The Australian Finance and Leasing Landscape

Introduction

Resilience. That is how we can describe what the Australian economy has demonstrated in the aftermath of the most extreme global health crisis in recent memory. The country's GDP expanded by 0.6% in the September quarter and 5.9% annually as the nation's economy recovered from stringent lockdowns due to the pandemic. The annual rate represented a rebound compared to the previous year when most of the country's economy was in lockdown.

Economists anticipate that while the economy may slow down from the December 2022 quarter onwards, Australia may still evade a recession that is anticipated to impact large economies globally, including the United States and the United Kingdom.

According to the International Monetary Fund, Australia will represent the 12th largest economy in the world this year (2023). Nominal GDP is expected to be around A$2.5 trillion (US$1.8 trillion). Despite having only 0.3% of the world's population, Australia is responsible for 1.7% of the world's economic output.

The Big Four Banks

According to the 'Major Australian Banks: Full-Year 2022 Results Analysis' by KPMG, Australia's major banks reported improved financials for the full financial year in 2022, as a consequence of continued strong post-pandemic demand and margin recovery in conjunction with increasing interest rates.

The 'Major Australian Banks' or the 'Big 4', as they are commonly referred to, comprise of the Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), the Australia and New Zealand Banking Group (ANZ) and Westpac. These four banks represent the leading banks by assets in Australia and have conventionally dominated the country's banking industry.

The economy of Australia has maintained its strong recovery post the unprecedented global health crisis, with the effects of the Reserve Bank of Australia's seven successive interest rate increases since May 2022, yet to impact any substantial slowdown in consumer and business activities. In the financial year 2022 results, Australia's Big 4 banks have therefore benefited from continued credit growth.

The Big 4 reported an accumulated cash profit after tax from continuing operations of $28.5 billion, up 6.5% from the previous year. However, there are still challenges for these banks in terms of inflation. Further, while the Australian economy did witness a strong rebound from COVID-19, there is still uncertainty to what the future holds not just because of inflation, but due to geopolitical unrest and an anticipated economic slowdown globally.

The Australian Equipment Finance and Leasing Industry

In Australia, the main products that lead equipment expenditure in the country comprise of finance leases, operating leases, hire-purchase and chattel mortgages or secured loans (the latter classified as non-lease).

Pertaining to the primary providers of lease finance in Australia, they have conventionally been finance companies, which includes bank-owned lenders, captives and general financiers, alongside banks. The past few decades has witnessed the majority of bank-owned finance companies being integrated into the parent or sold. In more recent times, while banks have been the dominating source of lease and other equipment finance, captives and independents have increased their share in the market due to better and improved access to funding.

Further, there has been increased focus on financial technology i.e. FinTech and the financial services sector in Australia being increasingly digitally evolved. Many FinTech companies in the country saw the global health crisis as a time to take advantage to tailor their products and services to meet changing customer preferences and benefit from technological innovation and advancements.

FinTech equipment finance providers have also been taking opportunity of digital processes in order to interact and transact with their clients. Swifter and easier application processing, management of assets and data-driven decisions have been enabling these companies to become more prominent and can result in them gaining a competitive edge.

During the financial year 2022, the Commonwealth Bank of Australia recorded the highest volume of new asset finance lending in its history, with companies in manufacturing, agriculture and production driving their demand for equipment and machinery. This record figure of entities in Australia investing in new equipment and machinery witnessed assets such as forklifts up 49%, trailers up 37%, cranes up by 26% and trucks up by 13%.

The Australian Finance Industry Association (AFIA) approximated that as at June 30, 2022, total new equipment finance (inclusive of fleet leasing) was A$36.6bn. According to the World Leasing Yearbook 2023, consistent with previous years pertaining to funding by equipment type, this has been mostly spread across cars/light commercial, mining/earthmoving, equipment, and trucks, trailers and buses. Chattel mortgage maintains its position as the favoured origination product.

The Australian Automotive Finance and Leasing Industry

According to Mordor Intelligence, the value of the Australian automotive financing market was estimated to be $50.60 billion in 2021 and is anticipated to exceed a net valuation of $73.60 by the end of 2027, representing CAGR growth of 6.30% during this forecasted time frame.

Auto manufacturers including Toyota, Volkswagen AG, among others have been leading the market. Preferred models offered by these auto manufacturers coupled with shifting buyer preferences has resulted in customers moving towards auto financing models in order to own a vehicle that can be easily financed over longer and shorter-term EMIs. Prior to the unprecedented health crisis, many customers preferred to purchase vehicles via entire cash payments to evade long-term EMI payments.

However, following the effects of the pandemic, customers are more inclined towards auto financing which enables them to better manage their respective expenses on a monthly basis, and essentially, this also manages to assist those with lower disposable incomes.

According to data derived from research by Deloitte, the average yearly profit that new vehicle dealers made in Australia comparing pre-pandemic 2019 to 2021 witnessed a substantial difference from $600,000 per year to $3 million per year.

Motor Intelligence estimated the value of the used vehicle financing market in Australia at $580.54 in 2021 and anticipates it to exceed a net valuation of $971.48 million by the end of 2027, representing CAGR growth of 8.96% during this forecasted time frame.

In Australia, the used vehicle market consists of OEMs, auction houses, pre-owned dealers and others who aim to increase the size of their fleets and offer various financing options to customers. During the pandemic, used vehicle financing in Australia observed a firm decline due to the subsequent economic crisis and stringent social distancing guidelines enforced by the government which resulted in the closure of showrooms and auction events. However, following the first quarter of 2021, used vehicle financing witnessed growth.

The Federal Chamber of Automotive Industries (FCAI), the industry's governing organization which represents the manufacturers and importers of passenger vehicles, light commercial vehicles and motorcycles in Australia, provided the following vehicle sales data for May 2022:

The number of automobiles sold in May was 94,383, increasing the total for the year to 437,884. This outcome indicates a drop of 6.4% from the same month in 2021.
Except for the Northern Territory, where 973 automobiles were sold, marking a gain of 2.4% over May 2021, sales were down in every State and Territory. Sales in the Australian Capital Territory decreased by 11% (1,367), in New South Wales by 6.3% (30,757), in Queensland by 11.3% (18,997), in South Australia by 8.2% (6,098), in Tasmania by 6.8% (1,651), in Victoria by 0.8% (25,164), and in Western Australia by 9.1%. (9,353).
Toyota dominated the market, selling 22,813 cars overall. Next, with 7,307, came Kia, then Hyundai, Mazda, and Mitsubishi (7,063, 6,474, and 7,307).
The Toyota Hilux was the highest-selling model, with 5,178. Toyota's RAV4 was next with 3,925, followed by Ford's Ranger (3,751), Toyota's Corolla (3,310), and Toyota's Land Cruiser (2,667).
In May 2022, Toyota led the market, followed by Kia and Hyundai. With a difference of 15,506 vehicle sales and 16.5 market share points, Toyota outsold Kia.

Electric Vehicles (EVs)

To meet the rising expectations of consumers and businesses worldwide, electric vehicles (EVs) are stealthily reshaping the automotive and commercial truck production industries. In the last decade, the market share of electric cars has grown exponentially, and it is anticipated that this trend will continue. Even while the number of EVs has already increased dramatically globally, estimates from the industry indicate that we are only at the beginning. According to a report by Mordor Intelligence, the Australian Electric Vehicle Market was estimated to be worth $3.89 billion in 2021 and is expected to reach $20 billion by 2027, showing a CAGR of 33.06% throughout the projected period (2022 - 2027).

In the beginning, the COVID-19 pandemic hurt the market since lockdowns and production unit closures reduced sales in the first half of 2020. However, the market regained momentum by 2021 thanks to loosened restrictions and substantial government interventions in the form of incentives and relief packages. Australia had a massive growth in EV sales in 2021, with 20,665 units sold compared to 6,900 units in 2020. It indicates that EVs now account for 1.95% of the new car market.

Throughout the forecast period, the market is anticipated to increase within the next few years due to rising demand for high-performance, and low-emission vehicles, tightening rules and regulations regarding vehicle emissions, dropping battery prices, and other reasons. Additionally, the active participation of major international players like Tesla, MG and others, with a priority on embracing methods like supplying cost-efficient models and enhanced product developments, is anticipated to generate a good picture for the market over time.

Government policies to phase out vehicles fueled by fossil fuels and government investments to upgrade public EV charging infrastructure are likely to support industry growth. Additionally, the market is expected to grow due to large OEMs' growing investments, product launches and their focus on localizing supply chain facilities.

Most of Australia's electric vehicles are located in New South Wales and Victoria, then in South Australia. With the majority of the demand backed by government efforts and helpful charging infrastructure, these states are essential to expanding the Australian electric vehicle market.

In August 2022, Bank Australia stated in a bid to push for a greener future and to encourage Australians to purchase or finance electric vehicles, that it would entirely cease financing for new petrol and diesel car loans from 2025. This decision by the financial institution to halt funding of fossil-fueled vehicles comes in wake of the strategy and commitment to achieve net zero carbon emissions by 2035.

Transformative Financial Services via FinTech

A wealth of opportunities exist pertaining to FinTech in Australia. Australian consumers are 'tech-savvy' - with nearly two-thirds of digitally active customers availing FinTech product and service offerings. There is increased demand for customer-centric solutions across the financial services sector of the country. As an early adopter of financial technology and innovation, Australia continues to offer a Fin-Tech-friendly regulatory regime.

The KPMG FinTech Landscape 2022 identifies FinTechs operational and based in Australia. The report highlights 775 currently operational FinTechs in the country, up from 718 in the previous year - representing an 8% year-on-year increase. This increase represents the levels of investment coming into the FinTech ecosystem, with the first six months of 2022 witnessing over $29 billion of investment into the sector.

In Australia, payments maintain their position as one of the most innovative and swiftly changing sub-sectors and payments therefore remain as the sector which contains the largest number of companies in the Australian FinTech landscape. Lending maintains its position as the second largest FinTech sector with organizations and customers increasingly moving towards Fin-Techs and non-bank lenders for their financing requirements.

Globally, the FinTech revolution has witnessed technology being leveraged in order to create and provide better financial services. In Australia, FinTech companies have been disrupting a number of sectors, most notably banking, payments, investment and wealth management. As opposed to traditional financial services providers, these companies offer financial services and experiences in a customer-centric manner which focuses on the customer experience through the utilization of technology solutions to provide financial services in the most effective and preferred way.

Conclusion

While great resilience has been witnessed following the Australian economy's recovery from the height of the global health crisis, uncertainty still remains. An anticipated global economic slowdown, geopolitical instability and rising inflation could have adverse impacts and may impact the Australian financial services industry and finance and leasing sector.

However, as the economy recovers from the pandemic, business confidence and buyer sentiments are likely to improve. The financial services sector is a significant part of the Australian economy and decisions taken by major financial institutions will have a profound effect on the future of the country's financial services industry. Further, as the impacts of COVID-19 lessen, it is anticipated that leasing will maintain its position as a key product that augments the Australian economy's base.

According to a Global Tech Report released by KPMG where more than 2200 industry leaders and experts across 15 countries were surveyed pertaining to the progress of utilizing transformation via technology and digital maturity, for Australia, a positive view and future can be seen via digital transformation.

Tech leaders in Australia and globally have a forward-thinking approach towards digital transformation with more than 66% signifying that they obtained a return from their digital transformation efforts and investments. However, this is especially pertinent to Australia, with 74% stating that digital transformation initiatives have resulted in more than 6% profits or performance, while just 57% of Australia's global counterparts reported profitability over 6%. There is no doubt that digitization is imperative for the financial services industry and other significant sectors in the country.

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