Auto hire purchase market 2021: Recovery expected, but asset quality merits close watch (Business Brief No.3900)

Auto hire purchase is another business that has been affected by the COVID-19 pandemic. Its impact on purchasing power consequently affected the outstanding balance of auto loans in 3Q20, causing a slower growth rate at 3.5 percent, as opposed to 7.7 percent in 2019. The slowdown resulted from a decrease in newly approved credit, which coincided with a 30-percent contraction of domestic sale of new cars to 530,000 units, compared to the same period last year. Outstanding auto hire purchase has not regressed alongside new car sales, as outstanding loans for more than 90 percent of total portfolio. Furthermore, a special factor of a debt suspension measure implemented to assist customers who have been affected by COVID-19 could consequently maintain existing car loans over a period of three to six months.

In 4Q20, the economy is set to gradually recover through stimulus packages to boost domestic spending and restore confidence towards COVID-19 prevention and control measures in Thailand. As a result, demand for new cars and granting of new auto loans over the remaining period of this year will likely see improvement, contrary to the first three quarters of the year. KResearch projects that, by the end of 2020, the outstanding balance for auto loans of  Thai commercial banks will grow by 3.7 percent YoY, amounting to THB 1.194 trillion.

However, close attention should be paid to asset quality in light of a surge in NPLs after the first phase of debt suspension measures by each bank came to an end at different points throughout July – October 2020. Such a rise in NPL levels should be relatively limited as the BOT's relaxed debt classification measures are still in effect. Furthermore, the used vehicle priceindex that has made a recovery this year – alongside decreased purchasing power for new cars in line with declining income level – are factors that should benefit lenders in disposing of NPLs.

Regarding 2021, if the economy grows as expected and no severe outbreak of COVID-19 happens, auto loans of  Thai commercial banks will likely witness an accelerated growth rate of approximately 3.7 – 4.5 percent in comparison to 2020, which is expected to see year-end growth of 3.7 percent. This projection, however, is accompanied by mounting concerns regarding asset quality amid debtors' income and purchasing power that have yet to return to their pre-COVID-19 levels. For this reason, the auto hire purchase business may not experience growth approaching pre-COVID-19 levels for the next two to three years due mainly to total car sales that is expected to see cautious, single-digit growth. Under these circumstances, immediate challenges facing auto loan providers are the launch of novel marketing campaigns, particularly those geared towards vehicle-specific markets like trucks and big bikes, and competition within the car registration loan market, which is likely to see brighter prospects. This situation is attributable to demand that comes from longer duration of car usage and interest rates which are lower than those of personal loan in general. In regard to supply, auto loan providers have sought the opportunity to expand the market, especially for existing customers who have completed their installment payments. In so doing, they can also benefit from a profit margin that has risen above the loan offered in the new car market. Against this backdrop, overall competition in the auto hire purchase market is expected to intensify, notably in markets with growth potential, which will become smaller after the end of the COVID-19 crisis. All in all, consumers will likely reap the most benefit from such competition.​