Monitor catches up with three Bank 50 leaders to discuss how they achieved growth in 2016 and how this year is measuring up to expectations. They offer predictions of what is in store for the industry in the second half of 2017, asserting that banks will continue to dominate equipment finance.
This year’s Bank 50 set new records for both collective net assets and new business volume. Of the group, 46% registered net gains in portfolio size. Our panelists, the leaders of three of these U.S. bank affiliates, share how they were able to achieve that growth.
“There are largely three factors that contributed to our year-over-year growth,” says Tom Partridge, president of Fifth Third Equipment Finance. “What really helped drive our volume was an economy that continued to improve, replacement demand coming from our existing customers and a restructured sales force, along with new talent we brought in to help drive new business. Adding new talent to the group enabled us to dramatically increase our volume. We also centralized the reporting structure for our team, allowing us to deliver a more consistent solution strategy to our existing customers and prospects.”
“TD Equipment Finance experienced growth within existing origination channels,” says Anthony Sasso, head of TD Equipment Finance. “In addition, our targeted vertical markets displayed strong economic growth which contributed to our year-over-year portfolio growth.”
John Evans, executive vice president of Bank of the West’s Equipment Finance division, says there were three primary factors that contributed to Bank of the West’s equipment financing business growth over the past year. “First and foremost is our commitment to our clients to ensure that we are bringing value, both through vendor financing as well as commercial banking. We continually assess and analyze the market and understand what our customers’ critical business needs are now and what they will be, in order to offer them solutions that help fit those needs. Market knowledge and the relationships we have with our clients are key to our business growth.
“Second, we carefully examine trends in technology to support innovative solutions that add value to our clients’ businesses. For example, shifts are taking place in certain industries that have fundamentally changed how customers want to structure their financing options, and we continually identify ways to stay ahead of these trends to offer clients the products they want and need.
“Finally, we evaluate and refine our services and make ongoing investments in our capabilities that allow us to increase the breadth and depth of solutions that we offer our clients, delivered in a way that best suits their unique situations and needs.”
Although 2016 was a success, we’re already past the mid-point of 2017, so we checked in with our panelists to see how actual 2017 results compare to forecasts at the start of the year and to evaluate what seems to be working so far.
“To date, our results are aligned to our 2017 plan,” Sasso says. “We have the strength, scale and experience comparable to the industry’s largest financial institutions, but retain the size and personalized feel of a regional bank. This model allows us the flexibility necessary to provide customized financing to some of the world’s most prestigious organizations and brands. We continue to focus on the client as a committed financial partner that understands their business and is reliable and trustworthy.”
“As forecasted at the beginning of 2017, new business has been variable month to month and industry to industry, and we expect that to continue throughout the rest of the year,” Evans says. “Year-to-date, we have seen some improvement, despite variability caused by inconsistent trends in investment in equipment and software. Regulatory changes and tax policy have dampened private sector investments. Companies have deferred investment or have shifted resources overseas. Until those factors change, there may be less interest in investments domestically. We have also seen industry-specific headwinds that have increased variability in the market. For example, agricultural equipment financing that has been hit by low commodity prices due to increasing global acreage and improvements in yield-enhancing technology over the past two years. Despite this, we have been buoyed by diversity of industries and equipment segments that has enabled us to reach overall objectives.”
“We are running slightly ahead of our forecast for the year,” Partridge says. “Although we started out a little slower, growth picked up in March. Through the first six months, June has been our strongest period. We are relatively optimistic about the balance of the year. We attribute this to our continued refinement of our sales force and strategy. It’s brought clarity for our teams and has improved our ability to act in the marketplace.”
“As the economic cycle has continued on a multi-year positive trend, there is a sense that the market is leading to risk not being completely priced into every transaction on many deals,” Evans says. “Market rates are beginning to compress slightly, while other structural signs point to a more aggressive posture being taken on the part of some lenders — particularly alternatives and non-bank.”
“Most structure points have remained consistent, but we have seen an increase in pricing competition as more firms are looking for quality assets,” Partridge says. “Recently, we have seen some lessees push to revise contract terms. We believe this is a result of more players chasing the same deals. We haven’t seen movement yet within the industry; however, we are noticing the requests as a growing trend among institutions.”
“The credit quality for our leases and borrowers has remained strong in 2017,” Sasso says. “Our volume has increased year over year, and we’ve stayed within our risk appetite.”
“Credit quality has generally remained strong, with the exception of a few sectors that have experienced some softness in the market,” Evans says. “As I mentioned previously, one example of this is the agriculture industry, where commodity prices have dropped substantially and have not largely recovered over the past two years. The other primary example is the oil and gas industry, which is still recovering from the decline in oil prices between 2014-16, but has recently experienced an upward trajectory.”
Forming Fintech Partnerships
We hear a lot about fintech players targeting prospects in the SME space, but how has this affected new business activity of banks in the equipment finance industry? While Sasso says fintech players are not affecting TD’s business as they focus on different verticals, both Partridge and Evans view these new players as potential collaborators.
“There has been a definite shift in customer behavior throughout the banking world — whether they’re retail customers, commercial banking customers or wealth management clients — that has been driven by technology over the past several years,” Evans says. “Bank of the West — particularly in partnership with our parent company BNP Paribas — is very aware of this trend and has been working over the past few years to collaborate with the fintech community in different ways in order to improve the way customers interact with and experience each group within the bank. Specifically regarding the equipment finance industry, we see a potential for impact from emerging fintech players and have been investing heavily in our digital capabilities to ensure that we are positioned properly to serve the needs of our customers today and in the future. These investments will allow us to not only improve delivery of our products to our customers, but also allow us to use data to improve efficiency and provide a better long-term experience.”
“Across the board, Fifth Third views fintech companies as partners, not as threats,” Partridge says. “We understand that these players bring an ease of execution for customers, and we continually look for ways to make it easy for our clients to do business with us. This means keeping an eye on the introduction of new technology that can improve the client experience.”
Evans says the industry must adapt to changes in the market. “The expectations, needs and demands of customers require lenders — whether bank, captive or independent — to reexamine how they deliver their products and invest in digital capabilities, new product and services that fit the needs of customers, rather than vice versa. At Bank of the West, we have enhanced how we work with fintech partners, as well as with our parent company BNP Paribas and their Leasing Solutions Group, to bring international capabilities to our vendor finance partners, their customers and our commercial banking customers. What is clear is that lenders must focus on continuous improvement in order to stay competitive in a market that is continually evolving.”
According to a recent MarketWatch article, the DOW and S&P 500 recorded the best first half performance since 2013. Is the business confidence reflected by the stock market sustainable and likely to continue to provide a tail wind in 2017?
“Overall, there are a number of economic indicators and data reports suggesting that the economy is strengthening which should continue to promote business confidence in 2017,” Sasso says.
“I agree that the stock market is an overall indication of business confidence, but I’m not convinced that the stock market performance is necessarily a tail wind for the equipment finance industry,” Partridge says. “We argue that tax policy and public policy will make a larger impact on overall demand, more so than stock market values. We have seen that large cyclical assets like planes, railcars, trucks and trailers, and marine assets, have experienced some softness. As an offset to this, we have seen growth in industries like medical, material handling equipment and general manufacturing equipment.”
“Since November, investors have anticipated that certain factors will shift in their favor — tax policy and regulatory burden, among others — but, while there’s been initial signs of regulatory relief, many of these expected changes have yet to come to fruition,” Evans says. “There’s an expectation that some, or a large portion, of this administration’s agenda will be enacted into law during 2017, which will increase confidence for U.S. companies in making investments domestically. However, there is a limit to this business confidence — while the expectation is regulatory and tax policies will be realized, a potential negative impact on the industry and stock market may be realized should these changes fail to take place.”
“Our biggest industry concerns at the beginning of the year centered on potential changes to tax and accounting policies and the impact those would have on our clients’ capital budgeting,” Partridge says. “Our concern has not changed at this point, but we do think that changes to tax policy will not occur as quickly as we did at the beginning of the year.”
“Business confidence is at a pivotal point,” Evans says. “If reforms are not realized as the market expects, there will be negative implications for both the industry and the equities markets. It remains to be seen how — and when — things progress, but the uncertainty is affecting the industry and causing hesitation among potential buyers.”
Sasso’s biggest concern throughout the year has been margin compression, but despite their concerns, our panelists agree that the bank-affiliated equipment finance companies will fare well this year.
“We’re expecting that the bank owned equipment finance industry will continue to experience growth as a high percentage of activity remains in the U.S.,” Sasso says.
“We believe this year will be fairly consistent with 2016, with a decent amount of demand,” Partridge says. “However, we’ve noticed two changes from last year with bank equipment finance companies. We are seeing equipment finance companies take on larger hold positions, and they are moving down the risk spectrum in search of higher yields, given the persistent low-rate environment.”
“Bank-affiliated participants will continue to be the predominant players in the equipment finance market for the foreseeable future,” Evans says. “Part of this is due to the continued growth of bank-led equipment financing since the recession, along with a willingness and ability on their parts to evolve as customers’ demands and expectations have change over time. Certain banks, including Bank of the West, are making large, regular investments in technology in the equipment financing and leasing space to keep pace with and exceed customer needs. This will position banks well for the remainder of 2017 and in the future.”
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