View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. Analysis
May 10, 2013updated 12 Apr 2017 4:02pm

The refrain in Spain

Despite continued economic stagnation leading to higher default rates and business contraction in some sectors, a smaller pool of competitors is allowing those lessors who remain in Spain to capitalise on continued demand, writes Claire Hack

By Claire Hack

Despite continued economic stagnation leading to higher default rates and business contraction in some sectors, a smaller pool of competitors is allowing those lessors who remain in Spain to capitalise on continued demand, writes Claire Hack

As the European debt crisis wears on, Spain remains among the countries with a great distance to go in terms of economic policy adjustments before it is able to recover.

The economic landscape in Spain is rocky and uncertain, and the European Commission (EC) has said the country still requires "strong policy action" to move forward.

Indeed, Spain is "experiencing excessive macroeconomic imbalances", according to the EC. "Although adjustment is taking place, the magnitude of the necessary correction requires continuous strong policy action," the EC concluded in a report into the economic health of member states published in April.

Spain has, however, already begun a reform agenda which has led to the reversal of the negative dynamic, according to recent research.

"The current account has returned to balance, competitiveness is improving, and risks stemming from the banking sector have been addressed in the framework of the financial sector assistance programme," analysts from Barclays Research say.

"However, the [EC] considers that the adjustment is still far from being over, and that it will require several years of a current account surplus to reduce the stock of external liabilities," they add.

Specifically, the EC has pointed out that a portion of the adjustment has been as a result of cyclical factors, and that this will have to be kept up once the Spanish economy begins to recover.

The situation domestically in Spain is still challenging, the EC believes, as the correction in the housing market is still under way, private debt levels are still high, and an inflexible labour market is responsible for soaring unemployment.

"This means the Spanish government must remain focused on policy action, and continuing to reform its product and services markets and its labour market," the Barclays Research analysts say.

"Moreover, the [EC] notes that the correction of the excessive fiscal deficit is clearly dependent on the implementation of structural reforms and the unwinding of imbalances."

If the economic backdrop is precarious at best, then it is possible that the leasing industry is one of the few bright spots in Spain, at least in relative terms.

"The leasing industry has proved to be one of the less-affected financial industries in this crisis," Fernando Navarro, a partner at Spanish law firm Cuatrecasas, Gonçalves Pereira tells Leasing Life.

"Of course, insolvency of a relevant number of companies will affect the industry in terms of payment defaults, recovery, etc., but lessors still have appetite and leasing transactions are in demand," says Navarro.

The general feeling in Spain, he adds, is that no further banking bail outs will be required, and the Ministry of Economy has stated that all necessary bail outs have already been put in place.

Traditional financing, furthermore, is more or less completely unavailable, meaning leasing is now an important alternative, and is much in demand as it is also attractive from a tax standpoint, according to Navarro.

The leasing industry in Spain is not totally immune to the fallout of the financial crisis, however.

"Further to the bailout, some banks may be selling, among other [subsidiaries], their leasing companies, so participants are likely to be even fewer," Navarro explains.

"There is already a huge concentration in the market with a reduced number of participants."

One such example is Südrenting España SA, part of German company Südleasing, which is in the process of leaving Spain altogether.

Alejo Lopez, director general at Südrenting España, says: "The company will continue giving service to the existing contracts with our Spanish customers.

"Therefore there is no defined date [for leaving Spain]. The majority [of contracts] finish in 2015, but the longest contract finishes in 2025."

The move is part of an international strategy implemented by the company to reduce its activities outside Germany.

The influence of Cyprus

On the positive side, Spanish lessors appear to agree that the industry will not be directly affected by the planned bail out in Cyprus – now estimated to be worth €23bn and under threat from disagreements over the independence of the country’s central bank.

José-Luis Martinez Carande, managing director of Société Générale Equipment Finance’s (SGEF) Spanish arm, says: "The wake of the financial crisis in Cyprus will not have a direct impact on the suggested additional bail out for the Spanish Banks.

"In any case, the leasing sector has already adjusted and no further realignment will be necessary."

Even with the understanding that Cyprus is an exceptional case, the potential precedent of a tax on savings has raised some concerns among deposit holders in Spain – but there is no real concern in relation to the leasing industry, according to Martinez Carande.

Despite showing resilience to the overall economic downturn in Spain, the leasing industry still appears somewhat lacklustre so far this year.

The first-quarter performance of SGEF Spain has not shown much improvement in 2013 compared with 2012, which Martinez Carande expects will be the case throughout the year.

"[The first quarter of] 2013 has been similar to the same period in 2012, and to the whole year in 2012 – low in comparison with pre-crisis years," Martinez Carande explains.

"No noticeable increment is expected for the rest of 2013, following the trend of the general economic situation, but also, no further decrease is expected," he adds.

Martinez Carande says a lack of internal demand for productive assets and longer periods for equipment renewal are the driving forces in the market.

"On the other hand," he says, "there has been a significant reduction in the number of leasing companies [present in Spain], reducing competition."

Because the number of larger banks and also savings banks has fallen, there has been a commensurate fall in the number of leasing companies associated with them, he added.

"The number of associated leasing companies has decreased, [as the banks adapt] to the reduced market. Service providers have passed through a similar process," Martinez Carande adds.

No new players have entered or are likely to enter the Spanish market at the moment, Martinez Carande says, and the gaps left by restructuring within the banking sector are being filled by the companies that remain.

During 2012, he notes, a number of bank-owned companies disappeared from the Spanish market, mainly as a result of the merger of the country’s saving banks.

"Also, some international companies have decided to abandon the leasing activity on a global basis," he adds.

The possible exception to the lack of new players entering the market may be a small number of ‘bargain portfolio purchasers’ – in other words, companies that were able to snap up the portfolios of those exiting the market.

José Manuel Mesonero, director general of Crédit Agricole Leasing España (CALES), agrees with SGEF’s Martinez Carande that the market situation has led a number of major banks to stop leasing in Spain while no new players have entered the market.

Both agree default rates have increased since the start of the year. Mesonero says the average default rate increased from 8.13% in 2012 up to 10.6% in the first quarter of 2013, a figure in line with the 10.78% figure (including real estate) that Martinez Carande quoted from the Spanish central bank.

Martinez Carande adds that while the rate has increased, it did so at a slower pace than in previous years.

"The number of defaults is increasing slightly, while bank credits are scarce," he notes.

Furthermore, the average leasing portfolio has taken a serious knock in recent months, Martinez Carande adds.

"The number of customers and prospects and the average portfolio have seen a reduction," he says.

"Traditional leasing sectors such as construction, transport and printing have suffered a drastic decrease."

Mesonero agrees the average size of leasing portfolios has continued to shrink so far in 2013, and adds: "Currently, there are no buoyant sectors. Banks and leasing companies are financing some substitutions for industrial equipment and road and transport equipment."

As a result of this stagnant market, leasing companies are taking fewer risks, and many have decreased their investment in Spain by as much as 30% in 2012, says Mesonero.

"Both banks and leasing companies are focusing on offering financing to their existing clients, and it is also the case that the needs of these clients have not grown," he explains.

"Most banks and leasing companies tend to lend to their most reliable clients.

Everybody concentrates only on core and well-known clients."

At CALES, for example, in 2012, the company signed 90% of its new contracts with clients that were already well known to the group.

"As a branch of Crédit Agricole Leasing & Factoring [CALEF], CALES follows headquarters’ guidelines. We are [now] only authorised to sign business with well-known group clients," Mesonero says.

First-quarter statistics are not yet available at CALES, Mesonero says, but his analysis and outlook for the period was fairly negative.

"The leasing market in Spain has dropped in 2012 to the same amount of investment as 1992. Some leasing companies [are not working] yet [this year] or are even closing," he says.

In terms of the necessity of further bail outs, however, he agrees with Martinez Carande. "The bail out for the Spanish banking sector has not produced any changes [in the leasing industry] because the banking sector is not in a positive position to finance new investments," he adds.

Mesonero also says the Cypriot government tax on savings above €100,000 could have a knock-on effect, as account holders may choose to withdraw some of their money from Spanish banks as a result.

"Regarding the Spanish economy, the decision taken by Brussels concerning the bail out of Cypriot banks partly through depositors may have consequences in the mass departure of deposits out of the country," he says.

This would have debilitating effect on the Spanish banks present in Cyprus, and could therefore cause further problems within Spain itself.

Away from the banks and the associated problems, Mesonero says captive-owned leasing companies have been able to increase their penetration.

Mesonero did see some positivity in the market in 2013 and said a rise in exports during the last quarter of 2012 could allow new investments during 2013. "Leasing is the natural way to finance this kind of investment," he says.

CALES also sees cross-border transactions as an opportunity for the company to service existing clients with a multinational presence.

"Cross-[border] selling will be desirable to be increased within the banks of the group," Mesonero says.

"We are focused on that, because nowadays, in Spain and France, [there exist] many international companies with [cross-border] businesses that we have to take advantage of and provide value-added support," he adds.

SGEF is taking a different approach, according to Martinez Carande, who says he expects there to be little cross-border activity, and that SGEF will focus on the local market.

Martinez Carande does see an opportunity in the rapidly changing nature of modern technology and says the sector has continued to provide support to the leasing industry.

Based on his own observation, he adds, the level of confidence in the market has not changed significantly, for better or worse.

"The dependence of companies on new technologies is steadily increasing, and the demand in this sector has proved more resilient than other sectors," Martinez Carande explains.

Beyond this, leasing activity is expected to run in parallel with the economic trend in Spain, he adds.

The expectation is that 2014 will see an upturn in general economic activity in the country, and, therefore, the leasing industry will follow.

It is possible to say, therefore, that while the leasing market and the economy as a whole in Spain may be performing far below their full strength, there are still opportunities for growth and collaboration.

NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. A weekly roundup of the latest news and analysis, sent every Friday. The leasing industry's most comprehensive news and information delivered every month.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy


Thank you for subscribing to Leasing Life