The rise in new leasing volumes and the substantial fall in loan loss provision were among the most significant year-on-year changes recorded in the latest Leaseurope index.
The index, the sixteenth that Leaseurope has produced, which tracks key performance indicators of a sample of 17 European lessors on a quarterly basis, found that nearly all performance variables improved in 2014 compared to the previous year.
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After the low results recorded in 2013, triggered by extreme values in a small segment of the sample in Q4 2013, the leasing industry has recovered. Some variables rose to such an extent that hit the highest levels since Leaseurope started this index.
Morten Guldhaug, executive vice president at DNB, believes that the better overall year-on-year performance of the leasing industry reflects the recovery of the European economy.
"In 2014, a gradual European recovery finally seems to be appearing. Almost all European countries, including those who suffered heavily during the economic crisis, are now experiencing growth.
For the whole of 2014 Europe saw a rise in GDP of 1.4% with the euro area experiencing slightly slower growth of 0.9%. This economic recovery is reflected in stronger financial performance for the leasing industry in 2014," Guldhaug says.
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By GlobalDataIndex results
Director for strategy and business development at ABN AMRO Lease Robert Peterson told Leasing Life that as the European economy grows, investments by companies increase, with the rise in investments already starting to affect new leasing volumes.
"Due to the financial crisis, companies were postponing their investments in the last few years, but the time has arrived for companies to invest again. The increase in new leasing business is not only for growth, it is also substitutional replacement of outdated equipment," says Peterson.
After two years of decline, new leasing volumes increased in 2014. Total new leasing volumes reported by the sample of firms increased by 7.3% last year compared to 2013, reaching 69.07bn (£50.82bn).
Despite this substantial rise, figures were lower than those of 2011, when 78.7bn of new business was recorded.
Peterson believes that new leasing volumes will increase in the following years and exceed the levels before the financial crisis.
Apart from new leasing volumes, considerable growth was measured in operating income and pre-tax profit. The values of these variables were the highest since the inception of the index.
The 17 companies taking part in the survey witnessed a 5.4% year-on-year rise in operating income, which reached an aggregate of 7.74bn. At the same time pre-tax profit was up by 145.4% to 2.37bn.
The median profitability ratio, companies’ pre-tax profit as a % of total operating income, increased from 36.1% in 2013 to 39.8% in 2014.
Another indicator of leasing companies’ strong performance is the lower cost/income ratio. This was a result of a smaller increase in operating expenses – rose by 2.4% to 3.63 – compared to operating income. The median cost/income ratio decreased from 46.8% in 2013 to 45.3% in 2014.
"Both the weighted average and the median cost/income ratio is going down, because of the higher operating income. In my opinion we should not only focus on increasing income but also to take out a ‘realistic’ cost.
"The index combines figures from both equipment leasing and car leasing companies. Car leasing companies have a more expensive production process to equipment leasing; I expect a higher cost/income ratio for the former and lower for the latter. Both types of leasing companies strife to lower costs and I think digitalisation will help them achieve that," says Peterson.
The larger spread between operating income and expenses was not the sole reason behind greater profitability, as loan loss provision dropped by 41.6% to 1.64bn last year compared to 2013.
According to Leaseurope, the loan loss provision in 2013 soared to 2.8bn because it was ‘unusually high’ loan loss provision in an isolated portion of the sample in Q4 2013.
As a consequence of the lower loan loss provision, the median cost of risk ratio-companies’ loan loss provision as a % of their portfolio – fell from 0.54% in 2013 to 0.42% in 2014. The median cost of risk was lower across all quarters in 2014 compared to the previous year.
Peterson comments on the figures: "In 2014 it went back to normal, as 2013 was an exceptionally bad year. It seems that in 2013 the aggregate number was influenced by incidence, one or a couple of issues within a limited number of data providers. Last year’s figure is in line with the years before 2013."
In addition, risk weighted assets (RWA) decreased by 7.4% year-on-year to 145.3bn in 2014; while the portfolio of outstanding contracts remained broadly stable over the period, declining by 0.1% to 214.2bn.
"This highlights the commitment of leasing companies to decreasing their portfolio risk," writes Leaseurope.
The fall in RWA has influenced the median return on equity which more than doubled last year compared to 2013.
Return on equity, which used 2010 as base year (2010=100), is an index of all companies’ net profit before tax as a percentage of 8% of total RWA.
In 2014, the median return on equity stood at 139, 77 points higher than the previous year.
"Both profit and risk-weighted assets in the companies have improved significantly, driving a higher return on equity ratio. Net profits went up mainly because of the decrease in loan provision. The fact that risk weighted assets went down is an indication that we are able to provide better data and models. We have lower RWA and higher pre-tax profit, therefore the return of equity is growing very fast.
"The 2014 figure is more in line with the years before 2013, which was a bad year for statistical comparison as there was exceptionally low pre-tax profit caused by high loan loss provision," says Peterson.
Return on assets also grew in 2014, with the total annual ration reaching 1.5% compared to 1% in 2013.
Future growth
"The European economy is expected to continue growing in 2015, with GDP growth rising to 1.7% on the back of a gradual increase in domestic demand," said Guldhaug.
"Leasing is ideally positioned to contribute to this recovery going forward through increased funding of the real economy."
Peterson is also optimistic for the performance of the European leasing industry for the following years, as he believes that the lessors could benefit from companies’ increased demand for investment.
"There are a lot of companies which believe that banks do not provide them with loans: leasing companies could take advantage of this. If they do, it could grow the penetration rate in some countries like the Netherlands which is low," he says.
Peterson believes that the opportunity is there, but the European industry needs to improve its communication channels to inform SMEs that leasing is an alternative option for finance.
"I am surprised there is a limited coverage of leasing by mainstream media. We need to inform companies that we are an alternative to banks and p2p. Many of us collaborate with banks; banks should use their communication channels to inform their clients about leasing. It is very limited if companies rely on their sales people alone," he says.
According to Peterson the problem is on the demand-side rather than the supply side. He says many SMEs purchase equipment because they are unaware of leasing options, and adds that there are companies that insist to own equipment, despite usage becoming popular in other forms of finance as well as other industries.
"Companies have a preference to own equipment, at a time when there is an important trend towards usage.
"Car makers used to advertise a price for consumers to buy a car, now they charge monthly subscriptions for people to use cars. Those that want to use photoshop they can now have a subscription instead of buying the product.
"Therefore I am still surprised that companies pay for new equipment with loans, even in cases that it is more expensive, instead of a leasing product," says Peterson.
