Leasing doesn’t have an
automatic right to exist under Basel III. That was the arresting
message from John Howland-Jackson, chief executive of ING Lease, to
the delegates at the Leasing Life European Conference.
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The first speaker of the day
presented the point of view of the bank-owned leasing business, at
times with startling honesty.
Howland-Jackson opened his
presentation with the revelation that the bank-owned leasing
industry has seen its return on leasing portfolios plateau and
margins actually decrease since 2006. This, he said, was
counter-intuitive when the cost to customers is down amid a
shortage of funding.
“Are we being paid properly for the
risk we are taking?” he asked the auditorium.
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By GlobalDataHowland-Jackson said leasing had
adjusted over the past five years in certain asset classes but,
overall, bank-owned leasing industry was not getting its risk
premiums right.
Bank-related lessors,
Howland-Jackson asserted, account for €95bn or 42% of production in
leasing in Europe and therefore what is happening to banks is
extremely important.
Stark picture
Referring to the crisis in the
eurozone and the resultant fragility in the markets, he added: “To
say life is difficult for the banks at the moment would be an
understatement.
“If you’re at the top of a bank you
will take a portfolio view and at the moment it is not looking
attractive.”
It was after painting this stark
picture of the bank-owned leasing sector, Howland-Jackson turned
his attention to Basel III and said parent banks across the sector
are looking closely at leasing businesses to assess their
viability.
“It is simple arithmetic,” he said.
“If you have to maintain higher capital ratio you need either more
capital or less assets or a combination or both.
“This is not a great time for
raising capital so I expect most banks will look at doing a
combination of both. Every single bank in Europe will be looking at
shrinkage on the asset side.
“Under Basel III leasing has some
attractive characteristics but it is not the automatic product of
choice – it doesn’t have a right to exist in a bank’s
portfolio.”
What the regulation would
definitely do to bank-owned lessors, said Howland-Jackson, was
focus the mind on what kind of business would work within the
bank.
The head of ING Lease told
delegates he believed bank-owned leasing businesses used to think
so long as they made enough money they would be left alone by the
parent companies.
Now, and under Basel III, he said,
the relevance to parent banks would be more important than the
return and said the recent sale of ING Car Lease to BMW’s Alphabet
International was an example of this kind of thinking.
“The Alphabet deal was a decision
about something which didn’t fit although it was highly
profitable,” Howland-Jackson said.
He added BMW was better positioned
as an owner of the Car Lease business and said captives have a cash
flow advantage and he expects to see a lot of action in the market
from them.
The impact of the impending banking
reforms was on one of the topics touched on by Jukka Salonen, chief
executive of Nordea Finance, who took to the stage shortly after
Howland-Jackson at the close of the first session.
Salonen described Basel III as a
fundamental change for bank-owned lessors and said it would require
an additional €4trn in the European banking market.
“What all this means,” Salonen
said, “is huge – €1trn in new capital, €1trn for a short-term
liquidity buffer and €2trn to cover long-term funding.”
He said many banks have plans to
reduce their balance sheet and risk-weighted assets to lessen need
for capital and that will mean less lending in the market.
However, both Salonen and
Howland-Jackson see opportunities as well as challenges in the
changes they believe necessary.
Need to
reinvent
Howland-Jackson said in difficult
economic times the focus on asset-based finance increases rather
than decreases and suggested lessors, bank-owned and otherwise,
need to reinvent themselves in the public eye.
“There is a buzz in the air about
alternative sources of funding and leasing as an alternative asset
class is an attractive proposition,” he said.
Salonen agreed there is opportunity
and said: “In Basel III there are actually great advantages for
leasing – even in the current environment.”
“Rating models,” he added, “show
lower loss-giving defaults for asset-backed lending so there is
less demand for capital – up to 20% less – so keeping the same
lending you can reduce risk-weighted assets using leasing.”
Salonen said that if a bank is
lending a certain amount in the market it can optimise risk-weight
and capital through leasing even though leveraging would be the
same although he said this detail was not widely understood in the
industry.
Both industry leaders remained
bullish, however.
Salonen concluded: “I truly believe leasing is able to survive
and in fact take a greater proportion of corporate lending.”
See also:
Using leasing to ‘look
better’
Small companies present
opportunities
