Banking royal commission puts brakes on Carsales
Australian-based automotive selling platform Carsales has warned shareholders about an expected write-down of its 50 per cent investment in vehicle loan broking business Stratton Finance on the back of tight lending conditions and regulatory changes.
Carsales bought a 50.1 per cent stake in Stratton in 2014 marking the automotive selling site’s first move into financial services. The business advertises itself as Australia’s “leading car finance broker” and offers personal and commercial loans, chattel mortgages and novated lease agreements for cars, utes, caravans, boats and commercial equipment.
Carsales’ 2018 annual report shows finance and related services - including Stratton, RateSetter and PromisePay - brought in $68.5 million in revenue over the year.
Stratton has 235 employees across Melbourne, Sydney and Brisbane offices and makes most of its revenue from commissions paid by finance companies (such as lenders on its panel like Pepper Money, Macquarie, Westpac, ANZ, Bank of Queensland Finance and Latitude Financial Services).
The company's 2018 annual report warned this income could be affected by changes to "regulations in the future, or a reduction in the availability of credit from Stratton’s lending panel".
A review undertaken for the year to June 30 found no impairment was required, but warned the regulatory changes and “uncertainty of any potential impacts on asset-backed lending markets associated with the financial services royal commission” could have an affect in the second half of the calendar year.
A non-cash impairment charge of $48 million is now expected in the first half of fiscal 2019, an update to the Australian Stock Exchange on Tuesday said, citing "continued tight credit market conditions", regulatory changes and delays in expected operational changes. There was an increase in contract volumes for the five months to November.
Nationally, home loan growth has slumped and regulators have expressed concerns lenders are being "overly cautious" after the royal commission ramped up pressure on banks to scrutinise potential borrowers more closely.
One of the changes that has hit Carsales particularly hard is an Australian Securities and Investments Commission (ASIC) ban in November on “flex” commissions, where car dealers and finance brokers were paid higher bonuses for higher interest rates charged on customers. Under the new rules, car dealers cannot suggest higher rates to buyers to earn more in commission.
Research commissioned by ASIC at the time found 15 per cent of customers were being charged interest rates 7 percentage points or more above the base rate with commissions up to seven times greater than the base rate.
Some dealers, such as Toyota Financial Services, have moved to risk-based pricing where the interest rate charged relates to the customer's credit score and personal circumstances.
Carsales expect the net profit from Stratton will be about $1 million in fiscal 2019 compared with $2 million in fiscal 2018. The company told shareholders the impairment was unlikely to affect the dividend payable to shareholders or the company's overall performance outlook.
Carsales' share price fell 1.45 per cent to $11.58 at midday, while the ASX All Ordinaries was down 1.21 per cent.
Carsales chief executive Cameron McIntyre has been contacted for comment.