An improving U.S. economy, particularly a pickup in capital investment, growing demand for commercial equipment, and firming in selected real estate markets, bodes well for commercial finance companies in 2004, according to Standard & Poor's. It believes that if the economic improvement that began in the second half of 2003 stays on track, it should boost finance companies' asset quality, collateral values, profitability, and portfolio growth in the coming year.
Higher interest rates may limit capital spending and increase funding costs for finance companies but while S&P expects a rate rise in 2004, it does not foresee a large jump. It adds that higher interest rates are likely to be consistent with economic recovery.
S&P's principal concern remains liquidity pressures, even though they have lessened. It says that over the past two years, finance companies have worked diligently to improve their liquidity profile by lengthening debt maturities, seeking alternative forms of funding, broadening investor communications, and improving accounting policies and disclosure. Those measures should continue to ease liquidity pressures in 2004, but because finance companies rely on wholesale funding and are entirely dependent on the capital markets, bad publicity could cause their funding to dry up quickly.