Absa Vehicle and Asset Finance: Comment on New vehicle market

During May a total of 16505 (excl sales not reported in detail to NAAMSA) new passenger vehicles were sold in SA (18896 incl sales not reported).

Passenger vehicle performance (incl sales not reported in detail):

- Year on Year for the month of May: 25.86% lower than May 08.

- Month on Month: 12.82% higher than April 09.

- Year to date: 31.52% down (compared to 08)

- Comparing last Quarter with same period last yr: 35.78% lower.

LCV Performance:

- year on year for May down by 41.62%

- month on month up by 8.11%

MCV/HCV performance:

- year on year for May down by 50.77%

- month on month down 6.75%

Total Industry performance:

- year on year for month of April down by 32.90%

- month on month up by 10.20%

The slowdown in economic activity continue to impact light and medium commercial vehicle sales but we also see the impact on MCV + HCV as mining, manufacturing and residential construction output continue to decline. Turnover of transport companies (with special reference to small and mid size corporates) severely impacted and therefore approval ratios from banks reduced due to unhealthy debt to turnover ratios. Further contraction is forecasted that will further delay investment in these industries, further impacting these sales for rest of 09.

Comments (with reference to passenger market):

- The interest rate reductions (450 bp from Dec08) have not improved consumer confidence (less vehicles sold per day in May than in Febr/March 09). Total vehicle sales now back to levels last seen in 2000/2001.

- Performance month on month was worst than expected (expected May 09 to be on par with March 09) and big disappointment for all retailers. May traditionally a high purchase index month.

- The vehicles sold per day in May were nearly 11% down on March 09.Vehicles sold in May/day were on same levels as the April/day sales (remember April was a disaster sales month).

- Consumer confidence at all-time low as evidenced by: average contract term increased by nearly 20% yr on yr (now at 38months), increase in cancellation of approved transactions (nearly 8% cancelled in May), decrease in ticket value financed indicating move to cheaper vehicles, continuous declining trend in new vehicle finance applications and no material improvement in the ratio of household debt to disposable income.

- With these sales the morale and motivation of the motor and vehicle finance industry “not well”. A major part of this industry remuneration is based on variable payment structures – a real challenge to management will be to give staff hope in these wild times.

- Internal bank finance trends confirms a shift from new vehicles to good quality pre-owned vehicles. Ratio now over 1used :1 new.

- Recent new vehicle prices increases (nearly 12% year on year) also impacted new vehicle sales. Current strong ZAR/USD exchange rate will definitely limit future price increases.

- Overall the replacement cycle of vehicles have lengthened substantially over last 6 months indicating/confirming financial stress of consumers.

- With these numbers, expect 09 to be a year of consolidation with special reference to suppliers of vehicles in SA. Consolidation will in all likelihood be a combination of dealership closures, take-overs and/or streamlining of brands, sharing of infrastructure and technology between different brands to cut costs etc. This will have knock-on effect on related motor vehicle parts- and component manufacturers/industry.

- A further interest rate cut of 100 basis points were announced on the 29 May 09. Bringing cumulative cuts of 450 basis points since Dec 08. On a R150 000 vehicle this represents a monthly saving of close to R350/month. Assuming a housing loan of R700 000 the total monthly saving for consumers on their vehicle and property finance can be close to R2600/month.

- Consumer confidence will only be restored after ‘rectifying’ of their personal balance sheets (time lag after interest rate reduction of +- 12-18 months to restore credit/spending).

- Outlook therefore bleak for 09 (vehicle sales can be further 24% down in 09) and we expect earliest rebound of this industry only after end Q1 2010.