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ZENITH COMMENT: Taking the risk

Date: 16 April 2009

"Independents are providing a valuable service to the banking industry because they are effectively taking on the residual risk for the banks," says Andrew Cope, Zenith

Their approach to RV risk will put non-bank owned funding firms in a strong position in the long term, writes Andrew Cope of Zenith

The country has been in the thick of this credit crunch for some time now, which has led to a full-blown recession.

Initially, it was difficult to see quite what impact the credit freeze would have on our industry, particularly from a contract hire and fleet management perspective, but now things are becoming clearer I think some significant observations can be made.

Almost every week another major leasing institution - which, in the main, tend to be large, bank-owned or manufacturer-owned organisations - announces significant provision against residual value losses,

By contrast, while also facing falling RVs, many of the independent players have not suffered anything like the same pain.

There are some very good reasons for this, notably that the people running and working in those independent businesses realise that major RV losses would probably signal the end for their own company, which has created a different attitude to RV risk over the years.

More attention

Independents are providing a valuable service to the banking industry because they effectively take on the residual risk for the banks, which is in direct contrast to them taking this risk via their own subsidiaries.

Therefore, in my view, the role of the independent is likely to be strengthened in the long run by the current freeze in the credit markets because banks will pay more attention to the fundamentals of residual value risk and long-term investment return. And over time funding institutions will re-examine the underlying returns and risk profile of how they supply car-related funding into the corporate world.

In no way am I predicting the demise of bank-owned contract hire institutions, but I do think a more balanced marketplace will appear, with independents working more closely with funding companies to develop different avenues for a wider customer base.

Time will tell of course, but there is no doubt the current economic climate has changed the thinking in boardrooms up and down the land. Whatever business you are in, we are all getting that 'morning after the night before feeling', where the consequence of such freely available cheap credit now has to be paid for and the fundamentals re-assessed.