CIT trash no BOQ treasure

Lending five or ten grand for three years for equipment that will be worth next to nix long before the end of its contract is one of the market niches that appeals to Bank of Queensland, the buyer of most but not all of the Australian and New Zealand business of CIT Group.

Around sixty per cent of the CIT assets are of the kind well and truly looking for an electronics reuse centre, if not the crusher, by their third year of use, many no doubt running fast-dating operating systems on machines built to sloppy specifications.

If computer hardware and software can be shown to have a material reuse value after three years (a typical contract term) then BOQ will make acceptable margins on the $350 million in assets financed at present by CIT and classed in the CIT accounts as "business services" and "consumer".

There are also cars and trucks and nifty items of industrial and agricultural machinery kicking around the CIT business. Kawasaki motorcycles are one example. These comprise around 40 per cent of the receivables BOQ will buy.

But financing computers, many with short useful lives, is the cornerstone of the CIT business.

CIT finances direct-to-consumer sales for the likes of Apple and Dell, and so has a decent customer base, but one not well controlled by these vendors.

Resellers, which are most of the computer market, typically source point of sale finance from alternative asset financiers.

Some of these alternative funders are discounters and innovators. Some are both.

One example is the Perth-based ThinkSmart, which is offering "free months" at present. ThinkSmart is also making progress improving the service proposition in-store and cutting costs at the same time.

The growth needs of BOQ, ThinkSmart, Flexirent and others in the vendor finance space means that margins, while wide, are not that elastic on the high side.

If anything, the price pressure is downwards given the obvious opportunities that exist for lower-cost providers.

The vendor finance space is also a small target market, since there are relatively few buyers of this style of finance.

It is not the tens or hundreds of thousands of buyers of computers and cars that matter, but a handful of niche and national chains that enter into point of sale finance arrangements with only one supplier. The choice for the buyer is then between the in-house financier and conventional alternatives, either cash, a home loan redraw for anything pricey and the credit card for everything else.

In buying CIT, BOQ is getting a list of stale relationships, and coming off a period of restricted credit from its supplier.

So BOQ is buying into a niche defined by declining margins and demanding active management.