The economic slowdown, rising non-performing loans (NPLs) and the popularity of electric vehicles (EVs) have dented the used car market, dragging down profits of car hire-purchase businesses this year, says Tris Rating.
In the first half of 2024, used car hire-purchase companies were slammed, with profits plunging 93% year-on-year.
Motorcycle hire-purchase firms reported a 71% decline in profit over the same period, while truck hire-purchase companies recorded a 48% dip.
"The main reason was financial costs and credit expenses increased from provisions for bad debts and losses from the sale of repossessed vehicles because of lower used car prices, especially for trucks and cars," Tris said in a report.
The used car group saw the highest increase in credit expenses, followed by trucks and motorcycles, respectively.
As for asset quality in the first six months, the NPL ratio for truck hire-purchase loans is expected to increase from 4.09% at the end of 2023 to 5% in the second quarter of this year.
The NPL ratio for used car hire-purchase loans climbed from 5.82% to 6.07% during the period.
In contrast, the NPL ratio for motorcycle hire-purchase loans slid from 4.08% to 3.61% based on increased write-offs, resulting in a lower loan loss provision ratio, but "the debt quality remains weak", Tris said.
Some operators may face risks from higher credit costs, both from increased provisioning and write-offs, noted the rating firm.
The popularity of EVs caused sales of internal combustion engine (ICE) cars and auto lending to slow in 2023, pressuring used car prices and reducing profits.
"The weak economy also led to a large number of bad debts and vehicle repossessions. Used ICE car prices have fallen by more than 20-30%, reducing collateral value and causing many companies to incur losses from provisioning and selling repossessed vehicles," said Tris.
Bad debts for truck hire-purchase loans have also surged, with a glut of repossessed vehicles pressuring used car prices.
"Tris Rating expects in the short to medium term, there will be no significant new players entering the market as this business requires lots of capital, given the high cost of trucks and large portfolio needed to spread risk. For the next 12 months, the hire-purchase business will continue to slow, in line with the sluggish economy and high household debt," noted the report.
Operators need to focus on maintaining credit quality to cope with the challenges, said the report.
"Competition should not be intense, except for quality customers, limiting the ability to increase yields to offset higher costs. In addition, the loan rejection rate will remain high."
The credit rating company expects the business to remain weak based on economic uncertainty and lack of government support for the rest of 2024.
In addition, falling EV prices has affected used car auction prices, marring companies' performance for the next 12 months, according to Tris.
"A clearer recovery in earnings is expected in the second half of 2025 when the government's stimulus measures take effect, giving the economy a lift," said the company.