The constant increase in interest rates in the economy increases the number of borrowers who find it difficult to meet the payments to those who financed the purchase of a new car for them. company Direct Financing, the largest player in the economy in the field of vehicle financing loans, reflects the trend well: in the reports for the first quarter of 2023, it shows growth in its financing revenues, but at the same time a decrease in net profit. This is after more than doubling its provisions for credit losses, due to customers having difficulty paying their debts.
The company operates in the field of consumer credit, mainly in providing loans (index linked) for the purchase of cars (against encumbering the purchased vehicle). In addition, it provides “solo loans” that are given when purchasing the vehicle, without liens against them, and in the last year also loans backed by residential real estate (mortgages).
In the summary of the first quarter, the company, under the management of Eran Wolf, recorded financing income (net) of NIS 240 million, a 4% increase compared to the corresponding quarter last year, which resulted from the increase in the company’s loan portfolio. However, due to the increase in interest rates, as mentioned, her credit losses more than doubled to NIS 42 million. In the bottom line, the quarterly net profit of direct financing was cut by 35% and amounted to NIS 47.3 million.
An increase in the volume of loans that are at risk
The company states that the increase in credit losses was due to two main factors: an increase in the size of the loan portfolio at risk, and an increase in the rate of credit losses to approximately 2.65% of the portfolio compared to 1.83% in the corresponding quarter last year. A significant part of those provisions is attributed to the solo loans, which are used as the equity for the purchase of vehicles without liens against them, which is why they are more dangerous.
The company’s reports show that while the rate of credit losses in the car loan portfolio was 1.8% in the first quarter, the solo loan component presented credit losses of 6.9% in the past quarter.
The reports state that “in light of the increase in risk, which is reflected in the higher rate of credit losses, the company began in the fourth quarter of 2022 to tighten the underwriting conditions for loans in general, and for loans that are not backed by collateral in particular.” In the past year, the company’s credit loss rate was 2.33% of the portfolio, and in 2021 it will be only 1.52% – an exceptional figure for the better attributed to economic euphoria resulting from large transfers of funds from the government to the public during the Corona period, as well as the zero interest rate in the economy. This trend has changed from end to end in the past year, with the sharp increases in interest rates.
In the years preceding the Corona period, the rate of credit losses was at higher levels than those recorded in the first quarter of this year. For example, in 2019 this rate was 2.8% and the year before it was 2.86%. However, since 2021 the increase in this figure is significant and stems from the increase in the level of risk in economic activity, with the increase in interest rates and the inflationary spike.
Aims for a 3% share of the mortgage market
The balance of Direct Financing’s loan portfolio grew to 6.7 billion shekels at the end of March, compared to 6.3 billion shekels at the end of 2022. The company turned to new, relatively safe channels, according to her, of providing credit for mortgages. In doing so, it seeks to take advantage of the increasing difficulty of the banks in expanding their mortgage portfolios, due to the limitations of the Bank of Israel.
In the quarter that passed the standing Direct Financing Its mortgage loans amount to 212 million shekels, an amount similar to the one it has made since entering the field in the second half of 2022. The company has set itself an ambitious goal: to reach a share of 3% of the volume of new mortgages to be granted in Israel within five years. In total, the company provided a credit of 2.38 billion shekels in the first quarter, of which 93% was secured.
CEO Wolff said that “the high financial stability and broad financial flexibility allow us to manage our loan portfolio responsibly, when in the last quarters we started working to tighten the underwriting conditions”.
In the last year, a share of Direct Financing, which is controlled by the Zur Shamir group of the Schnidman family, lost about a third of its value, and its market value is currently NIS 1.4 billion.