- Toyota Motor Corp.: 62%
- Honda Motor Co.: 48%
- General Motors Co.: 25%
- Ford Motor Co. 25%
- Hyundai Motor Co.: 14%
- Fiat Chrysler Automobiles: 2%
Source: J.D. Power, automakers
The 2008 financial crisis sharply reshaped Canadian auto finance. Automaker captive finance companies that once dominated the auto loan and lease market lost nearly half their share within four years. Captives have since regained some share, but their hold is still significantly lower than it was in 2008.
Market share numbers from J.D. Power tell the story:
• In 2008, captives had 82 per cent of the auto loan and lease market, leaving 14 per cent to banks and four per cent to finance companies and credit unions.
• Just four years later, captives’ share shrunk to 45 per cent and banks’ rose to 50.
• Through the middle of June 2017, the captives have regained some share, getting back to 54 per cent, but banks remained at a strong 42 per cent — three times their share pre-crisis.
Captives have gradually bounced back from the financial crisis because of leasing’s comeback, but experts agree that banks’ auto lending prowess is here to stay. Rising lease penetration and evolving auto finance market solutions (see related story on Page 22) suggest that there is room for banks and captives alike. But the market is unlikely to return to a 14/82 mix.
In 2008, many captives significantly decreased their roles. Banks were ready to take on more business, said Grant Simons, vice-president and head of Royal Bank of Canada Automotive Finance.
“Banks were happy to step into that void and find ways of funding the end consumer or the commercial enterprise,” he said. “There was a natural synergy there, in that banks had capital, and they largely knew how to do [auto] lending.”
Still, it was a change for the industry, especially dealers.
Hugh Brennan, president of Brennan’s Dixie Chrysler in Brampton, Ont., leased 65 to 70 per cent of the dealership’s vehicles 10 years ago, so he said he had never worked with a bank other than for a short stint. But his relationship with the banks “morphed into a similarity I wasn’t expecting,” he said.
|New-vehicle loan share by lender type|
|Banks||Captives||Credit unions and finance companies|
|Source: JD Power|
By law, banks are prohibited from leasing, and a large percentage of captives’ 82 per cent share in 2008 would have been leasing, said Kevin Teslyk, senior vice president of automotive finance for Scotiabank.
“Leasing ultimately dried up during the financial crisis. The captives were either not there or less able to offer it to the same extent that they had,” he said.
The subsequent rebound of captive financing reflects an increase in leasing, Teslyk adds:
“We’re at that part of the cycle, and we’re expecting to see more of that.”
There has never been anything wrong with leasing, but bad leases exacerbated the problem during the recession, said Alan Bird of SCI Marketview, a leasing and dealership technology company.
“Leasing has been a standalone good product,” he said. “What has happened with leasing over the last several decades is that people or organizations really abused the residual in order to try to help support moving product.”
Brennan now only leases five per cent of his sales, though he said he might begin to increase his store’s lease penetration.
“I think we were leasing too many cars back in the day, but it became the easiest way to sell a car,” he said. But it was troublesome. Customers often returned vehicles over their kilometre limit, meaning that dealerships had to handle penalties, as well as wear-and-tear fees.
He sees 25-30 per cent as a healthy lease penetration for the customer, the dealership and a lease company.
Through the middle of June, the lease penetration in Canada was 26.8 per cent, according to J.D. Power. It has grown steadily over the past few years. In 2014, it was 23.1 per cent.
“That’s a very significant increase from where we were post-crisis when [leasing effectively] went away,” said Teslyk. “It has already helped moderate the growth and lengthening of loan terms further.”
Most lease transactions are in Toronto, Vancouver and Montreal, according to J.D. Power.
Of the captives, Toyota Credit Canada does the most leasing in Canada, making up 62 per cent of its portfolio. Honda Finance’s business is 48 per cent lease. Hyundai has 14 per cent. FCA has two per cent. GM Financial has 25 per cent.
|New-vehicle loan and lease share by lender type|
|Banks||Captives||Credit unions and finance companies|
|Source: JD Power|
STRETCHING LOAN TERMS
Aside from providing an opening for banks, the decline of leasing helped contribute to longer loan terms. Even though many captives stopped leasing, consumers still wanted a low monthly payment.
“So with the departure and shrinking of the lease market came the emergence of ... the longer amortization loan,” stretching the loan term 72, 84 or 96 months, Teslyk said. Pre-crisis, the average loan term was in the 60s, he said.
Now Canada’s average loan term has stretched to 75 months, said Mike Buckingham, senior director of the automotive finance practice at J.D. Power.
“Banks are competing for that business and trying to aid afford-ability, so they stretch the loan term,” he said.
Loans of 84 and 96 months are also common, driven by market competition with incentive programs. Those incentives sometimes prompt consumers who don’t necessarily need a long-term loan to take one anyway.
“They could support a 48- or 60-month car loan, but the programs are on certain terms, categories, vehicles, that cause people that have greater financial means ... to be involved in those longer amortization loans,” Teslyk said.
“Cash buyers are as much attracted to that segment as are people who need a slightly longer term to be more affordable or to act as a proxy for a lease-type solution,” he said.
Loan terms probably won’t extend out much further as lease penetration revives, said Simons of RBC. The longest terms have been in the 84-96 month range for the last few years, he said.
|Lease sales (%)|
Still, with terms as long as 96 months, some experts say there is cause for concern.
Ninety-six-month loan terms leave the customer with too much negative equity for too long, said Bird, which is one reason leasing has grown in the last few years.
Through mid-June, nearly 29 per cent of trade-ins had negative equity. The average negative equity amount was $6,983. Both the percentage of trade-ins with negative equity and the amount of negative equity has risen consistently since 2012, according to J.D. Power.
“A lot of consumers like to get a new vehicle every three to four years,” Bird said.
“Long-term loans were some-thing that was created to fill the gap in the mid-2000s,” he said.
Buckingham added that customers might be in for a rude awakening “when customers who typically trade in their vehicle in about three years realize they have high levels of negative equity,” he said.
But overall, Bird said, lenders are very sophisticated: “They make decisions based on experience and good data.”
“I don’t see any doom or gloom with respect to lenders based on current behavior. They are actually managing it very well.”
Lenders are also taking a fresh look at non-prime. In the last five to 10 years, the industry has dissected the nonprime business, which accounts for about a third of the total auto finance market, more than ever.
Scotiabank has a division, Scotia Dealer Advantage, that originates only nonprime loans to help consumers establish or re-establish their credit, aiming to elevate them to the prime segment. And GM Financial focuses only on leasing and nonprime lending in Canada. General Motors has relationships with a few banks to finance prime consumers.
Overall, the outlook for the Canadian auto-finance market is positive. Lenders are being prudent and paying more attention to residuals, and the lender mix continues to balance out.
The market’s strength might in part derive from new leadership at some of the top banks: RBC, Scotiabank, TD Auto Finance and BMO, Bird said.
Several years ago, the heads of the banks’ auto lending divisions were tenured. Today, most leaders came from other areas of the bank and have been in the auto finance world for only a few years, “which is driving some new blood and enthusiasm into the business,” said Bird.
He expects the Canadian auto-finance space to be fundamentally healthy.
“Sometimes the rules of the game change and the competitive marketplace changes,” he said. “But folks adapt.”