2024 Monitor 100: Banks Pull Back From Equipment Finance

by Rita E. Garwood Monitor 100 2024
For the first time since GE Capital departed the Monitor 100 ranking, the No. 1 company in net assets and new business volume is not a bank. Nearly 60% of U.S. bank affiliates reduced their new business volume in 2023 marking the end of an equipment finance era.

Rita E. Garwood,
Editor in Chief,

The 2024 Monitor 100 companies reported net assets of $602.5 billion, new business volume of $223.4 billion and 31,155 employees.

The collective net assets of the group continued growing at a steady rate of 5.8%, a nominal decrease from 2022’s 6.9% rate of growth. Seventy-eight companies recorded increases in portfolio size totaling $47.4 billion while 22 posted a decrease in net assets equal to $14.4 billion, resulting in an overall increase of nearly $33 billion for the group.

Originations were down in 2023 for almost half of the Monitor 100 companies — 47 to be precise. However, the $13.1 billion drop from the declining group was not enough to negate the gains made by the other 53 companies, resulting in a net increase of nearly $6.2 billion (2.8%) for the collective group.

The bulk of this year’s drop in new business volume came from U.S. bank affiliates, with 31 of the 52 companies (nearly 60%) pulling back on originations. The Monitor 100 has not seen such a retreat from banks since the Great Recession in 2009 when 31 of the 43 (72%) Monitor 100 U.S. bank affiliates reduced their new business volume.

This time around, the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in March of 2023 sparked panic in depositors and greater scrutiny from regulators. Deposits — and relationships with depositors — became the No. 1 focus of many banks. With loan-to-deposit ratios under the microscope, banks took a hard look at equipment finance assets that were competing with cash given ongoing rate increases, and many decided it was time for a change. As a result, many banks made the tough decision to focus their equipment finance efforts exclusively on bank relationships and pull back from making loans for loans sake.

“Economic volatility and bank failures presented a major challenge, affecting market stability and clients’ confidence. Rising interest rates and inflation dampened investment appetites, making financing more expensive for all stakeholders,” a U.S. bank affiliate leader says.

“The bank failures that occurred earlier in the year raised red flags about liquidity issues,” another U.S. bank affiliate leader says. “This caused us to protect the deposits and lend less in the middle of the year. This made competition even tighter as we sharpened the credit requirements.”

For the second year in a row, the economy and capital spending were top of mind for Monitor 100 leaders, with 38% listing this as their greatest concern, down from 55% last year.

“Despite the U.S. economy adding jobs in recent months, job market growth is slowing compared to last year and most business owners continue to wrestle with inflation, which is driving higher input and labor costs and putting a squeeze on margins,” Bill Stephenson, CEO of PEAC Solutions, says. “This has translated to lower confidence in many sectors and a tightening of belts, but I remain hopeful that the Fed rate cuts projected for later this year will provide some relief.”

Over the last year and a half, confidence in the equipment finance industry has fluctuated somewhat, with confidence levels ranging from 40.6 in May 2023 to 55.2 in March 2024.1 In the Equipment Leasing & Finance Foundation’s April 2024 Survey, zero respondents characterized the current U.S. economy as “excellent,” 92.9% believed the economy is “fair” and 7.1% rated it “poor.”

According to the May economic outlook report by the economic group at Wells Fargo, a slowdown of business investment is likely to continue: “Although still positive, capex spending has been challenged by higher financing costs and uncertain demand prospects. Reduced clarity on future monetary policy and a potentially softer macroeconomic backdrop is likely to remain a constraint on equipment and intellectual property investment.2

The second largest concern of Monitor 100 leadership (23%) is credit quality of customers.

“There is instability within the industry, a lot of equipment finance companies have closed or pulled back, delinquencies and charge offs are higher than the last several years,” a U.S. bank affiliate leader says. “Having a team remain committed and focused is critical to succeeding during these times.”

The latest Equipment Leasing and Finance Association Monthly Leasing and Finance Index indicated 2.1% of receivables over 30 days, up from 1.9% in the same period in 2023. Charge offs were 0.5%, marking an increase from 0.3% on a year-over-year basis.3

Many Monitor 100 companies reported an upward trend of delinquencies and charge offs, particularly in the transportation sector. “Bad debt write offs, aging over 30 days, defaults, NSFs, and repossessions were all up compared to the prior year,” an independent leader says. “Industry data was showing aging and default figures the transportation industry hasn’t seen since the Great Recession.”

The freight market has been experiencing one of the longest recessions in history.4 The source of the downturn — an oversupply of capacity — began in 2019.5 The recession, which began in 2022, has entered its third year and sources are mixed on when it will end. According to DAT, the trucking industry lost 29,000 carriers in 2023.

“2023 brought some relief to transportation fleets with improvements in the supply chain and lessening demand for heavy duty trucks, but the industry continues to face a number of challenges,” an independent leader says. “Fleets need to be evaluating their procurement plans because of the impending CARB pre-buy, and monitoring how it may alter their plans. There is diminishing enthusiasm for electric trucks, increasing interest in hydrogen power, and it remains clear that fleets need assistance in navigating an uncertain future for alternative fuel vehicles.”

“The credit strain on our loan portfolio driven by the current trucking recession along with the operational efforts needed to deal with it has been our most significant challenge this year,” an independent leader says.

“Most challenging has been significant negative shift in performance relating to transportation segments and rapid increase in interest rates shifting the financial landscape and impacting various areas of the industry whether it be customer’s cash flows, funding source capacity or overall outlook,” a U.S. bank affiliate leader says.

The Fed continued its interest rates hikes in 2023, which led to mounting margin compression concerns for Monitor 100 companies — 19% of companies listed margin compression as their greatest concern for 2024 compared to 22% last year.

“Dealing with tighter margins in highly competitive vendor/manufacturer markets complicated by the higher rate environment was a challenge,” an independent leader says.

“The most significant challenges were rising rates compressing our net interest margins on our existing portfolio along with increased delinquencies/defaults in certain verticals such as transportation,” another independent leader says.

“We experienced two fairly significant challenges,” a foreign affiliate leader says. “The first was the rate environment, as our cost of funds skyrocketed the competitive landscape for pricing didn’t follow suit and as such we saw significant margin compression in 2023. The other challenge was an over softening of demand in our largest concentration of business originations. The uncertain economic times were major factors to both issues, and we expect 2024 to be less challenging simply because we’ve adjusted to the new norms; however, continued volatility of the economic markets and this being an election year are things we will watch very closely.”

Although the Fed initially indicated a plan to lower the federal funds rate several times in 2024, elevated inflation has persisted, and the goal of lower rates continues to be pushed forward. A recent Reuters poll of economists suggests that the Fed will lower rates twice this year, beginning in September.6 Only time will tell if this will come to pass.

In its May economic outlook report, “Softer Growth, Cooler Inflation and Rate Cuts Remain on the Horizon,” the economics group of Wells Fargo indicated that overall economic growth in the U.S. is in “solid shape,” with real GDP growth predicted to remain strong in Q2/24. According to the report, the strong labor market is expected to slow somewhat.

The April 2024 Beige Book, published by the Federal Reserve, indicated a slight expansion in economic activity with consumer spending barely increasing, manufacturing activity declining slightly, bank lending roughly flat, residential construction increasing slightly and nonresidential construction flat. Overall, the economic outlook was “cautiously optimistic.”7

Employers in the U.S. added 175,000 jobs in April 2024, which fell below estimates, and unemployment rose slightly to 3.9% from 3.8% in the prior period.8

Employment levels remained steady at equipment finance companies, with the Monitor 100 companies reporting a net decrease of 34 full-time employees, a nominal year-over-year decline of 0.3%.

2024 FOCUS
Given the myriad challenges they are up against, Monitor 100 leaders are focused on creating more liquidity and efficiency in 2024. Improving and automating processes and increasing borrower self service are top of mind for many leaders.

“In 2024, our primary aim is to streamline processes and implement advanced automation tools,” a U.S. bank affiliate says. “This targeted effort is essential to meet the growing demand for financing options while upholding our commitment to delivering prompt and reliable service to our clients. Addressing this will not only improve our operational efficiency but also strengthen our competitive position in the market by demonstrating our ability to adapt and scale our offerings to meet evolving customer needs. In doing so, we position ourselves for sustainable growth and continued success in 2024.”

“Our efforts are focused on doing everything we can to make business easier and faster for our partners while maintaining the appropriate risk mitigation,” an independent leader says.

Of the 96 Monitor 100 companies that provided a forecast for estimated year-end 2024 portfolio size, 66 anticipate an increase, eight predict a decrease and 22 expect their net assets to hold steady. The forecast for the group, calculated on an average weighted basis, is 2.1%, which would increase total Monitor 100 assets to more than $613 billion by year’s end, an increase of $12.4 billion. Last year, the group predicted a total increase of 6.4%, which was slightly higher than the 5.8% actually achieved.

When it came to new business volume, of the 96 companies that provided a forecast, 63 predicted an increase, 12 anticipated a decrease and 21 expected no change. The originations forecast for the group, calculated on an average weighted basis, is 2.8%, which would result in total new business volume of nearly $228.3 billion in 2024, an increase of $5.8 billion. Last year, the Monitor 100 companies predicted an overall increase of 4.1%, which was slightly higher than the 2.8% increase actually achieved by the group.

Looking ahead, Monitor 100 leaders expect to add 289 full time employees by year-end 2024 with foreign affiliates and independents expecting to see the bulk of the increases. Of the 82 companies that provided an employment forecast, 53 anticipate adding to their staff, 14 expect to decrease their number of full-time employees and 15 predict no change to their total headcount.

We may not know when interest rates will go down, who will win the elections this November or when geopolitical tensions around the globe will subside, but one thing is certain: the equipment finance community will find opportunities in every challenge this market has to offer and will emerge stronger, faster and more agile than ever before.

As always, we appreciate the time and effort of the equipment finance companies that participate in our annual survey. The Monitor 100 would not be possible without the ongoing cooperation of the equipment finance community. •

1 Monthly Confidence Index – April 2024 Survey Results, Equipment Leasing & Finance Foundation.
2 “U.S. Economic Outlook: May 2024,” Wells Fargo Economics. May 8, 2024.
3 Monthly Leasing and Finance Index: March 2024, Equipment Leasing & Finance Association, Apr. 23, 2024.
4 Fuller, Craig, “The Great Freight Recession has now lasted longer than the COVID bull market,” FreightWaves, Apr. 17, 2024.
5 McElroy, Manny, “Freight Market Outlook & Trucking Industry Forecast 2024,” ITS Logistics, Jan. 29, 2024.
6 Ghosh, Indradip, “Fed to Cut Rates in September, say nearly two-thirds of economists,” Reuters, May 13, 2024.
7 “Beige Book – April 2024, Board of Governors of the Federal Reserve System, Apr. 17, 2024.
8 Employment Situation Summary, U.S. Bureau of Labor Statistics, May 3, 2024.

Rita E. Garwood is editor in chief of Monitor.

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