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January 2, 2024


2024 OUTLOOK: INDUSTRY EXPERTS WEIGH IN ON THE FUTURE OF SME LENDING

The start of the new year is a time when people often think about the year
ahead. This year, I decided to ask a few industry friends for their thoughts on
major trends and events that will help shape SME lending in 2024. Below are our
combined observations - my sincere thanks go to Ylva Oertengren, Simon Goldie
and Christian Roelofs for their much-valued contributions.


UNCERTAIN ECONOMIC AND POLITICAL CONDITIONS

While conditions are much more stable than in late 22/early 23, economic
uncertainty remains. Both inflation and interest rates are expected to decline
but slowly – with possibly no change in interest rates during 2024. At some
point, there’s likely to be a general election (and potentially a new party in
charge), though this could also be pushed into early 2025. 

For some businesses, this will lead to delays in investment decisions, not
helped by any further U-turns in government policies (as recently experienced
with HS2 and the phasing out of ICE vehicles). Overall, the OBR’s November
projection for business investment in 2024 is down nearly 6% on 2023. 

Default risks are expected to rise. Recent insolvency rates are at their highest
since 2009 and are expected to remain high. Sectors with high energy usage will
continue to suffer. Consumer spending will remain under pressure as low,
fixed-rate mortgage deals lapse, and the OBR’s 2024 forecast for Real Household
Disposable Income is a fall of 0.9%. As an early signal, the fall-out from
Christmas trading will be interesting. A drop in consumer confidence will filter
into the SME market and, alongside other headwinds, drive an increase in
borrowing arrears.

The asset finance sector proved itself to be robust through the Covid pandemic.
2024 market conditions are likely to offer challenges, but these should be fully
manageable. Finance companies are aware of the risks and will be prepared. 

Economic forecasts have a habit of being wrong, and based on their on-the-ground
experience (continued growth and low arrears), many finance companies remain
bullishly in growth mode and may enjoy a very successful 2024. 


GOVERNMENT INTERVENTION

One piece of good news is that the full expensing of asset purchases has been
made permanent, as announced in the Autumn Statement, albeit that it places
specialist leasing businesses at a disadvantage. 

The ESG reporting regime is moving towards becoming more established, detailed
and coordinated. The government is currently reviewing the international
standard IFRSS2 which could lead to a mandating of Scope 3 reporting for listed
companies (though not in 2024). A growing ESG imperative will drive new business
models (including more “purpose-led” organisations) and lending opportunities.

The current version of RLS will expire and is likely to be replaced in April,
with an announcement expected in the Spring Budget. There is speculation that
the new solution will be targeted towards investment in green assets.

While implementation of Basel 3.1 capital arrangements has been pushed back to
1/7/25, “near-final” rules will be made available in Q2, including treatment of
the SME Support Factor, with knock-on impacts on profitability, pricing and
competitive dynamics. 


LENDING MODELS

It is expected that lending models will evolve rather than change radically. 

The broker market is expected to continue to grow and consolidate, with larger
broker firms expanding their sales reach under well-managed regulatory
umbrellas. New business models will evolve, especially for larger firms that
could shift towards offering a broader product set, more own-book activity, or
participating in joint funding models with lenders.

In captive and vendor finance situations, 'as-a-service' lending is on the
increase, though not yet near the scale predicted, and pay-per-use solutions
will continue to evolve.    


COMMODITISATION AND SPECIALISATION

Continued simplification of the asset finance product – whether for reasons of
market effectiveness, regulation, related transparency, process efficiency or
scalability – has already driven a level of commoditisation with less
availability of income streams beyond money-over-money margins. As a result, in
many cases, the primary differentiator between competing lenders has become
price (this was shown clearly during periods of interest volatility in 2022/3).

This has increased the power at scale of larger lenders with low funding costs
and has driven a rise in the number of niche specialist lenders who aim to build
market-specific competitive advantage, often below the scale required by a large
lender or driven by growth-oriented shareholders able to spot attractive lending
niches. For these firms, the need for continued growth is likely to remain in
2024.


NET ZERO

The transition to net zero will continue, creating new lending opportunities.
Scaling up seems inevitable but the transition will not always be smooth,
especially in liquid markets like cars and vans, where new and especially used
values will be prone to variation. The adoption of new BEVs will remain hindered
by high prices and first-life depreciation, leading to threats from lower-cost
market entrants. The corporate market will continue to lead the way, aided by
attractive BIK rates.

Funding of renewable energy assets will remain a struggle for many lenders,
unable or unwilling to modify historic practices.

For the BBB or larger financial institutions seeking to underpin green
financing, the development of a suitable wholesale finance solution to support
intermediary lenders was highlighted as an opportunity for purpose-led,
profitable growth.


TECHNOLOGY

AI and IoT technologies are expected to evolve rapidly, with the potential to
herald new ways of lending that aren’t expected to be realised at scale in 2024.
The role of IoT data in supporting more effective asset management - usage
patterns, maintenance and replacement – is noted.

Digitalisation will continue to raise table stakes for competition and, if done
well, will provide points of differentiation for lenders. Connectivity through
APIs will continue to support better integration between trading partners and
new ways of working. Increasingly, point solutions that help to streamline
processes and add new areas of value will be adopted. 

Connected technology developments will be aided by the continuing rollout of 5G,
able to support more sophisticated environments for information flows.


M&A AND OTHER STRUCTURES

Some consolidation may occur if trading conditions and profitability decline,
though given the impact of recent interest rises, buyers and sellers are likely
to have materially different views on value. Neither is wrong, so unless a
seller is distressed or the acquirer is looking for a strategic investment, the
M&A market is likely to remain quiet.

Some funders will look to alternative structures to drive growth and
right-shaping, such as partnerships (to access capabilities or new business
volumes), forward flow arrangements (for market access) and outsourcing (for
operational capabilities).


OUTLOOK

The asset finance market is likely to have been around £38bn of new business in
2023, with over 80 lenders. There will be market challenges in 2024 that need to
be overcome, but equally, there is a wide range of growth-related opportunities
available to the brave, the smart and the committed.

To discuss any of the topics discussed in this article, please contact:

Peter Hunt, Chief Operating Officer, Finativ

e-mail: peter.hunt@finativ.co.uk

Asset Finance, Corporate Finance, ESG, Motor Finance, Technology


BE PART OF THE CONVERSATION


ENGAGE WITH SUBJECT-MATTER EXPERTS AND EXPLORE THE HOTTEST INDUSTRY TOPICS

Join our free online informal meeting on 28 September from midday to 1 pm

Choose which sessions you join and move around as you wish. Topics are based on
some of our recent newsletter articles.

Add to my diary now

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