A new study conducted by the Equipment Leasing & Finance Foundation and PayNet, Inc., “The State of Credit Quality: Where We Have Been and Where Are We Going,” shows industry credit quality and performance remain strong and better than pre-recession levels. This study points towards continued better-than-historic average performance due to the economic outlook, improved underwriting and portfolio management, and better credit quality originations booked since 2010.

“Though intense competition and the length of time since the Great Recession are beginning to affect credit standards, this study shows very clearly that even if a recession were to occur, the equipment finance industry would experience significant lower default and loss rates than those seen in the Great Recession,” states Thomas Ware, PayNet’s Senior Vice President and an incoming Trustee of the Equipment Leasing & Finance Foundation, and the new Chairman of its Research Committee. “The weaker borrowers were wiped away by the recession, and both borrowers and lenders have since been more cautious, resulting in much higher portfolio quality today.”

The overall 24-month default rate by year of contract origination shows dramatic improvement from 2007 to 2010 and that improvement continued through 2013 when the default rate bottomed out at 2.2%.

The study reveals there was an increase to 2.5% in 2014, the last year for which there is a full 24 months of performance. Bank-Owned lenders exhibited the lowest default rates in all years except 2008 and 2009. Independents showed the lowest default rates in 2008 and 2009. Captives showed significant improvement to the point where they experienced similar default levels as Independents for 2011-2013, after suffering the highest default rates for the 2005-2009 origination vintages. However, Captives did show a meaningful increase in default rates to 3.1% in 2014. All three lender types showed increasing default rates in 2014.

“There is a remarkable improvement in the quality of originations from 2005 to 2016,” notes William Phelan, president of PayNet, Inc. “The results indicate that the equipment finance industry has fully recovered from the impact of the Great Recession, with expanding origination and portfolio volumes.”

The percentage of originations in the low and below average score tiers, based on volume, increased from 12.8% in 2005 to 20.1% in 2008 and then back to 12.4% in 2016, while the percentage in the high and above average score tiers improved dramatically from 25.7% to 43.9% from 2005 to 2016.

PayNet will provide insight at the Equipment Leasing and Finance Association’s 56th Annual Convention on Monday, October 23 at 11 a.m. in a breakout session, “Risk and Assets: An Overview and a Balanced View,” at the JW Marriott Orlando Grande Lakes.

The full study The State of Credit Quality: Where We Have Been and Where Are We Going can be downloaded here.
 
Note:
Defaults are defined as any default indicator, 90-day delinquency, equipment repossession, bankruptcy or related public record indicator reported in the PayNet database occurring within 24 months from booking date. All default rates in this study are determined using counts.