In response to the straitened conditions across Europe, leasing firms in Italy are opting for customer quality over portfolio quantity, discovers Claire Hack.
Defaults and overdue payments have become commonplace within the Italian leasing industry as the market is forced to adapt to a new economic landscape, characterised by a lack of liquidity and a generally risk-averse mentality.
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Increasingly, companies are strengthening their risk policies and implementing tighter screening procedures for potential clients.
"Managing the increasing level of defaulted deals is becoming an ordinary task for leasing companies. At the end of this crisis, the leasing industry will be provided with new, improved work out skills," Massimiliano Moi, CEO of UniCredit Leasing (UCL), said.
"[We have implemented] mitigated risk appetite, cost rationalisation, and more focus on asset repossession and remarketing."
As a result, furthermore, companies are also shifting away from a focus on increasing the size of their portfolios and towards making sure they work only with the most creditworthy clients, according to Edoardo Bacis, general manager of Leasint, the asset finance arm of Intesa SanPaolo.
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By GlobalData"We are focused more on quality, both of the offered service and of the portfolio, than on the market share increase," he told Leasing Life.
"We expect that leasing will not fail to play its role in the economic recovery, but it’s hard to say when and how [strong] the recovery will be," Bacis added.
The industry must therefore remain on its guard, and must continue to develop new ways to protect itself against further pitfalls as the backdrop continues to shift.
This includes building a deeper knowledge and understanding of the ever-shifting economic climate in order to meet the demands of a new clientele.
"The focus is on the quality of the offered service, taking care of the relations with customers and suppliers as well as quality of the process," Bacis said.
"We want to focus to our capability to meet the new requests of the market by offering products with a higher know-how. The know-how we are talking about is related both to the leased goods and to more complex relationships with suppliers and operators."
These more complex relationships, he added, include investments in the Italian public sector, and, increasingly, in projects linked to environmental sustainability.
The face of the leasing industry as a whole is changing, Moi said, leading to a marked drop in demand from the corporate sector, as well as a sharp rise in the cost of financing.
"As a consequence, the leasing market has been deeply impacted. Lending by UCL focused mainly on top-rated customers and we leveraged on supranational funding in order to offer customers a sustainable cost of borrowing," he said.
"The whole credit industry in Italy is experiencing an increase of non-performing loans and of the cost of risk."
The larger, bank-owned lessors, including UCL and Leasint, have thus far come through the ongoing economic turmoil relatively unscathed, but the market as a whole has suffered a great deal in recent months, according to Moi.
"The whole Italian leasing market has been deeply impacted by the negative economic context. Several players limited their business or quit the sector," he said.
"UniCredit Leasing is focusing on keeping an adequate level of business with a strong attention to risk and profitability. We are lowering our market share, but with an improved capital return."
UCL itself still holds a 15% share of the overall leasing market, he said, and Leasint managed to increase its market share in Italy by 20% in 2012 in terms of new contracts signed during the year to date.
Importantly, in the growing renewable energy financing sector, Leasint currently holds a 50% market share in Italy, Bacis said.
"Our company’s strengths haven’t changed in the last [few] years: real estate, either built or being built, machinery of medium to large [contract size], and, in particular, renewable energy," he added.
UniCredit has also enjoyed success in the renewables sector, Moi said, and has a dedicated Competence Centre, based in Milan and Vienna.
"Renewable energy can be considered the most successful sector for UniCredit Leasing, thanks to the strong positioning and the deep business know-how," he said.
"Other business sectors have been strongly limited by the high cost of funding and the lack of demand for new investments coming from the companies."
While the industry has not benefited from a great deal of direct support from the Italian government, according to Moi, it has seen some improvements in the wake of the change in administration.
"Italy is enjoying an improved governance of the country, backed by expected reforms, and a better interaction with European institutions and financial markets," he said.
"This is expected to deliver a lower cost of funding, which will stimulate investments and therefore new leasing business."
Beyond this, according to Bacis, the Italian leasing sector is closely linked to investment levels in the country, and is therefore also tied into industrial production trends.
"We are encouraged by the Bank of Italy forecasts, which predict the first signs of recovery in 2013. As far as Leasint is concerned, we expect that the selection of the market players that’s now ongoing will promote the strengthening of our leadership," he said.
In the medium term at least, Moi said, expectations are positive, and it is anticipated that the market could recover part of the business lost over the course of the last two years.
"The economic crisis is strongly driving Italian companies to restructure their practices, looking for productivity enhancement. In this context, all investments driven by energy saving or costs reduction will be taken," he said.
"In terms of product and services, we expect a major focus on mid-term funded products, on customer care and on additional, capital-free, services."
For the rest of this year, according to Moi, and also into next year, the Italian leasing market will be characterised by a strengthened focus on restructuring and consolidating the industry.
Leasing distribution channels in Italy
The asset finance market in Italy has a number of distribution channels, including bank branches, agents, suppliers and dedicated leasing branches.
"Most of the market claims to use a "mixed" distribution network, with the goal to reach different types of customers, but the most used channel for every company depends mainly on its origin – bank, independent or industrial," Bacis said.
The consensus among lessors, however, is that the country has not possessed a well-developed broker network – at least until relatively recently.
"There is no broker network as such. However, a new law has been approved by the government which introduces better defined rules and regulations for brokers. For example, transparency, more checks and verifications, and obligatory insurance," Stefano Esposito, CEO of Sardaleasing, said.
"Our company belongs to a banking group, so this is our main channel at 70%. We have direct commercial activity through our only branch in Bologna and through our top management business contacts at 25%."
The broker channel, he added, has seen a dramatic reduction in the last two years, and provides only a marginal contribution.
Moi added that the market in Italy has been historically distributed mainly through independent agents’ networks, but that this has changed somewhat in recent months.
"The market moved to a more-balanced mix with an increase in bank networks and vendors business," he said.
"We believe that in the coming years, the lessors will leverage more and more on bank networks, in order to develop leasing business with the bank’s customers and attract new customers to the bank through the leasing business."
The smaller player’s perspective
Sardaleasing, set up in 1978 and a founding member of Italian leasing association Assilea, currently holds a 1.5% share of the market in Italy, and a 33% share in Sardinia.
It, too, has enjoyed considerable success in renewable energy financing, with 12% growth in the sector as of July this year, although it achieved greater growth in real estate, up 20% thanks to a rally in smaller deals.
Despite its smaller size, the company also managed to weather the most recent economic storm relatively well, shrinking just under 2% against a reduction across the market of 38%, Esposito said.
"Overall, [we are] positive: our competitors dropped an estimated 15%, while the top ten companies dropped 50%," Esposito said.
"Our trend is due to specific niches, such as company leasing and nautical leasing," he added.
The company, along with other lessors, has also benefited from the support of the Bank of Italy, which, through the European Central Bank ECB, has increased the amount of capital available to Italian banks and therefore to Italian leasing companies.
"Leasing companies can receive liquidity by simply selling leasing credit to the ECB, which in turn will use it as a guarantee," Esposito said.
"Further financial support derives from the new tax law that has abolished the minimum duration of leasing contracts."
On the other hand, the latest debt crisis has led to a significant increase in required margins on new leasing transactions, and has also necessitated more rigid customer selection, as well as a reduction in non-banking distribution channels.
The number of defaulting customers has also increased, and has forced a special focus on capital assets, Esposito said.
Defaults and overdue payments at Sardaleasing increased by about 20% in the first eight months of the year, and there was also major growth in real estate to be sold or re-leased.
"We are facing a move from credit management to product management. New opportunities will arise from greater attention being paid to the link between risk, price and profitability," he added.
"The company is growing in new sectors and in specialised niches. Beside that, we are focusing on the most loyal clients across the entire banking group and on our historical partners."
Companies must pay more attention to their expenses and also conduct research into new revenue flows in order to survive in the current climate, he said.
"New activities are being developed by all the companies under [Italian leasing association] Assilea’s guidance," Esposito told Leasing Life.
"In particular, each company records all the data of collection to reduce [loss given default], and to show that the whole sector is low risk because the goods can be considered as collateral."
For 2012, Esposito said, he is expected the company’s returns to shrink by 5%, while the market in Italy as a whole will shrink by about 30%.
By 2013, he added, both the company and the market are expected to move up or down by about 5%.
"We will be focusing on the involvement of our business suppliers, paying more attention to asset management and giving priority to the green economy as part of a new philosophy and ethical approach," he said.
Assilea’s perspective
The companies that have performed best in the year to date have been the captive lessors, according to Gianluca De Candia, general director of Italian leasing association Assilea.
"It [is a result of] their capacity in financing goods as a service. This is strictly linked to the sale support of the producer and results in a better response to the increased cost of money. It is consistent with the ongoing automotive leasing market," De Candia said.
In the first seven months of the year, meanwhile, the market as a whole in Italy underperformed as a result of the European debt crisis, with a decrease of 38% in values terms, he told Leasing Life.
The general performance of the market is more reflective of that of bank-owned and independent lessors, according to De Candia.
"On the other hand, the captive ones performed well, with an 8% business increase," he said.
Bank-owned lessors have seen a decrease in business volumes of almost 45% compared with 2011, while banks offering other forms of financing in addition to leasing saw a fall of 51%.
Bank-owned funders offering financing such as factoring and consumer credit as well as leasing have seen a drop in business volume of 12% so far this year, while independent funders saw a decrease of 38%.The market share held by banks focused on leasing averaged 0.7% of total new business volumes, De Candia said.
"The Italian leasing market experienced a hard decrease in terms of number of contracts as well as in volumes," he said.
"Almost 60 players in the market financed a total of 150,523 contracts corresponding to an amount of 9.99bn in the first seven months of 2012."
The figure represents a decline of about 17% in the number of new contracts financed in the seven months to July 2012.
This has forced companies to resize their market share, De Candia said, and the trend has been seen in all sectors.
"The percentage fluctuations are negative, ranging from 24% [down] in the equipment sector to 58% in real estate," he said.
The automotive sector saw the smallest decrease in 2011, according to De Candia, with a fall of just under 4%.
The energy sector, meanwhile, outperformed most other business segments last year, as the drive for increased sustainability and reduced costs continued.
"At the end of 2011, there was an increase in the volume of business by 11%, driven by government incentives, which had a relevant influence on the tendency of the market," De Candia said.
"It sustained the leasing sector, helping to avoid a worse performance. At the end of 2011, the general volumes of leasing market decreased by 10%."
During the first seven months of this year, the players in the Italian leasing market have chosen to trim back their business, in order to address the capital constraints they now face.
While renewable energy financing has proved valuable to lessors individually, the energy financing sector as a whole shrank 40% in the first seven months of 2012, as government incentives dwindled.
"These changes have led to a new distribution of new businesses along sectors, pushing up the automotive market share at the expense of real estate and energy. Equipment leasing diminished by 24%," De Candia said.
More positively, however, the Italian government removed an important obstacle to the market in 2012 by taking away the minimum fiscal length requirement for contracts, through the deductibility of fees in the contract, he added.
This move could present an opportunity for Italian leasing by enhancing the credit cycle, De Candia said, while the release in the coming months of the exposure draft of International Accounting Standards 17 should lead to enhanced transparency of lessees’ balance sheets, thereby improving the assessment of credit risk.
"[The government move] unties the deductibility of the fees from the contract length. Reducing the contract’s length while maintaining the actual benefit of the fiscal discipline could lower interest rates due to funding easing for leasing companies," he said.
"The operating elasticity of leasing companies should benefit from this, especially in financing durable goods."
The latest debt crisis has, of course, delivered a tremendous blow to the Italian leasing market, De Candia said.
The rising cost of funding has affected businesses in all sectors, he added, and even though Italian lessors have been subject to similar supervisory measures to banks, they do not necessarily have access to the same sources of funding.
"Therefore, in the current debt crisis leasing companies have a competitive disadvantage with respect to commercial banks," he said.
While leasing has benefited SMEs in Italy by not locking up capital, the average size of lessors in has not helped them to neutralise continuing funding constraints.
In general, the length of the crisis and the lack of an end in sight have pushed the Italian leasing sector to its limits, forcing down profits, according to De Candia.
The longer the crisis lasts, he said, the more the leasing companies will have to do to remain in business.
"Different budgeting for profitability is what our associates are doing, focusing on the managing of exposures and asset remarketing," De Candia said.
"The 2012 incentives for the energy sector made clear the role they had in the recent tendencies of new businesses. The halving of energy incentives in 2012 had such a massive impact on the sector that, [for profitability’s sake], the sector needs, more than the others, a change in perspective," he added.
The leasing market also saw an increase in the number of defaults in 2012, De Candia told Leasing Life.
De Candia said a change in the definition of ‘past due’ – reduced from 180 days to 90 days – has hurt lessors’ balance sheets, lowering the ratio of good credits.
Lessors in the leasing market say that the difficulties will last for 2012 with a strong decrease in volumes financed with a general negative fluctuation of 25%.
