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November 2, 2011updated 12 Apr 2017 4:11pm

Basel III threats and opportunities

In light of decisive moves from French bank BNP Paribas on the new regulation, Nick Huber looks at the impact on bank-owned and independent lessors. Any regulation which requires banks to increase their capital reserves to help them withstand future shocks is likely to create both threats and opportunities for leasing businesses. Some of Europes largest leasing businesses are owned by banks and could be scaled back, experts believe, as banks re-allocate capital in preparation for Basel III, which will be phased in from 2013.

By Nick Huber

In light of decisive moves from French bank BNP Paribas on the new regulation, Nick Huber looks at the impact on bank-owned and independent lessors.

 

Box story about Basel III compliance challengeAny regulation which requires banks to increase their capital reserves to help them withstand future shocks is likely to create both threats and opportunities for leasing businesses.

Some of Europe’s largest leasing businesses are owned by banks and could be scaled back, experts believe, as banks re-allocate capital in preparation for Basel III, which will be phased in from 2013.

This would create job losses and provide opportunities for ‘independent’ leasing companies to expand.

But perhaps the most worrying aspect of Basel III for bank-owned leasing businesses could be how little influence they have on their owners at a critical time for the banking industry.

The requirement for a bigger capital buffer will mean that the cost of different types of bank finance (unsecured loans, corporate loans, asset finance etc) will come under greater scrutiny.

When reviewing loan types, banks may decide that some types of loan are not worth setting aside capital reserves for, either because they are not profitable enough, or are not considered a core service.

One bank has already announced plans to reduce the size of its European leasing business.

In September, BNP Paribas announced it would withdraw some of its non core leasing business in the UK and other countries as part of an effort to comply with Basel III.

Jean-Laurent Bonaffé, the French bank’s chief operating officer for retail banking, the division which encompasses leasing operations, also said the company intends to exit non-core leasing markets in real estate and yacht and private jet leasing.

Bonaffé said: “Basel III has a strong impact on the leasing business.

“Outside our domestic networks, some of these businesses are not adapted to Basel III; they rely on distribution organisations that will not allow re-pricing.

“It is key to adapt as soon as possible. It is a big change for leasing but the sooner you are ready for a new regulatory environment the better off you are.”

In the UK, BNP Paribas will only close its Fortis business, which it bought in 2008, said Jean-Francois Gervais, deputy general manager of BNP Paribas Leasing Solutions.

BNP Paribas’ UK vendor finance business was among the most profitable in Europe and would not be affected by the changes, Gervais added. He stressed BNP Paribas has no plans to exit the UK in these areas.

The previous day, Bonaffé had surprised some of the audience when he said the bank would be withdrawing all its leasing operations from the UK.

Leasing Life asked Europe’s biggest leasing companies about how they are preparing for Basel III and how they think it will affect their business.

Most of the leasing companies declined to comment. Those who commented played down any fears that Basel III could dent their profits, insisting the financial advantages of leasing would continue.

A spokesman for ABN Amro Lease said the company would “continue to increase investment in its leasing business over the coming years” and would “expand in geography, products and in numbers of staff”.

Its priorities when preparing for Basel III are capital efficiency and profit margins, the spokesman added.

Ben Lindberg head of business development in Nordea Finance, a Scandinavian bank with an asset finance business, said the “relative benefit” for leasing will remain because “risk weights” are calculated in the same way as Basel II and “leasing is still more capital efficient”.

A spokesman for Unicredit Leasing, which is based in Italy, said it had no plans to follow BNP Paribas’ example and cut its leasing operations.

Not everyone, however, is convinced leasing will remain unscathed by Basel III.

Kenneth Gray, an asset finance expert at law firm Norton Rose, said one of asset finance’s main advantages under Basel II – using the value of an asset to reduce the amount of a re-saleable capital that needs to be set aside against the loan – will be reduced under Basel III.

This is because the regulation stipulates a minimum amount of capital banks need to hold against a loan, irrespective of the value of any collateral.

“I think asset finance will become less attractive under Basel III because the benefit of being able to use an asset diminishes,” Gray said.

“Some banks will be doing a lot less business in asset finance.”

Should that be the case, it could be good news for leasing companies not owned by banks.

“Basel III is a potential opportunity for independent leasing companies to expand or buy some of banks’ leasing businesses,” said Christian Roelofs, associate director at the leasing and consumer finance division of Grant Thornton, an accounting firm.

He cites Alphabet’s acquisition of ING Car Lease for €637m in July as an example.

One independent lessor, Close Brothers, stated in its results report for the year to 31 July 2011 the group does not expect to be materially impacted by the proposed changes under the Basel III regime.

Close said it has a strong funding and capital position – £5.4bn (€6.2bn) available funding through a diverse range of sources and a core Tier 1 capital ratio of 13.1% as of 31 July 2011.

Privately, leasing industry executives seem fairly uninterested in Basel III.

One leasing adviser, who spoke to leasing company chief executives about Basel III during a recent conference organised by Leaseurope in Vienna, said one reason for their apathy was due to leasing subsidiaries’ limited influence on their corporate parents.

“I think the truth is – and that is supported by many of the comments in Vienna – that many do not yet know what affect it will have on them,” the consultant said.

“It will come down from on high once the parent banks have thought through the future strategy and many leasing CEOs won’t admit they have no say in the matter.”

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