Activity and Financing in the Vehicle Market

• The widespread activity of recent years in the vehicle market, and the decline in the value of second-hand vehicles, are attracting increasing attention to the leverage and the sources of credit of the companies operating in the field—vehicle importers and leasing and rental companies.
• The risk in this market is reflected in a sharp and unexpected decline in vehicle prices, because vehicles serve as collateral for financing the activity in the field both among households and among the companies themselves.
• The exposure of the financial system—the banks, the credit card companies, and the institutional investors—to this market was about NIS 40 billion in the third quarter of 2016, including both direct credit to households and to the companies operating in this field, and direct holdings of the securities (shares and bonds) of the companies.  While the exposure constitutes a significant portion of the outstanding credit of the credit card companies, it is only a small portion of the total assets of the system, and does not constitute a systemic risk to the stability of the financial system.

In recent years, there has been a marked and constant increase in new vehicle sales in Israel.  According to the Association of Vehicle Importers, there were 286,728 new private vehicles sold in Israel in 2016, more than 12 percent higher than in 2015.  The widespread activity in the vehicle market—and the concern that the large supply will lower vehicle prices significantly, since for the most part, vehicles serve as collateral against credit to the companies operating in the market—have attracted increasing attention to the leverage and the sources of credit of these companies and to the extent to which the financial system is exposed to them.

 

There are two main types of players in the vehicle industry in Israel: the importing companies, mostly privately owned, and the leasing and rental companies, mostly publicly traded.  The vehicle importers market new vehicles to both households and the leasing companies, and provide consumer credit mainly by spreading out the payments for a new vehicle.  Some of them do so through captive financing arms (subsidiary companies that offer financing for vehicle purchases from the parent company).  The leasing companies provide vehicle fleets to the business sector, private leasing services, and rental services in Israel and abroad, and sell vehicles at the end of their use period in the rental and leasing fleets.  In recent years, the companies have been expanding the field of transactions known as “zero kilometer”, in which they purchase vehicles wholesale from the importers, and then sell them as first-hand vehicles at a lower price and with higher financing rates, either through “regular” financing (on a payment plan) or through financial leasing.[1]  Against the background of the low interest rate environment, the vehicle companies enable a longer period of payments, and entitlement to additional credit beyond that provided by the banks and/or credit card companies.

 

Since the large vehicle importers are mostly under private ownership and do not publish financial statements to the public, it is difficult to estimate their volume of leverage or to outline the sources of financing for their operations.  However, it is possible to obtain a rough estimate by looking at the two publicly traded importers, since they are two of the five largest companies in the field.  At the end of the third quarter of 2016, the total assets of these two companies alone totaled about NIS 5.9 billion, while their total liabilities were about NIS 4.1 billion, for a leverage rate of about 70 percent.  Among the four large publicly-traded leasing companies, total assets were about NIS 17.5 billion, while total liabilities were about NIS 15.2 billion[2], for a leverage rate of 87 percent[3], while public companies in the business sector (excluding banks and insurance companies) had a leverage rate of 63 percent.  However, it should be noted that in the financial services, an industry similar to the leasing companies in terms of operations, leverage was 94 percent.

 

There is a unique risk of exposure to the vehicle industry as a result of the possibility of a decline in the value of vehicles encumbered as collateral to the entities financing the companies that operate in this industry, and that such a decline will exceed the forecast estimates.  Vehicles are the main encumbered assets of the companies, and if the used car market becomes flooded, most of their collateral may lose its value beyond the forecasts.  The vehicle trading companies are also directly exposed to the risk inherent in a decline in the value of collateral, through exposure to households and to the leasing companies.  Such a scenario may lead to borrowers returning the vehicles used as collateral to the merchants with a much lower actual value, thereby leading to large losses on the part of the importers and the leasing companies.  While the companies record the encumbered vehicles at a reduced value (lower than their price list cost), and also reduce their value when they encumber them to the financing entity, there is a risk that the value of the vehicles will decline beyond the forecast.

 

In addition to this risk, the financial system is also directly exposed to the risk of default of the vehicle trading companies.  If the economy is hit by an extreme recession and unemployment, the firms and households leasing vehicles may default, thereby leading to heavy losses to the leasing companies and importers.  Moreover, if the interest rate in the economy increases and impairs households’ repayment abilities[4], they may default and lead to heavy losses to the importers.

 

The financial system is also exposed to the vehicle market through a number of channels.  First, the banks are exposed to this market through the consumer credit they provide to households.  The outstanding balance-sheet credit the banks provided against encumbered vehicles was about NIS 9.5 billion in the third quarter of 2016, 7.1 percent of outstanding consumer credit provided to households.  The amount provided by credit card companies was NIS 1.9 billion, about 20 percent of the outstanding consumer credit they provided.[5]  In addition, the banks are exposed to importers and the leasing and rental companies through loans, and balance-sheet credit to the vehicle trade industry was almost NIS 25 billion, 6.3 percent of outstanding credit to the business sector.[6]

 

The institutional investors are also exposed to the vehicle industry, through direct holdings of the securities of the companies active in the field and direct loans they provide to those companies.  Total direct holdings in the large leasing companies was about NIS 1.5 billion at the end of the third quarter of 2016, while total direct holdings in importers was about NIS 700 million.  These amounts together comprise about 0.17 percent of total institutional investors’ holdings, while in the same period in 2015, they accounted for 0.14 percent of holdings.  The volume of loans provided by the institutional investors to the companies in the vehicle industry is NIS 1.2 billion, about 1.8 percent of their total loans, while in 2015, the amount was NIS 674 million, about 1.3 percent of total loans.[7]

 

The foregoing survey shows that the financial system is increasingly exposed to the vehicle industry and its offshoots, and that the current exposure is not negligible in terms of its volume (about NIS 40 billion).  However, since it accounts for a small share of the system’s total assets, the systemic risk is not large.  With that, it should be noted that the exposure accounts for a small share of the total assets of the banking system and of the institutional investors, but a significant share of the outstanding credit of the credit card companies.

 

The financial system’s exposure to the vehicle industry (NIS million)

	Type of exposure	2015:Q3	2016:Q3
The banks	Outstanding business credit to the vehicle trade industry	22,924	24,855
	As a share of outstanding business credit	5.86%	6.16%
	Outstanding consumer credit in vehicle encumbrances	n/a	9,542
	As a share of outstanding nonhousing credit	n/a	7.12%
The credit card companies	Outstanding consumer credit in vehicle encumbrances	1,637	1,932
	As a share of outstanding credit to private customers	22%	20.2%
The institutional investors	Holdings of vehicle importers	507	685
	Holdings of leasing companies	1,190	1,523
	Outstanding direct loans to the vehicle industry	674	1,168
	Exposure as a share of total managed assets	0.2%	0.26%
	Exposure as a share of total risk assets1	0.35%	0.46%
Total exposure of the financial system		--	39,705

¹ Risk assets—managed assets minus the government bonds portfolio.

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[1] In these leasing transactions, the customer makes a pre-determined monthly payment for the vehicle.  During the lease period, the vehicle remains the property of the leasing company, since it serves as collateral for the monthly payments.  At the end of the period, the customer is permitted to (a) purchase the vehicle for a pre-determined price, (b) return the vehicle to the company, or (c) continue the arrangement with the company and replace the current vehicle with a new one.

[2] About 28 percent of total liabilities are long-term bonds, and about 22 percent are loans from banking corporations.

[3] And the variance is low: the leverage rate ranges from 85.6 percent to 88.2 percent.

[4] We assume that at least some of the credit is issued at variable-rate interest.

[5] While it is possible that some of the credit for vehicle purchases was issued within the “all-purpose credit” framework and not against the encumbrance of a vehicle, in such a case the risks to this credit are identical to the other credit risks to households, and do not include the additional risk of a decline in the value of the collateral.

[6] This is an underestimation of the banks’ exposure to the companies in this field.  Credit to the financial leasing companies is included in the “financial services” industry, and since this industry obviously includes companies in other financial areas, it is not possible to include it in exposure to the vehicle industry.

[7] In order to make these calculations, we added the direct loans issued against encumbrance of vehicles and the loans where the names of the loans indicate that they were issued to companies in the field.  Here too, we have an underestimation, since some of the loans also have a generic name that does not indicate the identity of the borrower.

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