Spearheading Innovation in Automotive Financing

Q: What are your expectations for the automotive financing market after a near 27 percent increase in 2016?

A: I think the market will remain stable in comparison to total vehicle sales. Mexico achieved a record of over 1.6 million light vehicle units sold in 2016 and almost 1 million were offered through a loan. The year 2017 promises to be more challenging and industry growth might decelerate. In January 2017, sales grew only 3 percent compared to 2016. We are now at one-digit levels after 16 months of doubledigit growth.

There is definite uncertainty due to the political and economic climate so many people postpone purchases until the market’s future is clearer. Even so, we are confident about Mexico’s growth opportunities. The automotive industry is cyclical and even during the worst economic crisis, Mexicans always buy cars. The only variable is who is going to sell these cars.

Our main goal for 2017 is to support clients throughout the lifetime of their loan to provide the best solution for their needs and payment abilities. Back in 2016, an automotive financing boom saw many companies grant loans to people who could not afford them. We want to be mindful of how we grant loans and to whom. Particularly in the face of uncertainty, our responsibility as a bank and financial institution is to sell while supporting the client. Provided the industry remains at similar levels to 2016, we can expect moderate growth for Scotiabank of 7 or 8 percent by year-end. The bank holds a 4.5 percent share of the automotive financing market and our goal for 2021 is to achieve 8 percent. Reaching 5.1 or 5.2 percent in 2017 is a challenging target for us.

Q: What impact will higher car prices resulting from peso weakness have on the financing market?

A: Carw prices have been rising since November 2016. But the way companies choose to play with their prices will determine their sales outcome. Many companies are rightly choosing to increase prices gradually throughout the year, which has a positive impact on the client. In the end, prices might go up 4 or 5 percent but will vary each month by less than 0.5 percent. By March 2017, most companies were already at the price level they need to maintain to counter the effects of exchange rate volatility.

From a financing standpoint, these increases will most likely slow our clients’ decision-making process and force them to weigh up different options. We do not see sales being affected by this and in fact, financing will become more important than ever. We will offer clients the option to dilute the extra MX$20,000 (US$1,135) or MX$30,000 (US$1,700) that inflation will imply for their monthly payments, softening the blow.

OEM financing arms have grown aggressively, supported by interest rate subsidies and bonuses for cars sold through financing. But when interest rates are higher than OEMs expect, banks have an opportunity to increase their participation. We adjust to the market’s rates so we are not impacted by increased subsidy costs. If current momentum continues in the market’s cyclical nature, we forecast a stronger position for banks by 2019.

Q: With so many loans granted in 2016, how likely is it that the industry will collapse under unfulfilled payment obligations?

A: The possibility exists but in Scotiabank’s case, we have maintained an overdue portfolio below 1.5 percent. Scotiabank’s conditions for loans are accessible but the goal is for clients to pay off their loan and acquire another one to continue growing personally. It is in no one’s interest to offer loans to people who cannot pay them. We do not forecast fraud or overdue problems and I am proud of Scotiabank’s risk management strategy

Other institutions used aggressive sales strategies during 2016 and after 12 months they will start to realize how that will impact their portfolio. As a result, overall results might be lower compared with 2016 but this is fortunately not the case for Scotiabank. We keep our risk department in the loop to determine the best options for our clients and the bank.

Q: How has Scotiabank’s strategy for electric and hybrid models evolved since 2016?

A: Sales of hybrid and electric models totaled 8,260 by the end of 2016 fueled by stricter emissions regulations that spurred an increase in loan applications. Electric and hybrid products are a cornerstone of our social responsibility and environmental consciousness.

Our excitement about the electric vehicle market led us to organize the first national event to gather all brands marketing electric or hybrid models. We are organizing the event with several dealerships. The event will target VIP Scotiabank clients and we expect the event to boost Scotiabank’s current financing of 10-15 vehicles every month. The event will send a clear message to the Mexican audience about our interest in the market as the only bank with a solution specifically designed for electric and hybrid cars.

Once the government decides to offer the same incentives available in other countries, electric vehicle sales will boom. We want to be there when that happens. Scotiabank Mexico is spearheading innovation in financing for electric models and many of our other branches are already approaching us to understand how the market works.

Q: What new projects is Scotiabank introducing to Mexico in 2017?

A: Part of our strategy for the year is to form long-term alliances with automakers and distribution groups. We now have agreements with 38 dealership groups in the country, having already signed to become Subaru’s financing arm and we are in negotiations with Suzuki. Our alliance with Mazda celebrates its eighth anniversary in 2017 and we have increased from 21 percent penetration to 37 percent since July 2016. The certified used-vehicle market spurred us to introduce four or five events throughout the year, at which 30-40 distributors will show 400-500 certified used vehicles. We feel it is our obligation to offer an integral solution that covers new and used vehicles sales, as well as financing for new dealerships or remodeling projects.

In the motorcycle market, we are now Piaggio’s financing arm. Rather than just financing cars, we seek to offer our clients an integrated mobility portfolio. Not everyone’s lifestyle suits a car and young people are looking for easier and cheaper mobility solutions that also demonstrate a certain social status. Piaggio is the perfect option to satisfy these demands and our collaboration with Corporación Zapata was a match made in heaven. The group has an aggressive growth strategy for the distribution network and we expect double-digit growth each year, with 35-40 percent penetration in Piaggio’s total sales.