in activities from both automotive companies and dealerships that have been offering a diverse range of affordable packages for retail customers. Statistics from this June represent the highest monthly result since June last year.

The instant asset write-off scheme implemented by the government enabled Mercedes, BMW and Audi with immense growth in sales. The country's number one selling vehicle, the Toyota Hilux Ute, recorded their highest all-time sales.

Federal Chamber of Automotive Industries' Chief Executive Tony Weber provided some positive outlook towards the future. He stated that there could be a quick turnaround once there is the availability of a vaccine to treat COVID-19 and consumer confidence resurfaces. In Weber's perspective, longer-term growth would take place due to the structure of the Australian economy, the government's stimulus measures pertaining to the automotive sector and important matters related to consumer finance being addressed.

Weber stated that the significance of the Australian government in enabling the automotive sector is to attain the right regulatory balance pertaining to vehicle finance in the country. According to him, a 'balanced approach was required, which both protects consumers as well as promotes sales and growth in the marketplace. He displayed signs of confidence in the government doing so.

Once the demand for new vehicles normalizes, automakers and dealers will return to a more stable position. It is pertinent to note that prior to the current unprecedented crisis, in the 12 months to November 2018, Australians borrowed A$8.1bn to purchase vehicles. According to the Australian Bureau of Statistics, 19% of the 1.1m+ new vehicles sold during that timeframe were acquired via financing.

While prices for used vehicles reached their highest two month drop in March and April 2020, they rebounded strongly in the following month of May by 10.6%, according to Moody's Analytics, nearly returning them to pre-COVID levels. A number of aspects have led to the recovery of used vehicle prices including stock shortages of new vehicles, reduced fuel costs, decreased usage of public transportation and the reduction of domestic air travel.

In July 2020, used vehicle prices reached a record increase. Further data from Moody's Analytics revealed that used vehicle prices for July transcended for the second month running, with a large 16.2% increase on pre-COVID prices and a 30.8% surge on prices during the April 2020 collapse.

According to the Australian Automotive Dealer Association Chief Executive Officer James Voortman, passenger cars are Australia's third largest import and the automotive sector contributes nearly $13bn to the Australian economy. This highlights the impact and significance of the industry to the overall economy of the country.

In a report published by PwC Australia, in order to weather the storm, it was stated that it is important for financial services and auto finance and leasing companies in Australia to revive growth and adhere to swiftly changing market expectations through digital transformation, innovation and new business models that are imperative to not only reduce costs and increase revenue, but to survive in today's fast-changing marketplace.

Digital Trends and Forecasts

The rapid rate of technological advancements and increasing penetration of mobile devices, combined with changing preferences of customers has had significant effects on the ways in which financial services are planned, executed and consumed.

In Australia, the number of internet users rose by 265,000 between 2019 and 2020, giving the country over 22 million internet users and an internet penetration rate of 88% in January 2020. At the beginning of 2020, the country also had nearly 33 million mobile connections, which is equivalent to 130% of the total Australian population.

An analysis of digital trends and forecasts in Australia provides positive insights into the future of digitization of the finance and leasing industry in the country. Technologies such as Cloud Platforms, Data Analytics, Blockchain, Artificial Intelligence and IoT will play a critical role in driving economic growth in Australia in the near future. It was estimated, that in 2018, total spending on IT projects and services in Australia grew by 2.6% to $84.8bn.

According to KPMG, investment in the Fintech industry in Australia is becoming extremely diverse. In terms of number of Fintech organizations in the country as per size and investment, the two major and most significant sectors are Payments and Lending. The growth of capital markets and Wealthtech continues, alongside Blockchain, Insurtech and Regulatory Technology.

Digital transformation for auto captives, banks and finance and leasing companies is no longer a requirement, but a necessity in order to strive in today's unprecedented and challenging marketplace. By digitally transforming, financial institutions are enabled to effectively manage their complex multi-site and multi-currency operations and to thrive in hyper competitive markets globally. According to Deloitte, digital transformation could add as much as $45bn to Australia's GDP by 2021.

Digitally transforming enables superior customer experiences, streamlining of operational processes and new business models that are imperative to not only reduce costs and increase revenue, but to survive in today's fast-changing marketplace. In a report published by PwC Australia, it was stated that in order to weather the storm during these unprecedented times, it is essential for financial services providers in Australia to revive growth and adhere to swiftly changing market expectations through transformation. According to research, the current crisis of COVID-19 has accelerated digital transformation for Australian companies by an average of six years.

Australia's finance and leasing industry will remain a dynamic part of the country's financing market with equipment leasing in Australia accounting for nearly half of the country's total equipment capital expenditure. The financial services sector is highly developed and over the last five years, growth in annual business volume coupled with the high rate of car sales sourced by finance indicates the continuation of a thriving sector in the country.

Australia has a fast-growing Fintech market and recent research indicates that Fintech revenue is anticipated to increase at a rapid pace. Primary factors contributing to this growth are likely to be digital payments, personal and business finance, data analysis and financial infrastructure.

In the last two years, customer adoption of Fintech-enabled services has more than doubled in Asia-Pacific. According to the EY Global Fintech Adoption Index 2019, nearly 60% of digitally-active Australians are using Fintech-enabled products and services, up from 37% in 2017. It is predicted that the digital disruption that is currently taking place will continue even deeper in the near future, making Australia one of the leading hubs in Asia Pacific.

Written By:
Farooq Ghauri, NETSOL Technologies Australia

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