• The widespread activity
    of recent years in the vehicle market, and the decline in the value of
    second-hand vehicles, are attracting increasing attention to the leverage and
    the sources of credit of the companies operating in the field—vehicle importers
    and leasing and rental companies.
  • The risk in this market
    is reflected in a sharp and unexpected decline in vehicle prices, because
    vehicles serve as collateral for financing the activity in the field both among
    households and among the companies themselves.
  • The exposure of the
    financial system—the banks, the credit card companies, and the institutional
    investors—to this market was about NIS 40 billion in the third quarter of 2016,
    including both direct credit to households and to the companies operating in
    this field, and direct holdings of the securities (shares and bonds) of the
    companies.  While the exposure
    constitutes a significant portion of the outstanding credit of the credit card
    companies, it is only a small portion of the total assets of the system, and
    does not constitute a systemic risk to the stability of the financial system.

In recent years, there has been a marked and constant increase in new
vehicle sales in Israel.  According to
the Association of Vehicle Importers, there were 286,728 new private vehicles
sold in Israel in 2016, more than 12 percent higher than in 2015.  The widespread activity in the vehicle
market—and the concern that the large supply will lower vehicle prices
significantly, since for the most part, vehicles serve as collateral against
credit to the companies operating in the market—have attracted increasing
attention to the leverage and the sources of credit of these companies and to
the extent to which the financial system is exposed to them.

 

There are two main types of players in the vehicle industry in Israel:
the importing companies, mostly privately owned, and the leasing and rental
companies, mostly publicly traded.  The
vehicle importers market new vehicles to both households and the leasing
companies, and provide consumer credit mainly by spreading out the payments for
a new vehicle.  Some of them do so
through captive financing arms (subsidiary companies that offer financing for
vehicle purchases from the parent company). 
The leasing companies provide vehicle fleets to the business sector,
private leasing services, and rental services in Israel and abroad, and sell
vehicles at the end of their use period in the rental and leasing fleets.  In recent years, the companies have been
expanding the field of transactions known as “zero kilometer”, in which they
purchase vehicles wholesale from the importers, and then sell them as
first-hand vehicles at a lower price and with higher financing rates, either
through “regular” financing (on a payment plan) or through financial leasing.[1]  Against the background of the low interest
rate environment, the vehicle companies enable a longer period of payments, and
entitlement to additional credit beyond that provided by the banks and/or
credit card companies.

 

Since the large vehicle importers are mostly under private ownership and
do not publish financial statements to the public, it is difficult to estimate
their volume of leverage or to outline the sources of financing for their
operations.  However, it is possible to
obtain a rough estimate by looking at the two publicly traded importers, since
they are two of the five largest companies in the field.  At the end of the third quarter of 2016, the
total assets of these two companies alone totaled about NIS 5.9 billion, while
their total liabilities were about NIS 4.1 billion, for a leverage rate of
about 70 percent.  Among the four large
publicly-traded leasing companies, total assets were about NIS 17.5 billion,
while total liabilities were about NIS 15.2 billion[2], for
a leverage rate of 87 percent[3],
while public companies in the business sector (excluding banks and insurance
companies) had a leverage rate of 63 percent. 
However, it should be noted that in the financial services, an industry
similar to the leasing companies in terms of operations, leverage was 94
percent.

 

There is a unique risk of exposure to the vehicle industry as a result
of the possibility of a decline in the value of vehicles encumbered as
collateral to the entities financing the companies that operate in this industry,
and that such a decline will exceed the forecast estimates.  Vehicles are the main encumbered assets of
the companies, and if the used car market becomes flooded, most of their
collateral may lose its value beyond the forecasts.  The vehicle trading companies are also
directly exposed to the risk inherent in a decline in the value of collateral,
through exposure to households and to the leasing companies.  Such a scenario may lead to borrowers
returning the vehicles used as collateral to the merchants with a much lower
actual value, thereby leading to large losses on the part of the importers and
the leasing companies.  While the
companies record the encumbered vehicles at a reduced value (lower than their
price list cost), and also reduce their value when they encumber them to the
financing entity, there is a risk that the value of the vehicles will decline
beyond the forecast.

 

In addition to this risk, the financial system is also directly exposed
to the risk of default of the vehicle trading companies.  If the economy is hit by an extreme recession
and unemployment, the firms and households leasing vehicles may default,
thereby leading to heavy losses to the leasing companies and importers.  Moreover, if the interest rate in the economy
increases and impairs households’ repayment abilities[4], they
may default and lead to heavy losses to the importers.

 

The financial system is also exposed to the vehicle market through a
number of channels.  First, the banks are
exposed to this market through the consumer credit they provide to
households.  The outstanding
balance-sheet credit the banks provided against encumbered vehicles was about
NIS 9.5 billion in the third quarter of 2016, 7.1 percent of outstanding
consumer credit provided to households. 
The amount provided by credit card companies was NIS 1.9 billion, about
20 percent of the outstanding consumer credit they provided.[5]  In addition, the banks are exposed to
importers and the leasing and rental companies through loans, and balance-sheet
credit to the vehicle trade industry was almost NIS 25 billion, 6.3 percent of
outstanding credit to the business sector.[6]

 

The institutional investors are also exposed to the vehicle industry,
through direct holdings of the securities of the companies active in the field
and direct loans they provide to those companies.  Total direct holdings in the large leasing
companies was about NIS 1.5 billion at the end of the third quarter of 2016,
while total direct holdings in importers was about NIS 700 million.  These amounts together comprise about 0.17
percent of total institutional investors’ holdings, while in the same period in
2015, they accounted for 0.14 percent of holdings.  The volume of loans provided by the
institutional investors to the companies in the vehicle industry is NIS 1.2
billion, about 1.8 percent of their total loans, while in 2015, the amount was
NIS 674 million, about 1.3 percent of total loans.[7]

 

The foregoing survey shows that the financial system is increasingly
exposed to the vehicle industry and its offshoots, and that the current
exposure is not negligible in terms of its volume (about NIS 40 billion).  However, since it accounts for a small share
of the system’s total assets, the systemic risk is not large.  With that, it should be noted that the
exposure accounts for a small share of the total assets of the banking system
and of the institutional investors, but a significant share of the outstanding
credit of the credit card companies.

 

The financial
system’s exposure to the vehicle industry (NIS million)

 

Type of exposure

2015:Q3

2016:Q3

The banks

Outstanding business
credit to the vehicle trade industry

22,924

24,855

 

As a share of outstanding
business credit

5.86%

6.16%

 

Outstanding consumer
credit in vehicle encumbrances

n/a

9,542

 

As a share of outstanding
nonhousing credit

n/a

7.12%

The credit card
companies

Outstanding consumer
credit in vehicle encumbrances

1,637

1,932

 

As a share of outstanding
credit to private customers

22%

20.2%

The institutional
investors

Holdings of vehicle
importers

507

685

 

Holdings of leasing
companies

1,190

1,523

 

Outstanding direct loans
to the vehicle industry

674

1,168

 

Exposure as a share of
total managed assets

0.2%

0.26%

 

Exposure as a share of
total risk assets1

0.35%

0.46%

Total exposure of the
financial system

 

39,705

1 Risk assets—managed assets minus the government bonds
portfolio.


[1] In
these leasing transactions, the customer makes a pre-determined monthly payment
for the vehicle.  During the lease
period, the vehicle remains the property of the leasing company, since it
serves as collateral for the monthly payments. 
At the end of the period, the customer is permitted to (a) purchase the
vehicle for a pre-determined price, (b) return the vehicle to the company, or
(c) continue the arrangement with the company and replace the current vehicle
with a new one.

[2] About
28 percent of total liabilities are long-term bonds, and about 22 percent are
loans from banking corporations.

[3] And
the variance is low: the leverage rate ranges from 85.6 percent to 88.2
percent.

[4] We
assume that at least some of the credit is issued at variable-rate interest.

[5] While
it is possible that some of the credit for vehicle purchases was issued within
the “all-purpose credit” framework and not against the encumbrance of a
vehicle, in such a case the risks to this credit are identical to the other
credit risks to households, and do not include the additional risk of a decline
in the value of the collateral.

[6] This
is an underestimation of the banks’ exposure to the companies in this
field.  Credit to the financial leasing
companies is included in the “financial services” industry, and since this
industry obviously includes companies in other financial areas, it is not
possible to include it in exposure to the vehicle industry.

[7] In
order to make these calculations, we added the direct loans issued against
encumbrance of vehicles and the loans where the names of the loans indicate
that they were issued to companies in the field.  Here too, we have an underestimation, since
some of the loans also have a generic name that does not indicate the identity
of the borrower.

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