Ongoing political instability has failed to dampen the optimism of lease industry participants in Bulgaria buoyed by a steady increase in new business over the last three years, writes Paul Golden.

Bulgarian economic data paints a confusing picture of the health of this Balkan nation. According to data from the National Statistical Institute (NSI), GDP rose by 3.4% in the fourth quarter of last year compared to the same period in 2015, and was 0.9% higher than in the third quarter of 2016, based on preliminary short-term information.

However, the NSI also reported a fall in industrial confidence between November and December 2016. Consumer confidence was unchanged from July to October last year, although expectations for the economy over the next 12 months were lower.

IMF estimates suggest GDP growth of 3.3% for 2016, and approximately 2.5% in the medium term on the back of encouraging macroeconomic developments such as under-execution of EU-funded capital spending.

An assessment of the banking system conducted by the Bulgarian National Bank in August 2016 found that most banks were well capitalised, although three – the largest domestically owned bank and two smaller ones – had to restore the coverage of their capital buffers.

The IMF says output is growing at a steady pace, unemployment is at its lowest level in seven years and deflation is showing signs of gradual easing. Yet the IMF directors involved in the country’s most recent consultation noted that growth is expected to moderate in the medium term, and remain below the levels needed to accelerate income convergence to the EU average.

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Political uncertainty also continues: Bulgaria’s centre-right government resigned late last year and March’s parliamentary election – the third since 2013 – is not expected to produce a strong majority government. Rising new business volumes suggest businesses increasingly view leasing as crucial to their commercial viability, however.

Just under €806m of new business was done last year, up from €738.5m in 2015 and continuing a trend of strong growth from 2012 that was only interrupted in 2014. Trucks, vans and cars represented more than €575m of that total, with machines and industrial equipment adding a further €162m. Operating lease business accounted for €29.5m last year, exclusively for trucks, vans and cars.

According to Nikolay Hristov, managing director of Raiffeisen Leasing Bulgaria, while financial leasing is the main driver of new business growth, operational leasing is becoming increasingly popular with demand for this product increasing.
“The leasing market is growing faster than GDP in Bulgaria, which is a sign that the sector is outperforming other economic sectors, and shows signs of a modest revival of the investment environment. Expectations are that the market will grow this year as well.”

He says there is no definitive market data for the division of market share between bank-owned, independent and manufacturer owned lessors. “There are no official statistics that offer such a breakdown, but the largest part of the market portfolio is held by leasing companies which are bank-owned.”

When asked whether the Bulgarian government has taken any direct or indirect action to support the lease finance industry, Hristov observes that no specific actions have been taken.
“Even the persistence of the leasing association – which represents approximately 30 lessors in Bulgaria – in promoting leasing as an acceptable type of financing for EU programmes in legislation has produced an unsatisfactory outcome due to the overwhelming conditions concerning the ownership of the asset.”

The agricultural sector showed the biggest growth in lease financing over the past four years, although Hristov acknowledges that the pace of this expansion slowed last year. The main driver for this growth was EU grant programmes for rural development, which ceased in 2016.

“All the leading leasing companies invested a lot in the farming and agricultural sector, but it appears that resources will be increasingly relocated to the land transport sector, the new pace setter in the leasing industry,” he continues.
“Bulgaria has the lowest wage taxes and lowest vehicle taxes in the EU, which combined with the mobility of drivers as a workforce makes the Bulgarian land transport sector very competitive compared to other EU countries.”

In late 2016, Raiffeisen Leasing Bulgaria signed a guarantee agreement with the European Investment Fund (EIF) under the European Commission’s Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) programme which helps SMEs in central and eastern Europe grow and create new jobs. Under the COSME programme, lessees will have improved access to lease financing with no or minimal requirements for collateral securitisation.

“We are experiencing increasing interest in the programme from the customer side,” says Hristov. “It will be one of our main tools and methods for increasing market share during the next three years until the programme ends. Raiffeisen Leasing is the only leasing company in the market offering such a guarantee scheme.”

UniCredit Leasing’s CEO, Alexander Krustev, also reckons the Bulgarian leasing market is on the path to growth, recording sustainable increases over several consecutive quarters.

“Aside from the surging leasing volumes, for the first time since its peak in the period 2009-2012, the share of non-performing leasing exposures fell below 10%, standing at 9.6% for the year-end 2016,” he explains.

“This translates into further improvement when compared to the 12.6% share of non-performing portfolios at the end of the previous year, and is fuelled by the increase in new business volumes coupled with measures undertaken by the majority of leasing companies to shed impaired portfolios and clean their balance sheets.”

Krustev says lease market growth of 7% is in line with expectations, and the upward dynamic would have been even more noteworthy if there had not been a considerable delay in EU-funded project implementation under the new programme period. He suggests this delay has prompted a deceleration in economic activity in certain economic sectors, where investments are often supported by lease financing schemes.

According to Krustev, growth in the leasing market in 2017 is anticipated to be broadly equivalent to the levels of last year, although additional growth acceleration could be sparked by an improved economic environment.

“Unless negatively influenced by political uncertainty and turbulence, the outlook for 2017 is for a third consecutive year of strong GDP growth, and an economy likely to reach its cyclical peak,” he adds. “In parallel, EU-funded investments from the new programme period are expected to gather momentum and scale up demand for leasing products.”

Krustev agrees that the local leasing market is dominated by bank-owned leasing companies, at a level pretty much unchanged over the last several years. He observes that certain amendments in the tax and regulatory legislation frameworks have been adapted to facilitate the business of leasing entities, but adds that what is central to the leasing industry is the economic climate.

“From the experts’ reading of the market, 2016 was among the best years from a macroeconomic perspective since the start of the transition [to democracy in 1989],” says Krustev.

“GDP marked strong growth, stabilising close to the solid achievements posted a year ago. The improved economic environment – GDP growth blended with surpluses in the government budget, abundant fiscal and FX reserves, a fall in unemployment and stabilised foreign direct investment – facilitates investment spending and ultimately leasing business.”

NSI data indicates that foreign direct investment in the non-financial sector in 2015 amounted to just over €23bn, an increase of 7.2% from 2014. The largest volume of investment was made in the industrial and service sector, which includes wholesale and retail trade, repair of motor vehicles and motorcycles, transport, communication and services, and accommodation and food-service activities.

Krustev refers to improved consumer confidence amplifying demand in the retail car industry. “In parallel, the overall upswing in the FMCG and services segments has fuelled the necessity of enlarging companies’ fleets. This business expansion and the favourable cost environment – in terms of taxes, wages, et cetera – in the transportation sector further lifts demand for leasing of trucks.

“In the manufacturing field, especially for export-oriented companies, investments are accelerating due to the fact that available production capacity is falling short of meeting expected demand.”

When asked what his company is doing to encourage growth in leasing activity in Bulgaria, Krustev states that UniCredit Leasing is constantly upgrading and developing new products and services.

“Some recent commercial activities of our company include the launch of a fleet management line of business, a special product directed to customers using EU funds, and an initiative where certain brands of our dealer partners are jointly promoted in the branch areas of the bank.”

The current health of the Bulgarian leasing market can be largely attributed to liquid assets, with more than 70% of business being done in heavy and light commercial and passenger vehicles, which clearly ensures low cost of risk on the market.

That is the view of Mihail Komitsky, head of specialised financial services at Sogelease Bulgaria, who says the most significant development in the market over the last 12 months has been an obvious increase in demand for financial leasing with high residual value in sectors of activity such as heavy vehicle finance, in order to decrease the monthly cost for end clients.

Given these comments, it is hardly surprising that he expresses satisfaction with market growth over this period. “The annual growth of new business is driven mainly by vehicle financing [15% on outstanding] but with already decreasing net book value on heavy and commercial vehicles [-3%] and equipment finance [-6%].”

Komitsky expects lower market growth of between 3% and 5% this year, driven mainly by car finance, while growth in heavy vehicles finance will be restricted due to the limited availability of drivers.

On the subject of market share he also observes that there are no official statistics on how that share breaks down between bank-owned, independent and manufacturer-owned lessors, although he goes on to suggest that many captive leasing companies cancelled their activities in Bulgaria during the global financial crisis.

On the subject of state support for the sector, Komitsky notes that in 2014 the Bulgarian government decided to allow VAT deduction on all types of car in the case of operational lease. “This action continues to support the car finance business with 30% growth on the operational leasing business in 2016, but it remains below 4% of the total leasing outstanding.”

Vehicle financing is the core activity of the leasing business due to the high liquidity of the assets, ensuring acceptable cost of risk and the option for attractive pricing conditions, he continues. “For general equipment finance, there is huge competition coming from the banks, which are also trying to adapt their banking products to attack the overall vehicle financing market.

“For all financing related to EU subsidy programmes for agricultural producers or equipment, the customer should have the ownership on the asset, which doesn’t facilitate the usage of standard leasing products. This is part of the reason why equipment finance represents only 20% of leasing business with decreasing volumes. High-tech financing is almost non-existent, mainly due to the risk appetite of the leasing companies.”

Komitsky explains that Sogelease Bulgaria is mainly focused on the vendor finance approach with adapted financial solutions for the end customers, such as subsidised programmes with low IR, high residual-value products, and services included to differentiate the product range from standard bank financing.

In light of the looming election, Neno Stanev, managing director of Deutsche Leasing Bulgaria, reckons the market will slightly decrease or stay on the same level as in 2016 over the next year, based on the political and economic situation in the country as well as across Europe.

“Usually in an election year the economy and the business climate does not do very well,” he concludes.
“There is a process of delay and postponement of investments, which immediately leads to a decrease in the use of leasing or lending services by enterprises.&rdquo; <