Analysts Try, But There’s No Easy Way to Predict What Lies Ahead
Bill Fite, President,
Regions Equipment Finance
Jerry Newell, EVP, Bank of the West, Equipment Finance
Changing or stalled economic indicators continue to perplex the financial community as analysts try to predict what’s ahead. Despite an abundance of liquidity, businesses continue to build and hold onto their cash reserves. Oil prices remain unsteady, a presidential election is in the balance and unemployment is high.
In the midst of these factors, we gathered four leaders of bank-owned equipment finance companies to provide their perspective on the economic ups and downs, the impact of regulatory and accounting changes, and their concerns and hopes for our industry. The participants include Bill Fite, president, Regions Equipment Finance Company; David Merrill, president, Fifth Third Equipment Finance Company; Jerry Newell, executive vice president, Equipment Finance Division, Bank of the West; and Adam Warner, president, Key Equipment Finance.
When asked if he’s still excited about the equipment finance industry, Warner exclaims, “Very much so! Our industry is very resilient. Despite all the crises that have impacted it — economic, regulatory or accounting standards — the industry continues to thrive. It’s nimble and creative.” Key Equipment Finance manages $8 billion in assets with new business coming primarily from the U.S., Canada and Western Europe. Warner joined Key in 2001.
Merrill agrees that the industry has the ability to adapt. “I am confident that our industry will continue to move the needle and creatively provide cutting edge strategies for our clients well into the future.” Merrill has been with Fifth Third Equipment Finance for more than 20 years. Headquartered in Cincinnati, the company manages a $6 billion portfolio focused on middle-market and large-ticket lessors.
Newell has been with Bank of the West for 25 years. “I remember our CEO saying he wanted me to take over this small business for a two-year assignment in equipment leasing — that was 18 years ago!” Bank of the West’s parent company is BNP Paribas, and the Equipment Finance Division manages $3.5 billion in assets.
After three years with Regions Bank, Fite says he’s found his home as president of Regions Equipment Finance Company. “To say that I run stop signs to get here each morning might be a little bit of a stretch, but it isn’t far from the truth!” Regions Bank, headquartered in Birmingham, AL, covers a 16-state footprint ranging from Texas to Indiana to Virginia, the Carolinas and the Southeast.
Most equipment finance companies reported a good year in 2011 with significant new business volume. Some of that momentum rolled into 2012, but now business is showing signs of slowing down. “At some point the slow-to-no growth scenario that is being projected by most economists is going to catch up,” predicts Warner. “We are going to start seeing year-over-year originations shrink — or at least not grow at nearly the rate they have been.”
Merrill says Fifth Third is on target on the new business front, with a solid third quarter. “I’m optimistic that we will exceed our targets for the year, but we have seen a slowdown in the last couple of months that’s likely to last into 2013. There is a great amount of economic uncertainty out there. People are worried about the approaching fiscal cliff and leveraging up their businesses when they aren’t certain what tax policy will be.”
“We benefit from our bank’s franchise, which includes various parts of the country where economies have outperformed the averages,” notes Fite. “Particularly important in our footprint are the transportation and energy sectors that have provided lift, though growth prospects downstream are clearly uncertain in a 2% growth economy with the threatening fiscal cliff and growing geo-political headwinds.”
Bank of the West is witnessing significant growth in its vendor and dealer financial services businesses. “Part of that is due to the fact that we launched a joint marketing program with BNP Paribas Leasing Solutions this year,” explains Newell. “By aligning more closely with them, we can offer a global vendor finance solution. In our direct and indirect businesses, we are seeing good flow but with more modest growth.”
Warner attributes the slowdown to several factors. “Washington is unable, or unwilling, to do anything to stimulate the economy in a meaningful way, and a major reason for that impasse is the impending election. There is also the looming effect of a growing U.S. deficit, and Congress has been unable to agree on how to address it. Automatic spending cuts will go into place, but they won’t be strategic and targeted. What is happening in Europe is going to catch up, too.”
“Deal flow through the third-quarter 2012 has been healthy by all measures for us,” reports Fite. “Though we experienced increased levels of growth in CAPEX earlier this year, current demand is weakening and the mix of business is transitioning to replacement equipment orders versus growth.”
Deal flow in Bank of the West’s strategically important vendor business is very strong. “We have seen a slowdown in certain industries, but that has not affected us as much because of the new programs we have brought on,” says Newell. “End-users are more cautious about making a financing commitment in areas such as agriculture and healthcare. The drought has affected farmers, and the uncertain political climate and potential changes associated with the Affordable Healthcare Act are worrisome for the healthcare industry.”
“Portfolio and asset quality has improved for most of the industry, but there’s a lot of money chasing the same business around the country and creating heavy competition,” emphasizes Warner. “There has been noise in Washington about banks’ unwillingness to lend, but that couldn’t be further from the truth! Right now, there isn’t enough demand to go around for all the liquidity that’s available.”
Everyone learned lessons during the economic downturn, but business leaders remain wary that it can happen again. “U.S. banks are looking for assets, and primarily we see competitive pressure in the margins,” states Newell. “We have not seen a lot of loosening of credit criteria among our competition, and I am hopeful that everyone learned their lesson when things got a little crazy before the last recession.”
Relationship-building continues to be the focus of bank-affiliated equipment finance companies, and increasingly, they depend on the strength of the franchise and ability to cross-sell to bank customers as a way to increase volume. “That strategy was at the genesis of Key Equipment Finance and continues to be a huge focus as we look for opportunities,” remarks Warner.
Regions Equipment Finance works hand in hand with its local banking teams in a go-to-market strategy that emphasizes seamless integration. “At a minimum, any bank’s ability to achieve cross-selling goals is a function of two things,” instructs Fite. “First, the product partner must be a specialist in his or her trade where thought leadership is provided in meeting the client’s unique equipment financing needs. Next, the bank must have a culture that’s partner-supportive where systemic conditions exist that encourage banker outreach as opposed to creating a barrier against it.”
“One of the keys to getting employees to focus on the cross-sell is to train them so they truly understand the bank’s products and services,” insists Newell. “They must be able to recognize opportunities, make referrals within the bank and know how to access the right bank partners.” Bank of the West structures goals and incentives to include referral and cross-sell components and tracks activity through monthly scorecards.
Sharpening the Technological Edge
When he was chairman of ELFA last year, regulatory compliance was a key element in Merrill’s speech at the annual convention. “Regulatory compliance used to be an issue reserved for the banks, but now it impacts everyone in the financial services industry. Our future success as an industry is highly dependent on our ability to develop systems and processes that allow us to comply with the regulations while simultaneously building quality portfolios.”
“We spend a lot more money, time and resources on regulatory compliance than we ever have in the past,” says Warner. “The biggest expense is in the personnel and systems required to manage, monitor and report back to each regulatory agency. We find that many regulatory agencies overlap on their requests and requirements but not necessarily in the same format or delivery methods, so it becomes quite a challenge.”
“Regulatory compliance is probably a good thing, because it keeps us focused on the right stuff,” ventures Newell who takes a proactive approach to compliance. “Whenever we do any expansionary activity such as a new geographic territory, venture or large portfolio purchase, we keep our regulators informed. It’s good business to keep the channels of communication open so no one is surprised.”
Increasingly technology is the tool that helps companies streamline operations and identify efficiencies. There is a constant need to evaluate emerging technologies to determine if they can improve methods for engaging and serving customers.
“From enterprise-wide sales and profitability tools to the use of secure websites to facilitate information transfer and documentation, we use technology tools that allow us to securely and efficiently conduct our business,” comments Fite. “The technologies are always morphing and changing, but today our systems are more useful, user-friendly and effective than ever.”
Bank of the West’s Equipment Finance Division is in the midst of a three-year implementation of a new front-end process management system that will help it take a big step forward. “This will include more Web-enabled capabilities for receiving applications, automated scoring and documentation,” relates Newell. “It will provide Web portals for manufacturers and dealers to look at transaction status and for end-users to access customer service functions.”
“The leasing industry has been fairly advanced in using technology,” points out Warner. “If you think about it, there is a whole technology sector dedicated to equipment or auto finance — and a whole subset of software development companies catering to our market. In addition to evaluating how Key is using technology, we also consider how our customers use technology and whether that presents opportunities for us to provide additional financing.”
Outlook on Long Term Growth
We asked our panelists which core competency would make a difference in creating an environment that ensures the future growth of their organization. Surprisingly, each had a different answer.
Warner said credit quality is the critical factor. “At some point there will be another dip; the question is when. When it does happen, portfolio quality is going to hold up a lot better for most lenders. The only thing that can really damage lenders going forward is reaching too far down, from a quality perspective, to get assets. Banks need to be sure they can manage through another downturn.”
Fite fervently believes that the differentiator that will propel his organization’s success is their relentless pursuit to be relevant to the bank. “Being relevant means doing something that causes you to be indispensable in acquiring and serving a client. To maintain long-term sustainability, this conversation cannot be had without reiterating the significance of maintaining credit quality disciplines that come under pressure and erode in hot markets.”
Merrill keeps a keen focus on customer service. “Our ability to partner with our bankers and be a part of the team that acts as a trusted advisor to our clients is the key to our future success. When we put product offerings on the table, we find ways to add value.”
Newell says it’s their human resources performance culture. “We work hard to develop our people into leasing professionals,” asserts Newell. “We look to hire the right people, train and educate them, motivate and incent them in a way that works, and build a positive, fun environment where they can feel good about their jobs.”
The last ELFA report on industry confidence showed that more than 78% of survey respondents believe conditions will remain the same through the end of 2012. So, what’s ahead for the rest of this year and what are the keys to sustaining long-term growth?
“We need more clarity on what fiscal and tax policies are going to be,” says Merrill. “Before companies start to invest heavily, they need to see clear-cut evidence that the fixes are in place and working to drive GDP.”
“In the best case, forecast for outlays for business equipment through the end of 2012 remains flat, because businesses have refreshed plant and equipment needs and replenished inventories,” states Fite. Newell adds, “Longer term, I believe customers in the market hate uncertainty, and the potential for accounting changes is a big question that hangs over our industry. To settle that would be positive.”
“My greatest concern is that our economy will continue to experience a no-growth scenario, which will put stress on businesses and further impact jobs,” claims Warner. “Getting the economy going and getting people hired is the biggest issue we face.”
Aging ranks of talent and the need for new talent worries Fite. “At Regions, we have an active talent management process where we regularly assess talent, assign goals and identify possible positions for those people within the bank. We also have a management training program that brings graduating college seniors into the bank in Birmingham.”
“My greatest concern is the economy,” voices Merrill. “The current economic environment is challenging, but I always say, ‘Where there are challenges, there are opportunities, and we have to look for them and act upon them.’”
“With the appropriate changes in U.S. policy and stimulating the economy in the right way, I believe things could turn around in a few quarters,” concludes Warner. “It won’t happen fast but by the end of 2013, we could begin to see a promising growth scenario. But there are a lot of factors, and obviously if there was one solution, someone would have done it already.”