Indonesia's vehicle sales drop risks finco asset quality

Fitch expects finco sector receivables to grow at a high-single-digit rate in 2024.

A downturn in new four-wheel vehicle sales in Indonesia will prompt local financing and leasing companies (fincos) to explore alternative business lines for sustained growth, Fitch Ratings predicts. 

Whilst this shift could boost profitability if successful, it also poses risks to asset quality if credit standards are compromised.

According to the Association of Indonesia Automotive Industries (GAIKINDO), new four-wheel vehicle sales dropped by approximately 24% year-over-year to about 215,000 units in the third quarter of 2024. 

Factors contributing to this decline include deferred spending ahead of national elections. Despite recent tax breaks on electric vehicles (EVs), which are positive for demand, their impact is expected to be limited as the battery EV segment accounted for less than 4% of total car sales in 2023.

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Fitch expects finco sector receivables to grow at a high-single-digit rate in 2024, driven by increased new-car financing penetration and diversification into segments like used-car financing. 

Whilst used-car financing typically yields wider margins, it also carries higher credit-impairment costs. There's a risk that lenders might increase exposure to high-risk borrowers to maintain growth and margins, potentially weakening their standalone credit profiles.

However, most Fitch-rated Indonesian fincos' ratings are expected to remain stable due to anticipated extraordinary support from stronger shareholders. 

Commercial-vehicle and heavy-equipment financing growth is not expected to be strong in 2024 due to lower global commodity prices, which influence demand for such vehicles. 

Similarly, smaller-ticket consumption loans are not expected to see significant growth in the near term due to potential volatile delinquency behaviour.