Can consumers keep on availing of car loans amid TRAIN?

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By Jochebed B. Gonzales, Senior Researcher

BANKS HAVE BEEN lending out more readily to consumers, offering promos and flexible payment schemes to entice first-time buyers or even those wanting to buy a second car. This ease of credit, coupled with households’ increasing disposable incomes, have led to the increasing share of car loans into the banks’ loan portfolios over the years.

The passage of the Tax Reform for Acceleration and Inclusion Act (TRAIN) into law, however, has put a dent in car sales for the opening months of 2018, putting into question the reliability of car financing, at least in the short term.

A joint report of the Chamber of Automotive Manufacturers of the Philippines, Inc. and Truck Manufacturers Association showed that member companies sold 86,037 units during the first quarter, down 8.5% from the 94,026 units in the same first quarter 2017. This was a turnaround from the 18.4% growth in sales in 2017 to 425,673 units from 2016’s 359,572 units.

Months before TRAIN’s passage, many have bought cars on speculation that it would increase prices of cars.

Manuel G. Santiago, Jr., executive vice-president and head of Consumer Finance at Union Bank of the Philippines (UnionBank), said this to be the case: “The slowdown that we’re seeing now is partly because most people have actually purchased ahead of TRAIN.”

However, UnionBank as well as other lenders are not worried as they expect loans on automobiles to stabilize in the next few months, seeing the downtrend as temporary.

“Those that were affected by the taxation, the income earners, they actually had a take home pay increase. I think that will actually drive the new sales in the coming months,” Mr. Santiago said.

Jose Jesus B. Custodio, senior vice-president and head of Indirect Sales Channels Group at Philippine Savings Bank (PSBank), was of the same opinion: “The psychological effect of raising taxes and rates had somehow affected the car industry, but hopefully only in the short term.”

To recall, TRAIN or the Republic Act No. 10963, increased excise tax rates on automobiles, among other items. The new law, which took effect last January, raised the levy on cars, with units valued P600,000 or cheaper to be charged 4% in tax from 2% previously. Meanwhile, cars worth P4 million or higher will also be taxed as much as 50%, compared to an average rate of 22% under the old regime.

For banks, it would be business as usual.

In the latest Senior Bank Loan Officers Survey by the Bangko Sentral ng Pilipinas (BSP), banks in general kept their credit standards unchanged for auto loans in the first quarter.

In the same survey, more lenders said they made borrowing easier for most aspects of car financing compared to those which have tightened requirements. This was reflected by the diffusion index which reported “net easing” among banks, specifically on debt margins, size of credit lines, collateral requirements, loan covenants and the use of interest rate floors.

In a separate survey, the BSP noted in its latest Consumer Expectations Survey that 22.5% of the households believed the first quarter was still a “good time to buy” motor vehicles, up from the 20.6% recorded in the first quarter of 2017. Among overseas Filipino workers interviewed, 8.6% allot a portion of their remittances for car or motor vehicle purchases.

Also, the impact of the tax reform has yet to reflect on bank lending for car ownership. So far in March, auto loans, which include rural and cooperative banks continue to grow at a double-digit pace, by 21.2% year on year to P481.43 billion from P397.18 billion, according to BSP data. From end-2017, it was up 4.9%, a tad slower than the 5.2% increase during last year’s comparable period. These type of loans comprise half of the total consumer loans and account for 5.59% of the total loans outstanding to residents and non-residents within the Philippine banking system.

While the new tax system lets low-income workers get to have more in their pockets, car buyers, composed mostly of those in the middle- to upper-income brackets, will now have to pay more for the most affordable vehicles in the market with higher excise taxes compounded with the value-added tax of 12%.

Cars with Net Manufacturer’s or Importer’s Selling Price (NMISP) up to P600,000 will see a doubling of the excise tax, from 2% to 4%, while those priced between P600,000 and P1 million will see taxes increase to 10%.

The new law also taxed vehicles whose NMISP falls between P1 million to P4 million by a flat rate of 20%. Hardest-hit will be those buying cars with a pre-tax price between P1 million to P1.1 million as their vehicles will be subjected to 20% excise tax from just around 10% previously.

Meanwhile, cars with a pre-tax worth between P1.64 million and P4 million will shell out less, as rates declined by as much as 21 percentage points towards the P4-million upper bracket. Thus, cars worth near P4 million will find their tax rate dipping now to 20% from around 41% in the previous tax system.

Those priced more than P4 million will be charged with 50% excise tax. In the old regime, where cars over P2.1 million were levied with a fixed P512,000 plus 60% of value in excess of P2.1 million, vehicles in this price range were taxed by at least 42%.

Under TRAIN, however, the difference between the present and previous rates narrow down as cars become more expensive. Beyond P7.48 million, the new rates will again be in favor of the luxury vehicle buyers who will see slightly lower taxes than before (refer to Infographic titled “Automobile Tax Rates: Old vs. Train”).

“The impact of TRAIN is really on the mid to lower segments where the prices of cars actually increased. In fact, in the luxury segment, the prices of cars even went down,” said UnionBank’s Mr. Santiago.

Despite the tax increase, monthly amortizations would just increase by a few hundred pesos for the passenger cars, according to Security Bank Corp. Consumer Business & Operations Group Head Abigail Marie D. Casanova.

“If you see the effect of TRAIN, it’s not that substantial because you can amortize it. For a [Toyota] Vios, if you amortize it for 48 or 60 months, [the increase] will come out at P400 to P500 a month,” she said.

University of Asia and the Pacific (UA&P) economist Victor A. Abola concurred: “At the lower end, a P600,000 loan would raise monthly amortizations by only some P300 per month with a 2% interest rate rise.”

“In general, the income effect is stronger than the price effect on industry sales,” he added. “Specifically, even the price effect will be weak, since the increase in excise tax is very small (+2%) for low-cost cars, and thus, volume for the largest segment will still be on the rise.”

Prior to the government’s tax reform, banks have noticed consumers’ preference shift towards cars that are known for their safety. For instance, sport utility vehicles (SUVs) have become a favorite even with their relatively expensive prices and bulky bodies.

“We noticed that Filipinos have fallen in love with SUVs since we see more of them on the road. After that, most consumers look for comfort to keep them relaxed during long drives and family weekend getaways,” said Joaquin Ma. B. Abola, Retail Loans head at BPI Family Savings Bank.

“If you look at the car advertisements, they talk about safety of the car in case of collision. It’s one of the selling propositions of cars apart from fuel efficiency,” for UnionBank’s Mr. Santiago.

However, SUVs would be most affected by the tax reform given that their pre-tax price usually starts at around P1 million.

“There will definitely be changes,” said Gerardo G. Miral, Consumer Lending Group Head at RCBC Savings Bank, the thrift arm of Rizal Commercial Banking Corp.

“For one, there may be a shift in model preferences that would suit the budget of customers. This is the reason why automotive assemblers have introduced the SUV crossover variants.”

For PSBank’s Mr. Custodio: “Aside from pricing and car features, buyers tend to look at fuel efficiency and cost maintenance.”

From truck-based SUVs such as Ford Everest, Toyota Fortuner and Mitsubishi Montero, car manufacturers came up with smaller and budget-friendly crossover utility vehicles (CUV) such as Ford EcoSport, Toyota Rush, Mitsubishi Xpander and Honda BR-V.

These CUVs are known to consume less in fuel compared to their bigger and heavier truck-based counterparts. The downside is that, as with other small cars, most CUVs use gasoline instead of diesel, which is cheaper and has better mileage.

Another feature of TRAIN also involved higher taxes on fuel. From P4.35 per liter (L) last year, gasoline is now taxed at P7/L and will increase to P9/L and P10/L in 2019 and 2020, respectively.

The new law also subjected diesel to tax this year at P2.50 per liter, which will adjust upwardly to P4.50 next year and P6 in 2020. Liquefied petroleum gas (LPG), which is used by some cars as fuel, are now taxed as well, at P1 per kilogram (kg). By 2019 and 2020, LPG tax rates will increase to P2/kg and P3/kg, respectively.

Further, the BSP increased key rates by 25 basis points this month, leading banks to slightly increase borrowing costs for consumers and corporates.

Still, banks have said that this might not be enough to deter people from availing of cars albeit noted that buyers might reassess the type of cars they buy.

For instance, RCBC Savings’ Mr. Miral said that they may expect an increase in demand for used cars due to budget constraints. “Getting a second-hand vehicle can be an acceptable car model but for the same budget,” he said.

Security Bank’s Ms. Casanova said they were also looking into pre-owned cars. “It could be one of the areas where we can expand. If the effect of TRAIN would really be drastic, then we are looking for the used cars market to be one of the opportunities for the bank.”

For some banks, new models would still be the name of the game as far as driving demand for car loans is concerned.

“The one that is going to drive the market back to life will be the new products, the new models. Normally, the new models come out during the third to fourth quarter,” said UnionBank’s Mr. Santiago.

“We see the car loans portfolio to start increasing towards the third and fourth quarter,” he said.

Sharing the same view, PSBank’s Mr. Custodio said: “Car sales are slowly picking up with the arrival of new models and we expect car sales to recover shortly.”

For Security Bank’s Ms. Casanova, opportunities would also come from increased interest from ride-hailing companies. “We have new players coming in, so they would buy cars and use it for ride-sharing,” she said.

“As long as the increase in interest rates don’t go haywire, then the banks revenues won’t be eroded that much.”

Price is not the only consideration in enticing people to avail of car loans. According to banks, deals and promos and fast turnaround time are still among the top considerations among clients when applying for a car loan.

“Aside from cheaper rates, what incentivizes them are low downpayment, the freebies from the dealers and discounts,” said Security Bank’s Ms. Casanova.

For BPI Family Savings’ Mr. Abola: “A customer also appreciates a bank that can help him lower the cost of car ownership in the form of freebies such as free insurance or chattel mortgage. These things attract customers.”

“More than rates, we see consumers today looking at speed, meaning they want fast loan approval. A lot of them want to drive their cars at the soonest possible time,” he added.

UnionBank’s Mr. Santiago said buyers are often anxious as to whether they’d be approved or not.

“If I were a buyer, do I have to wait two or three days? That’s why our turnaround process for approval is fast. Once we get your application form, we validate that and you get an answer within a few hours,” he said.

Thrift banks BPI Family Savings and RCBC Savings are also seeing “healthy” growth while making sure to keep their share of the auto loan market.

“We have been the leader in the auto loan business through the years. Our loan portfolio will continue to grow and be healthy in 2018,” BPI Family Savings’ Mr. Abola said adding that they remain optimistic amid TRAIN and tighter monetary policy.

RCBC Savings’ Mr. Miral likewise was upbeat in maintaining their position amid tightening competition within the auto loan business.

“In all time frames, we continue to be in the top three lenders in the thrift bank industry, the preferred bank by both customers and auto dealer partners,” Mr. Miral said.

For economists, sustained growth will continue to support consumption and bank lending that will benefit the automotive industry.

“There is and there will be a growing demand for cars. The market for cars has grown in years due to the numerous players in the market offering various promos and a robust consumer demand,” De La Salle University economist Mitzie Irene P. Conchada said.

“There is so much potential in the automotive industry because of the growing economy as reflected in the growing middle class, increasing remittances from overseas workers and the emerging TNVS (transport network vehicle service) sector,” Ms. Conchada added.

For UA&P’s Mr. Abola, opportunities for car loans and sales are “still very good.”

“As we are in the middle-income category for GDP (gross domestic product) per capita, it is usually at this level when spending on durables, including cars increase rapidly,” he said.