Wednesday 20 September 2017

New car lenders may be victims of their own success

Personal Contract Plans have helped drive the rise in new car sales
Personal Contract Plans have helped drive the rise in new car sales
Richard Curran

Richard Curran

New car registrations took a bit of a dip in November compared to the same month last year. While overall new car sales are up 22,000 in the year to November, at 146,000, the slight drop in the month won't go unnoticed by motor companies.

They have been shovelling out new cars to customers on very attractive car finance deals known as Personal Contract Plans. Basically, the customer puts up part of the money and drives off in the new car. Relatively low monthly repayments are agreed as long as the customer meets the cap on miles driven per year and no damage is done to the vehicle. The motor company agrees to pay a guaranteed minimum value for that car in three years's time.

This allows the customer to hand back the keys and take up a new deal, or pay a bullet payment on the rest of the car. Most people seem to hand back the keys and go again. It means they will never actually own the nice car they are driving around in, but as long as they can keep replacing them, they may not care. Some are changing for a new car after just two years.

PCPs have literally driven the rise in new car sales. Since 2014 there have been around 360,000 new cars registered in Ireland. Many of these have been bought with PCPs and will hit the second-car market very shortly.

What if the car manufacturers have made incorrect assumptions about the future second-hand value of these cars? They may be victims of their own PCP success and could end up taking a financial hit on them.

Markets are built on supply and demand. The more successful PCPs are, the more second-hand cars will come on the market, and the less they will be worth, which could undermine the car companies' and lenders' assumptions about their value.

Has the success of PCPs meant there is a flood of second-hand cars set to come on the market? New car sales have been slowing down for three months now. They were down 1.2pc in September 2016 compared to the same month last year. The drop in October was 12pc and now we have seen in November it was 20pc.

Car companies have had a great run. Renault Ireland lent out €165m to own-brand buyers in the first seven months of this year. This was up 52pc.

Volkswagen Bank lent out €340m (a 39pc increase) in the first seven months, with nearly 40pc of its new car makes - Audi, Seat, Skoda and Volkswagen - now financed by the bank. Internationally Volkswagen Bank has lent out €100bn to its customers.

PCPs look like a good deal for customers and have been a nifty way for car makers to finance people to buy their product.

But second-hand car values in Ireland have now begun to fall. One catalyst is the fall in sterling. The managing director of Ford Ireland, Ciaran McMahon, told the Irish Independent Motoring section recently that second-hand car values had fallen by around €2,000. Up to 70,000 second-hand cars are arriving in Ireland from the UK this year. As more of the tens of thousands of cars bought with PCPs in the last three years hit the second-hand market, and UK imports rise, car makers could find these PCP cars are not worth as much as they expected.

Giants of UK banking too hot for Dame Street

The Reuters news agency really burst our bubble a few weeks about attracting big London banks to Dublin after Brexit. It quoted banking sources in the UK as saying the Irish regulatory authorities were signalling to large investment banks that they would be reluctant to host large trading operations. The Irish Central Bank's head of financial regulation Cyril Roux joined the chorus this week of disputing that story and saying it was not seeking to dissuade firms from moving investment banking or trading operations to Dublin.

There is no doubt that Roux is spelling out the facts but would the Central Bank really be ready for large London investment houses or trading operations?

The risks would be off the charts and the Central Bank would need to seriously ramp up on expertise if it were to cope with keeping an eye on the activities of these firms.

It would be as much about expertise as physical bodies. Ironically, the Central Bank has lots of bodies. At last count it had 1,500 staff, keeping an eye on around 56 banks, 55 insurance companies and around 10,000 investment funds and other financial entities.

Across the water financial regulation split in two a few years ago with the Financial Conduct Authority (FCA) and the Bank of England's Prudential Regulation Authority (PRA). The FCA oversees 73,000 firms with its consumer credit role. It does this with just 3,000 staff.

The PRA oversees the activities of 900 banks and 600 insurers from a financial stability and prudential perspective with just 1,200 staff. Median pay in the British regulators is £63,000 per year. Average pay in the Central Bank of Ireland is €60,000. This excludes the €44m pension bill last year.

Michael Noonan and now Cyril Roux have insisted that the Central Bank is not trying to put anybody off coming to Ireland. The sources for the Reuters story may well have mis-read the mood in the room when Central Bank officials were meeting large investment banks. There can be no doubt however, that regulating the activities of London banks that have given the world the Libor scandal and turned mis-selling of financial products into an art form, would require a massive step up for the Central Bank of Ireland.

I think we can realistically expect a jobs boost for Dublin in fund management, fund administration and other financial services' bits and bobs. The really big stuff might be too hot to handle.

Upwardly mobile private sector staff keep moving

What does a private sector worker do when he/she is not happy with their pay? Find a better job. What do Gardai, Dublin Bus drivers and teachers do? Call a strike.

Recruitment company, Hays Ireland, produced an interesting survey during the week which showed the importance of salaries when it comes to retaining staff. It found that almost half of those surveyed plan on changing job next year, primarily because they are unhappy about their salary. An astonishing 73pc said they planned on changing job in the next two years.

While 47pc of those surveyed were satisfied, the other half are going to move somewhere else.

The survey should be compulsory reading for the Public Service Pay Commission. In the private sector, when people feel they are not being paid enough, they find another job.

In the public sector, they take a different approach, as evidenced by recent industrial relations disputes and the pending talks on fast-tracking pay restoration.

The Hays survey found that 65pc of employers in the survey had increased pay in the last year which many in the public sector could argue has not happened for them. Leaving aside the use of increments as automatic pay increases, there is another fundamental difference.

Even if two thirds of employers increased pay last year, how many have restored pay to pre-crash peak levels? I would imagine the number is very small, except in high-demand professions like IT etc. Public sector employees can argue that there isn't another similar job for them to go to in the private sector, except for certain health professions etc.

While staff attrition rates in these jobs have been relatively high in the public sector after the crash, the overall message remains the same.

In the private sector, people look for another job. There is much less attrition in the public sector and the pay commission needs to ask why.

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