The State of Denial
According to experts, the situation with car financing, which for a long time was one of the main elements driving the sales in the
automotive market, is quite difficult. Since the year began, many banks lost their position in the market due to the lack of resources, while remaining players are forced to significantly increase interest rates and toughen the requirements for customers or just take advantage of the situation and still do the same,” says Ekaterina Chebotaeva, deputy head of the department of the financial service business development at Atlant-M. Many car financing schemes have been discontinued, such as no down payment loans, express loans, etc. A number of people who are denied financing increased, while loan terms were reduced. All this slowed down auto financing and, as a result, led to lower levels of financing. “According to the data we have, banks make a positive decision on financing in approximately 35% of cases while before the number was 70-80%,” says Dmitry Sharovatov, a consultant with Simon Kucher & Partners. Thus, the share of cars bought with financing, which previously was about 30-40% of all cars sold, decreased significantly.”
According to Association of Russian Banks, as of March 1, the volume of loans given out to individuals was 311 billion rubles, an increase of 28.4% compared to the same period in 2008. However, if looking at the dynamics, the volume of financing has been going down since November. Thus, it fell 0.7% in November and 0.9% in December. As representatives of the association explained, January saw a small seasonal increase of 0.5%, which was later downplayed by the February drop of 1.6%. There are several reasons behind the drop. “First of all, banks now have limited resources due to their reduced ability to loan money abroad and a large number of defaulted debtors. Currently only 5-7% of loans get paid back,” points out executive vice president of the Association of Russian Banks Anatoly Milyukov. “But the main reason why financing is down is huge risks associated with the difficult financial situation of both companies with no prospects for growth and development and individuals. Even if the bank is ready to give a customer a loan, it cannot be sure the money will come back.” Another reason, according to Milyukov, is the money getting more expensive. “While previously the bank rate was 12-15%, it now increased to 20-25%,” says Milyukov. “The Central Bank hiked the price of money it sells to commercial banks, the so-called rate of refinancing. Now they have to buy money at 15-16%. When giving out loans banks have to play it safe and charge higher interest rates to be able to use it to compensate for defaulted debtors.” Therefore, banks make financing terms tougher. It is next to impossible to secure a loan without submitting an income form. And if one already have one loan, chances of getting a new one are significantly slimmer.
The lack of resources caused many banks to curtail auto financing programs. Alexey Tokarev, vice president and head of auto
financing department of VTB24, estimates that today there are about 8-10 active players in the market, compared to 50-60 a year ago. Banks prefer to concentrate on servicing portfolios they already have. “It is the result of the lack of available resources, heightened risks and expectations of the increase in delinquent payments,” says Vitaly Pykhtin, commercial director of auto financing at Cetelem Russia. According to Pykhtin, the banks that continue working in this area are for most part either government banks or large international players who have kept access to long-term sources of financing and have the tools and experience to manage risks.
“Banks complied a ‘black list’ of jobs whose holders are not desirable recipients of loans. Ironically, bank employees made it to the list too,” says financial director of the AvtoSpecCenter group Oleg Moseev. “There is a similar list of companies. The company where a potential borrower works has become a critically important factor for banks.” Also, according to Moseev, banks reduced the loan amount available to a borrower based on his cumulative income. “Banks are skeptical in their estimates of future salaries of borrowers. They quite reasonably believe that not everybody will be able to maintain the same level of income. So they reduce possible loan amounts in advance.”
November saw the maximum number of denials of loan applications, says Irina Zagornova, marketing director of New York Motors Moscow. “In some banks the refusal rate was up to 70% of all applications,” she adds. “Now the refusal rate for the Ford brand is about 30%. But different banks evaluate potential borrowers differently so refusal situation is different for different banks.”
According to Dmitry Baranov, leading expert at Finam, difficulties in obtaining a loan are still not the most important thing. “The procedure and requirements changed insignificantly,” says Baranov. “Interest rates that spiked sharply have more impact on the situation. I think this was the factor behind passenger cars sales going down by 12-14%.” “The acceptable auto loan interest rate for customers is about 12-14% but the rates in the market are on average 4-8% higher than that,” mentions Vitaly Pykhtin.
Tougher terms for car loans also resulted in increased amount required by banks as a down payment. “Most bank increased down payment on average by 20-30% for standard financing schemes. And for simplified loans, with no proof of income and employment, on average by 40%,” says Alexey Tokarev. The longest loan term available was also reduced. “If previously one could get a loan for seven years in several banks, now nobody offers that. Some banks also increase the minimal age of the borrower,” explains Tokarev.
Financing is not in demand now as it used to be before the crisis because clients are not sure they will be able to make their monthly payments tomorrow, says Ivan Romanov, head of insurance and financing service at the Avtomir group. “Even if we talk about zero interest rate,” he adds.
“Bad Weather” as the New Trend
First indicators of the “bad weather” in the car loan market became visible in the summer of 2008 when banks toughened requirements for borrowers, thus increasing the rate of denials by 30%, says Oleg Moseev. “The storm broke out in September when many banks stopped giving out car loans and others, who remained in this market, increased interest rates, discontinued all financing programs not requiring down payments and started asking for more documents. As a result, every other potential borrower was denied.”
Since the crisis began, interest rates went up in several stages, believes Vitaly Pykhtin. Thus, in the very beginning banks facing ruble liquidity deficit increased interest rates by 2-7%. The next wave came when banks responded to heightened risks associated with new loans and possible losses associated with loans given out previously. Any increase in interest rates that happened after that was caused by the actual reevaluation of risks in portfolios which included earlier loans.” According to Pykhtin, the rates remain high. The financial situation is not stable yet, and it prevents banks from going back to the precrisis levels.
Ivan Romanov estimates that since the crisis began, interest rates in different banks have moved in opposite directions. “Thus, those banks that had had low interest rates (Sberbank, VTB24) increased their rates. Those banks that hiked their rates when the crisis began are now gradually reducing them,” says Romanov. According to Alexey Tokarev, since September auto loan interest rates have grown by 8-10%. But there is no point in estimating the value of the borrowed money without looking at the current financial situation. “Three or four years ago customers took out loans at interest rates comparable to the today’s levels, however, the market demonstrated constant growth,” says Alexey Tokarev. According to Ekaterina Chebotaeva, customers who are prepared to take out a loan look for banks with the lowest interest rates, between 15% and 19% in rubles, but every day the number of people prepared to borrow money is decreasing.
Experts vary in their estimates on how far financed car sales have fallen. Some speak about 20-25%, while other insist on 10%.
Most dealers speak about the lowest number ever as during winter and spring individual customers made most purchases with cash trying to make something out of their savings which were rapidly losing there value. And only back in September an average of 50% of cars sold in Russia (depending on the brand) were bought with loans. So far many companies have been selling 2008 cars. When they clear out their warehouses, the very same cars will cost significantly more. And when 2009 cars go on sale, the availability of financing will become more important for the market.
“In mid-price segment we see a linear relation. Previously 45% of cars in this segment were bought with financing, now the number is 10%,” says Oleg Moseev. “In the premium segment the relation between financing and sales is nonlinear. Before the crisis, some customers took out loans though they could afford to buy a car with their own money. The share of premium-brand cars bought with financing dropped down to 10%, compared to 30% a year ago. At the same time sales in the segment fell by 5-10%.”
The representative of New York Motors Moscow concurs. “According to our estimates, for Mercedes-Benz the number of financed purchases dropped from 14% to below 10%. For the Ford brand the financed sales fell from 35% to 15%,” says Irina Zagornova.
Svetlana Lisitsyna, PR manager of Subaru, notes that in 2007 and in the first half of 2008 up to 60% of Subaru vehicles were sold through financing programs. “Due to a sharp increase in interest rates and tougher requirements for borrowers we have lost up to 35% of potential buyers,” says Lisitsyna. These numbers are comparable with losses of other brands. Thus, financed sales of the Ford brand fell to 10-20% depending on the dealer and the region from 60-80% in 2008.
The situation with car loans affects the stability of auto retailers. But it is for most part true for those dealers who rely only on selling cars rather than on post-sale service and maintenance. However, there is no direct relation between stability of car dealers and auto loans. As sales went down, dealers optimized their costs, including in sales departments. Therefore, losses in revenue from sales are partly compensated for by reduced costs. According to Ivan Romanov, as decline in the number of loans has affected sales, it also affects financial indicators of retailers. “It has made the situation particular difficult for those dealers whose sales were 50-60% dependent on financing.”
Declining sales resulted in lower earnings and gross profit of the company, the representative of New York Motors Moscow told
Auto Business Review. “We anticipated that the situation would develop this way when drawing up our budget for 2009 and adjusted our financial indicators accordingly.” Obviously, the profitability of the business has changed, says Irina Zagornova.
Government Support
Those banks that obtained access to government support offer the most competitive rates and are in no rush to bring them down. Those banks that do not have the same access have to get their financing at a higher price. Therefore, their auto loan programs are quite expensive. Some banks try to lower interest rates by increasing their once-off commission. Others rely on getting bonuses from their partners, car insurance providers, if insurance is purchased through the bank. However, these measures do not allow bringing down interest rates significantly. According to Ekaterina Chebotaeva, the most popular schemes are offered by Sberbank, VTB24, Rosbank, Rusfinansbank, and BSGV.
In addition to government support, major auto loan providers have been working with car manufacturers to resolve the issue of high interest rates, says Alexey Tokarev. “Among the existing programs, I can mention joint projects with Sollers and importers of Subaru and Land Rover.”
Subaru Finance, a joint program of VTB24 and the Russian branch of Subaru, was launched in February and offers an interest
rate from 17% with a 20% down payment. April marked the launch of the financing programs under the brand Kia Bank, developed by Kia Motors Rus together with Gazprombank: 15-16% with a down payment of 20%. Managing director of Kia
Motors Rus Vladimir Dukelsky hopes that this should increase the brand’s sales in Russia, even when the market is contracting.
The Russian division of General Motors is also concerned with the issue of affordable auto loans. According to the data of Auto
Business Review, the company is considering options for cooperation with banks. Representatives of the group’s Russian division confirmed that they would like to establish such a program in order to maintain sales, but, although the program, according to Auto Business Review sources, was scheduled for launch in mid-April, no specific agreements with the banks have been reached yet.
“Having our own financing program allows us to process applications within the shortest timeframe and without involving any third parties,” says commercial director of Renault Trucks East Igor Davydov. “This is especially important for customers who buy commercial vehicles, because every day of the truck’s work brings profit to its owner. Despite the crisis, Renault Trucks Financial Services offers a low interest rate starting at 9% with a down payment of 10%.
But the demand for manufacturers’ own financing programs has also been falling. Representatives of Ford Russia told Auto
Business Review that a share of vehicles purchased through the company’s own financing program in the first quarter was 7%, a 17-percent decline compared with the same period in 2008.
Limitation of the Government Program
In addition to its own financing programs, Ford made use of the “advances” offered by the government which included the Ford
Focus in a list of locally assembled vehicles eligible for the government subsidy. As Auto Business Review reported previously, the government will subsidize car loans in the amount of two-thirds of the Central Bank refinancing rate. Cars eligible for subsidized loans are domestic and foreign-branded models assembled in Russia that cost less than 350,000 rubles. According to Nigel Brackenbury, head of Ford Russia, due to its low price of 345,000 rubles, this option will not make profit for either the importer or its dealers but will help attract a new category of customers. “It is a very positive thing nowadays but we would still prefer the government program to be expanded.”
Ford waited for two weeks after the government announced its subsidy scheme before starting its own financing program to support buying power. “Since the [government] program was launched, we have discovered that many customers who found out about the subsidy and came to our dealerships wanted to buy a vehicle with a higher level of comfort. So they were disappointed they could not use the government’s offer,” says Nigel Brackenbury. Ford’s offer is very similar to that of the government. The only difference is that the subsidy in the amount of two thirds of the refinancing rate will cover all the Focus and Mondeo cars assembled in Vsevolozhsk. And the banks will be compensated by the carmaker and not by the government.
The government program started in April and it is too early to speak about what its impact on the market is. However, there is a consensus among analysts that the importance of this program will grow. Though, according to Dmitry Baranov, the program does not resolve the issue of “reviving the market” because, first of all, the list of vehicles included in the program is too short. It would make sense to include in it all cars assembled in Russia. Secondly, potential buyers of budget-oriented cars, being in the difficult financial situation, will prefer not to make big purchases even if they are subsidized by the government. The program of government subsidies did not bring any results yet but triggered the discussion of inefficiency of restricting prices. “We welcome the government’s initiatives of overcoming the crisis situation in the auto industry. But we believe that a limit of 350,000 rubles
does not reflect the real situation in the market,” says Nigel Brackenbury. “Ideally, we would like this program to include all cars assembled in Russia, regardless of their price.”
Experts agree with this opinion. “It is reasonable to support all companies manufacturing cars in Russia,” believes Dmitry Sharovatov. “For instance, only the very basic model of the Ford Focus is eligible for the subsidy, and traditionally this model has accounted for only 2% of the Ford Focus. It would be better to introduce location rather than price restrictions. Germany is a very good example here. Everybody who trades in a car older that nine years gets a 2,500-euro subsidy to buy a new car. Considering how old cars in Russia are this approach seems to be very interesting.” Alexey
Bizin concurs: “In Germany the scheme was aimed at scrapping old cars rather than at selling cheap cars and worked through a direct cash payment rather than through a subsidized car loan. This is what made it so impressively successful.” So far the prospects of the Russian-style car market revival have been unclear. Favoring exclusively budget-oriented cars can limit the possible effects of the scheme.
Banking Crisis: the End or the Beginning?
The demand for car loans may resume only when the economic situation becomes more stable and the refinancing rate goes down. According to presidential aide Arkady Dvorkovich, this could happen in the near future. Ivan Bonchev, an analyst of Ernst&Young, believes that refinancing rates could not go down because of high inflation, which has slowed down at the moment. “Given that the macroeconomic situation has stabilized somewhat, and many players have begun to adjust their forecasts for oil prices and exchange rates, the refinancing rate might be cut by the end of the first half of the year,” says Bonchev. “Lowering of auto loan interest rates should mirror the level of the refinancing rate. Banks are aware that in such a way they could boost the demand. Also, interest rates will depend on competition between banks.” Analysts suggest that in the foreseeable future interest rates on auto loans may be reduced down to 15%. But in early April, president and chairman of Sberbank German Gref said that the banking crisis in Russia was only at its early stages. Time will show whether it means that the emerging positive trend will disappear into nothing and the money will become more expensive and auto financing will come to a stop.
