Today the Senate and House meet to hammer out terms for the a final bill that is intended to address perceived weaknesses in bank regulation. Rest assured that some form of financial regulation reform will be enacted into law. Whatever the final content, FinReg will have broad impact on banking and credit for years to come.
(House Version; Senate Version)
Likely consequences of FinReg on the commercial banking sector will be:
- Reset of equity returns. Increased capital requirements and higher expenses will drive equity returns lower. My models indicate that most regional banks should expect equity returns to fall from a historical average of around 20% to under 14%, and maybe even lower.
- Bank consolidation. The net result of higher capital requirements and increased expenses necessary to comply with a heightened regulatory burden will be bank consolidation. I expect that most of the bank consolidation will occur in banks with asset ranges from $1 billion to $5 billion. This is the “middle market” of banking where there is sufficient critical mass to warrant sizable “cost out” plays.
- Re-evaluation of profit models. The full range of bank products are under attack. Mortgages, commercial lending, card interchange, and capital markets activities stand to become more heavily regulated, including price and contract terms. Banks are going to have to recognize and jettison marginal businesses, reducing the scope of products they manufacture.
- Opportunity for well capitalized, niche banking. Banks that can profitably manufacture products will are likely to expand their geographic footprints and / or offer those products on a wholesale basis.
In any case, for better or for worse, the US banking sector is about to fundamentally shift to a more concentrated system with much lower return expectations.
Two closing thoughts:
- FinReg does not address a $500 billion hole in the Federal coffers known as Freddie and Fannie. This is just wrong and irresponsible on the part of Congress and the President.
- From a macro perspective, we have an industry that is critical to U.S. prosperity (aka banking), where capital requirements and regulation are moving up, and earnings growth rates and equity returns are moving down. From a micro view, it looks like a market where consumer and small business credit will be more difficult to access and come at a higher price.
Does this sound like a recipe that will drive an economic recovery or reduce unemployment?
P.S. FinReg also includes a provision for a Federal Insurance Office under the Department of Treasury. Insurers of all types would be subject to their purview, with the exception of health insurance.
June 10th, 2010 in
Banking | tags:
bank product,
bank sales,
Capital Investment,
Credit,
Dealer,
equipment leasing,
F&I,
Insurance,
small business,
Tax Planning |
1 Comment
Top performing commercial equipment dealerships measure what matters, and use those measures to drive their business to higher performance standards. Finance and insurance products are core products offered by top performing dealerships. Dealerships can gauge the performance of their F&I teams by asking the best questions and establishing metrics that provide fact-based answers. (Note: Metrics presented below are not an all inclusive list of metrics that your dealership should track and report.)
Is the F&I team adding value to every equipment sales opportunity?
Metrics to track:
- F&I products presented per equipment sales opportunity
- Credit applications per equipment sale opportunity
- The number of sales leads provided by the F&I team to the equipment sales team
Does our dealership have the right F&I partners?
Metrics to track: (Your finance and insurance sources can regularly provide you with these measures)
- Credit response time by finance source
- For each finance source: Credit approval /declines rates by commercial credit score band
- Claim satisfaction scores by insurance provider and product provided
Is the F&I team efficient and productive?
Metrics to track:
- Total dollars financed by F&I team as a percent of total value of whole goods sold
- Total F&I expense per credit application
- Total F&I products presented to customers (in a given period of time…weekly, monthly….)
- Total “decisioned” credit applications divided by total F&I hours worked
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DealerBahn provides commercial equipment dealers with outsourced F&I services and web-based workflow management tools that facilitate the sale of commercial finance, insurance and associated services. Contact Thomas Ball at thomas.ball@dealerbahn.com
Commercial equipment dealerships must have sales teams that make the most of every sales opportunity. Dealers can grow their revenues when sales, service and F&I teams work together to create a disciplined selling system that is focused on providing customers with options that could meet their needs. But how do you know if a dealer’s selling system is organized for peak performance? The following checklist is a sound indicator.
- Are equipment sales, service and F&I teams consistently presenting ALL relevant products to ALL customers ALL of the time? There is only one way to be certain that dealership products are considered for purchase: The customer must be shown all products.
- Is the purchasing process convenient and simple? Equipment sales, service and F&I teams should regularly meet and work together to map the customer purchasing process. After mapping the sales process, the combined team should work to identify and remove barriers that interfere with closing deals. A good indicator of a commercial dealership’s commitment to customer convenience and simplicity is to review the company’s website. Prospects should be able to quickly find and review key products and, at a minimum, easily submit an inquiry form that forwards specific customer needs to the dealer sales team.
- Does sales management track and report metrics about the sales process? The best dealer sales management teams voraciously gather sales process and product data. They use this valuable data to make fact-based management decisions that lead to realization of revenue growth opportunities.
By creating a selling system that contains all of the components above, dealers can build a top notch sales team that is the essential to driving sales growth over the long term.
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DealerBahn provides outsourced F&I services and web-based workflow management tools that facilitate the sale of commercial equipment finance, insurance and associated services. Contact: Thomas Ball at thomas.ball@dealerbahn.com
Here are four tax planning issues you should address as part of your 2009 tax planning:
Bonus depreciation: Your company can get first-year 50% depreciation of the cost of new equipment purchased and put into service during 2009. The “bonus” is in addition to normal depreciation and deductions available under Section 179. It applies to purchases of new tangible personal property used in a business. If you need new equipment, it would be to your company’s advantage to purchase and take title to the equipment before the end of 2009.
Section 179 Depreciation Deduction: The Section 179 deduction has been increased to $250,000 for qualifying property placed in service in this year. This deduction allows you to depreciate an asset in total in 2009.
(Note: The Associated Equipment Distributors has a good on-line calculator that demonstrates the benefits of accelerated depreciation.)
Net operating loss carryback: In November 2009 the In November the president signed legislation to help companies raise cash and save on taxes if they have current operating losses. The net operating loss carryback provision was expanded to allow any size company to carry back losses incurred in either 2008 or 2009 against income earned in any of the five prior years.
Pending tax increases: Tax rates are going up as Bush tax cuts expire. Top individual income tax rates, currently 33% and 35%, will likely roll back to their 2000 levels of 36% and 39.6%. And top capital gains rates will likely rise from 15% to 20%. If your income is in a top bracket then you should consider taking capital gains in 2009.
Last weekend’s announcements of nine more bank closings and CIT’s bankruptcy will add more stress to small and middle market businesses in the U.S. Today, I am sure that many of their business customers are scrambling to find alternate funding sources.
These unfortunate events highlight the need for businesses to continually assess the viability and commitment of their funding sources. Here are five tips for maintaining healthy and stable lending sources.
Never trust a single lender to be there for you 100% of the time. You have trusted relationships with PEOPLE, not with a bank or lending institution. Your personal banker may be a great human being, but your banker is powerless in the face of management, who’s career (and personal net worth) may ride on defending the bank’s balance sheet at all cost. Have no doubt, if it serves their needs, a lender will quickly cut off your access to credit for reasons that have NOTHING to do with your business. For example, there are many banks that are currently operating under great pressure from various banking regulators. Those regulators may be pressing the bank to increase capital or slow down lending. In this case your banker may love you, but his /her boss is under pressure to show progress toward meeting regulatory targets.
Diversify your funding sources. Investment managers know that diversity is one key to capturing growth and limiting losses in an investment portfolio. Funding your business is no different. Depending on the size and complexity of your business, you should always have at least three reliable sources that can supply your business with necessary liquidity. And avoid borrowing from the similar types of institutions. You may love your community banker, but typically, when an economy goes sour, the entire geographic market goes with it. This means that every local or regional bank in the area is likely to be stressed and limiting new credit relationships.
A better strategy is to have credit relationships with local / regional banks, large money center or independent lenders, and access to some alternative source for funds from an insurance company or other lending hybrid. Trade publications (web sites, magazines……) are decent sources for finding lenders interested in providing funds to your industry.
Match the timing of your borrowing terms to your funding needs. Fund short term receivables with short term borrowings. Fund long term investments or capital expenses with long term debt. Most businesses are not designed to take risks associated with changing interest rates. By matching the timing of your cash inflows with credit maturities you are minimizing your risk to changing interest rates and getting the most out of your invested capital.
Establish lines of credit when you don’t need them. It is easy to recall the good ol’ days when credit was easy and your business was generating more cash than you knew what do with. That was the time to lock down credit lines. Waiting until you need the credit is a fools strategy. Why? Again it may have nothing to do with your business. Lenders’ agendas and priorities change like the wind. So even though you have been a customer of XYZ Bank for many years, bankers are usually first to run for the hills during times of economic uncertainty and politely respond to their customers, “Now might not be the best time for us.”
So take advantage of economic upswings and establish committed credit lines or backup liquidity resources. Paying a few points for maintaining committed credit lines is like a paying an insurance premium. You may never need it, but when you do it is because there is almost certainly a life or death issue.
Communicate Often. Finally, make sure that your lending sources are blanketed with information about the successes of your business. This goes beyond delivering the required financial statements per your loan covenants. Use any means possible. Make regular “social” phones calls, add your lenders to your company email or blog feed, issue press releases, publish customer testimonials, lead community events, sponsor local sports teams. How about teaching your lender how to follow your business on Twitter? Any means to “brand” your business is not only good for your prospects and customers, it creates an aura with your lenders that will give them confidence to defend your business in their credit committee meetings.
Below are the answers to a few of the most common questions senior financial managers have about the commercial equipment finance market in the U.S.
How big is the U.S. equipment finance market?
Total Investment in Equipment vs Total Equipment Financed or Leased
Chart 1
Total U.S. business investment over 2009 to 2011 is expect to be about $1 trillion. Each year, about $500B to $550B, or 53% of all business fixed investment, will be financed or leased. (see Chart 1) As businesses re-invest in commercial equipment, the sector is expected to grow at, or slightly above, the growth rate of the U.S. GDP through 2012. (The October 2009 consensus estimate of the WSJ’s panel of 52 economist expects 2010 GDP growth at 2.8%. )
What are the characteristics of businesses that utilize loans or leases to fund equipment acquisitions?
- About 75% of small firms (50 to 100 employees) and medium-sized firms (101 to 1000 employees) use loans or leases to acquire equipment.
- Very small firms (<51 employees) use cash to acquire equipment more than 50% of time, but rely on established lines of credit almost 30% of the time.
- Very large businesses (>1000 employees) use cash for about 50% of their transactions, while about 33% of large firm transactions are facilitated using some form of a lease.
- Generally, businesses with annual revenues exceeding $1 million are likely to finance or lease equipment about 75% of the time.
(Source: ELFA / Global Insight)
Which industries are most likely to use equipment finance to acquire equipment?
Top 10 industries most likely to finance or lease equipment
- Railroads
- Truck transportation
- Air transportation
- Printing and publishing
- Marine Transportation
- Construction
- Mining
- Buses and Transit Systems
- Manufacturing
- Healthcare
What types of equipment most frequently use loan or lease products?
As a percent of total fixed investment here are the top 10 industries that are likely to finance.
- Agriculture
- Aircraft
- Marine
- Railroads
- Construction
- Trucks and trailers
- Automobiles
- Engines and turbines
- Medical instruments
- Computers
Why do businesses choose to finance or lease equipment?
The ELFA conducted a survey of businesses in 2007, asking them select the reasons that drive them to finance or lease equipment. (Respondents could provide more than one answer.) Here are their responses and approximate response rates.
- Optimize cash flow (>50%)
- Tax advantages (>40%)
- Protection from equipment obsolescence (>25%)
- Off balance sheet financing (>10%)
Over the next few weeks I am publishing a series of articles intended to be a reference resource for bankers who are investigating entry into equipment leasing .
Equipment finance is especially attractive during the recovery phase of an economic cycle because valuations tend to be realistic, businesses demanding equipment finance products are likely to be stronger survivors, and many of those same businesses will be keen to refresh or replace aging “essential use” equipment.
Topics we will explore will include:
- Market size and scope
- Small business relationships and equipment finance
- Origination and servicing models that address specific markets
- Competition and competitive factors
- Expenses / Risk / Technology Issues
- Pricing and Return on Capital
- Integration of sales and operations into the commercial banking product suite
If there are other topics you think worth exploring then please send me an email at thomas.ball@dealerbahn.com
