The German leasing market slowed in 2012 but still managed growth against a backdrop of declining investment confidence and poor second-half volumes. Lessors in Europe’s biggest market expect more of the same in a quiet 2013. Peter Johnstone and Steffen Müller report.
After a growth spurt of 13% in 2011, new business levels in the German equipment leasing sector increased by just 0.5% yearon- year in 2012, but the industry still anaged to gain a higher percentage of he equipment investment market over the year.
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Business volume for the whole of 2012, with the figure for December estimated by the German leasing trade body the Bundesverband Deutscher Leasing-Unternehmen (BDL), was 47.2bn compared to 46.9bn in 2011 and the penetration rate increased from 22.2% to 22.7%.
With overall investment in the German economy having declined by 2% over the same period, the reduction in growth still points to a successful year for Europe’s largest leasing market.
First-half growth
A look at 2012 quarterly performance shows it could have been better, however.
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By GlobalDataThe new business results from the BDL show 4% and 3% year-on-year growth for quarters one and two of 2012, which, when compared to the exceptional year-on-year growth of 18% and 13% the German market saw in Q1 and Q2 2011, the BDL described the 2012 first-half performance as "very satisfactory".
In the summer of last year, while anticipating business would not be as positive as 2011, the trade body predicted total growth for 2012 would be around 4 to 5%.
The market witnessed a decline in the latter half of the year, starting with a 3% year-on-year drop in business in the third quarter, which the BDL blames on the pervading global economic gloom, and specifically the effects of the eurozone crisis, on investment confidence.
"The general reluctance of the companies in Germany to invest is a consequence of the euro crisis," says Horst Fittler, chief executive of the BDL.
He says the effect of the ongoing crisis reached the leasing industry in the second half of 2012 as investment weakened. "The leasing business depends on the economic trend and the overall investment. A weak investment climate influences the leasing business directly," he says.
Martin Starck, chief executive of LBBW Leasing agrees with Fittler on the causes of investment reluctance in Germany and also point to the weak economies of southern Europe as leading to economic decline continent-wide.
Nonetheless, LBBW experienced a stable level of business in 2012, mirroring the overall picture in German leasing.
So too did Siemens Financial Services (SFS), the leasing arm of the German manufacturer, which grew slightly ahead of the overall market, according to Kai-Otto Landwehr, managing director of SFS’s finance and leasing division. Landwehr says Germany’s economic resilience is down to its export strength which, he says, is reflected in SFS’s leasing business.
"As an export-oriented country, Germany is entrenched in many growth economies and is therefore more resistant to economic volatility in Europe," he says.
Landwehr adds SFS has seen a "healthy" level of business growth in its emerging market subsidiaries in Russia, India and China which has helped the firm weather low investment in Europe. "We are better positioned to withstand economic headwinds," he says.
Deutsche Leasing also saw steady growth in new business, recording a 4% year-on-year increase against the 2010/2011 fiscal year in the 12 months to 30 September 2012, which Kai Ostermann, the firm’s chief executive, described as pleasing in the "present climate of global economic insecurity".
Although 5.7bn of Deutsche Leasing’s 7.2bn in new business recorded as of September
2012 was signed in Germany, like SFS the highest growth was recorded by the firm’s foreign entities with total new business from international subsidiaries growing 15% year-on-year to account for 21% of Deutsche Leasing’s lending.
Despite the slowdown of German domestic leasing business, the industry not only outpaced investment but gained ground against other forms of commercial lending.
The 2012 data from the Ifo Institute for Economic Research shows leasing, including real estate, accounted for 53.5% of all externally financed investments in Germany – the highest market share since 1989, before which Ifo research was not available.
"Companies in Germany invested [less], but they made use of leasing [more] intensely. Therefore, the leasing industry was able to expand its market share," says BDL’s Fittler.
Permanent fixture
Fittler says leasing is a permanent fixture in the German f inance marketplace and says the industry supports German businesses of all sizes and has increased its penetration of the public sector market by 16% over the past 10 years.
Deutsche Leasing’s Ostermann sees the resilience of Germany’s leasing market as a natural extension of how crucial the industry is in supporting businesses.
"To support companies with their investments is the only business objective of leasing companies," he says. "Thus, the development of their business is always dependent on the real economy. This is a logical consequence.
"During the financial crises, the leasing economy demonstrated that it can handle volatility due to being diversified in various branches, regions, and products. For us, this business model is positive. We see ourselves as part of the solution, not of the problem. And we think so in a social as well as an economic context," Ostermann adds.
Highlight the advantages
Despite its fundamental value to the German economy, the leasing industry does face challenges and LBBW’s Starck believes the industry needs to highlight this worth in order to continue to grow new business volumes.
"Leasing is more than financing," says Starck. "To raise new business, leasing companies have to highlight the advantages of the product."
Starck points to the increasing cost of administration and risk in light of the impending lease accounting changes and the economic crisis as already having an effect on the German leasing landscape.
"The smaller independent leasing companies have been hit by the costs of regulation very strongly," says Starck. He is supported by BDL’s Fittler who says the association saw its membership decline slightly in 2012 as small leasing companies were forced to wind down due to regulatory pressures.
Starck continues: "In the future it’s more and more important for leasing companies to put their focus on efficiency."
"To focus on the costs of risk is an inevitable consequence of the financial crisis.
In every company – big or small – there is a need for professional risk management, which includes higher requirements from credit ratings, as well as a higher degree of diversification of the customer and credit portfolio," he says.
Effects of Basel III
The higher capital adequacy requirements imposed by the Basel III regulation will affect German leasing in two ways, says Siemens’ Landwehr – making it more difficult for leasing companies to refinance themselves, while a tight credit environment means that businesses will have difficulty obtaining bank financing and leasing might, therefore, become a more attractive option.
Landwehr says the latter can already be seen in the German leasing market, a point borne out by the gain in penetration rate in 2012.
Despite this potential positive impact, Fittler, who adds anti-money laundering compliance and the risk management requirements to the list of regulations, is unequivocal in calling for a moratorium on further red tape.
"For our heterogeneous industry structure, with [so many] small and mediumsized companies with fewer than 15 employees, more regulation is not acceptable," Fittler says.
Fittler says the industry will meet the fundamental requirements of Basel III and accepts it is a meaningful measure aimed at stabilising the banking and financial system while limiting the liability of the state and taxpayers. However, he adds, with stricter rules putting banks "on a short leash", the leasing industry will ultimately be hit.
Lifeline for SMEs
Irrespective of the potential regulatory setbacks on the horizon, lessors in German look ahead to this year and beyond with quite confidence.
Starck tells Leasing Life LBBW expects new business volume to remain at least stable from 2012 to 2013 and points to the lifeline leasing can offer to SMEs.
Starck says around 85% of all lessees in Germany are SMEs and leasing will continue to be an "essential instrument" for this customer sector creating potential for business growth for lessors regardless of economic constraints.
"Despite all the challenges by the economic and legal environment, accounting, supervisory regulations, and costs, there is a high potential for the leasing industry," he says.
With a customer focus also aimed at servicing Germany’s huge number of SMEs – making up 99.5% of all businesses in the country – Deutsche Leasing’s Ostermann is equally sure of steady growth this year and anticipates the firm will again grow above the market average.
Ostermann adds the leasing industry will probably see this steady growth against a backdrop of a stuttering German and European economy citing the "substantial insecurity" which continues to dominate economic development in Germany in 2013.
Such insecurity also lends an air of caution to Fittler’s predictions for 2013. "Future developments will be shaped by companies’ willingness to invest, which will depend on how confident they feel
about the stability of the eurozone," he says. "Signs of an upturn are beginning to appear, but an overall improvement in theinvestment climate any time before the second half of 2013 is unlikely. We expect the levels of new leasing business acquired next year to remain in line with current levels."
Fittler adds the BDL is confident that 2014 will see the German economy return to significant growth and with it the leasing industry.
Green and healthy
While German lessors are moderately confident about growth in 2013, expectations differ across asset classes.
The passenger and commercial vehicle segment made up 69% of the market in 2012 and is set to decline, or at best remain steady, for lessors not specialising in fleet, according to LBBW’s Starck.
The firm’s business volume in the vehicle segment increased 2% yearon- year in 2012 but Starck has a mixed outlook for 2013.
"The market of car leasing is dominated by captives and fleet management companies," he says. "In 2013 we expect a decrease in leasing with private customers and stable business with commercial vehicles."
Deutsche Leasing saw a 2% drop in vehicle leasing in its 2012 fiscal year to 30 September, recording 1.73bn in new business, which Ostermann blamed on a decline in new car registrations across Germany and intense competition in the sector, particularly from producer-related funders.
Ostermann also highlights "sustained competitive pressure" in the IT and communication technology asset sector but says: "At the same time, technological developments are providing an impetus in the field of new investments and replacement investments."
Deutsche Leasing hit 615m in new business in the IT and
communication segment in 2012, up 12% on the previous year’s figure.
The segment accounted for 9% of new business volumes across all of
German leasing in 2012.
LBBW’s Starck says the IT sector was affected by a drop in equipment prices and reduced investment in 2012.
However, he predicts, with the price drops already in place, 2013 will see at least a steady level of
business in the technology sector.
Siemens Financial Services’ Kai-Otto Landwehr says he is expecting strong performances in 2013 from healthcare equipment and green technology, both of which are core areas for the lessor.
Landwehr says SFS is experiencing a crossover of the two segments among some of its customers with health care organisation looking for greener equipment. He says SFS is generally anticipating a greater uptake in finance for energy-efficient technology.
"In particular, the manufacturing sector should show a growing interest in leasing energy-efficient equipment," says Landwehr, and gives the example of variable speed drive motors used in manufacturing processes.
Ostermann also sees growth in green technology in 2013 for Deutsche Leasing’s project finance division and says the energy sector is benefitting from the transformation of the industry in Germany and the associated need for investment in renewables technology, power plants and further infrastructure.
BDL president Martin Mudersbach, in a statement on the German markets’ 2012 performance, agreed with Landwehr and Ostermann that green technology and healthcare equipment could be big growth areas in 2013.
He said: "Immense investments will be required in connection with the turnaround in Germany’s energy strategy, and these could be financed through leasing. In the health care sector as well, leasing is enabling hospitals and medical practices to take full advantage of the latest technological developments."
Leasing, he added, is the best way of financing high-tech equipment with short innovation cycles.
