The Portuguese leasing market may have seen a drop in growth over the last year in line with so many sectors taking a hit during the pandemic, but it still outperformed GDP and increased its contribution to the economy Che Golden reports

The Portuguese Leasing, Factoring & Renting Association (ALF) has published estimated results for 2020 which contain some unexpected conclusions. Although factoring recorded a drop in growth for the first time in six years, with a decrease of 6.9 per cent totalling €31.5bn in loans taken, the drop in income was less than the 7.6 per cent drop in Portuguese GDP, according to the estimate released by the National Statistics Institute (INE). Overall, the ALF estimates that in 2020, factoring has increased its weight in the national GDP to around 16 per cent.

Domestic factoring decreased 6.4 per cent, with production values in the order of €15.1bn. In the international sector, the drop was 17.7 per cent, totalling €3.9bn in loans taken, of which €3.7bn in export factoring (18.4 per cent decrease) and €195m in import factoring (growth of 0.1 per cent). Overall, there was a decrease of 3.6 per cent of the activity, resulting in €12.5bn in credits taken.

In 2020, according to ALF estimates, leasing supported investments of €2.4bn, with a 22.3 per cent drop in total production compared to 2019. The smallest drop was observed in real estate finance leasing, which registered a 12.5 per cent decrease in value, with a production of €740m – with 90 per cent of the value of these investments being allocated to contracts made by companies or public entities in 2020.

Equipment and vehicle financial leasing were responsible for €1.6bn in investments, 26.0 per cent less than in 2019. Close to €1.04bn of the total was invested in vehicle leasing contracts, which correspond to 33,411 contracts. €795m were invested in light vehicles (of which €553m were contracted by companies and €24m by individuals) and €249m in heavy vehicles. The remaining €566m were invested in equipment, corresponding to 8,454 contracts, according to estimated data.

However, changes in legislation made to help Portuguese business cope with the economic effects of the pandemic may skew these estimates, according to the lessor DLL.

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“Customers consider that the financial products have been making an essential contribution to their companies, being a fundamental pillar in their business performance, both in operational terms and as a factor in the reduction of risk and optimisation of efficiency,” said Carla Camilo, DLL PT Country Representative. “However, some sectors have been greatly impacted by the pandemic and by the lock-downs. Since there is a moratorium law in place the real impact on the health of the leasing market is not yet possible to determine.”

The Portuguese government approved a moratorium law that was first published in March 2020 and has since then been reviewed and extended a few times. Overall, this law determines extraordinary measures to support the liquidity of families, companies, institutions of social solidarity, associations, non-profit organisations and other social economy entities, during the pandemic.

The moratorium offers customers a grace period (no instalments charged) on loans and lease payments for a period of 18 months up to September 2021 and the extension of the contracts term by the same period, according to Álvaro Zafra, DLL Iberia country manager.

“This law was originally applicable to financial products only and since January to non-financial products as well. All leasing companies in Portugal were obliged to comply with the moratorium law and the customer adherence to it has been high, especially in the sectors most affected by the pandemic, and the lockdowns measures,” said Zafra.

To benefit from this moratorium, contract holders must find themselves in one of the following situations: be self-isolating either because they have or might have coronavirus or are looking after children or grandchildren who are self-isolating; be on reduced working hours or suspended employment, or unemployed due to the pandemic, or be eligible for extraordinary support to reduce the economic activity of the self-employed.

Customers can choose to suspend the payment of principal or to suspend the payment of principal and interest. The remaining charges provided for in the contract can continue to be charged, such as taxes, bank fees and insurance premiums.

As well as a predictable loss in revenue, there has been a drop in assets held by vehicle leasing companies. The ALF report showed a 27.5 per cent reduction in the number of vehicles acquired in 2020, compared to 2019, with a total of 27,115 vehicles acquired in renting (of which 22,451 correspond to light passenger cars and 4,664 light commercial vehicles). But overall, the total size of fleets has decreased only marginally compared to new production, with the total fleet managed by renting companies contracting only 2.4 per cent in number of vehicles, totalling 118,805 vehicles. The Portuguese fleet is now worth €1.91bn, only 1.1 per cent less than last year.

Isa Silveira, a consultant at Invigors EMEA, feels that the sector is already bouncing back. “In general, it can be said that the leasing market in Portugal is currently in a phase of some normalisation, even if very uncertain,” she said. “There was a retraction in some leasing sectors, originated from the behaviour of the national and international economy, last year, but currently, although at a still fragile moment, a tendency towards normalisation is underway.”

According to DLL, the market sectors that are particularly strong are construction and industrial since these sectors have not been directly affected by the Covid-19 pandemic and its measures, unlike sectors such as hospitality, gyms, beauty, and culture.

“The current circumstances don’t allow for clear forecasting, especially since the country is still in partial lockdown, after a complete lock-down of two months,” said Zafra. “However, we can expect that investments from end-users follow the recent trend of being postponed or even cancelled in the short-term. That might be minimised by the necessity of liquidity, resulting in higher demand for products like sale and lease-backs.”

According to Camilo, customers are increasingly interested in leasing solutions and have become more demanding, not only in terms of pricing but also with regards to the ease of use of promotional channels and turnaround times of response. “In this context, we’ve been noticing financial institutions investing in platforms to promote their products, and adopting digital solutions,” she said.

Flexibility is going to be key for leasing companies navigating the market over the next year and they have to been seen as a supportive partner to their customer. “To help with the economic stresses of the pandemic, some companies have presented payment deferral solutions, other rentals in arrears and also payment deadline extensions,” said Silveira. “In general, the need for leasing companies to meet customers’ needs requires that they enhance their products facing market demands as well not to be distanced from the competition.”

While the moratorium law has given the Portuguese leasing market a shot in the arm in Covid times, specialised financing has driven the market for the past two years and is very important according to Silveira. “There is a historical evolution of leasing products and the trend has been a high propensity for their development,” she said.

Silveira’s observations have been borne out by a study, Specialised Financing and the Portuguese Economy released by Deloitte in December 2020. It found that leasing, factoring and renting products have been drivers of economic growth in Portugal and that the three sectors have shown strong performance over the past few years.

The study stated that leasing products present a set of underlying characteristics and advantages that can be capitalised on through specialised financing. Financial institutions in the leasing market are recognising the importance of flexible financing solutions that add value, both for suppliers as well as for customers and that allow accommodating variations in product configurations to cover a wide spectrum of needs.

At the same time, there is a greater sophistication and demand from customers, whether with the service itself or with the way it is made available.

The real opportunities for growth in Portugal are in the private sector, according to the study. It found the corporate sector too mature to offer significant opportunities for expansion, while the private sector still has plenty of room to adapt and move into new markets.

A note of concern in the study is the capacity of Portuguese legislation to support specific leasing products and Deloitte says there needs to be a better framework in place if Portugal wants the special financing aspect of leasing to continue to develop. For instance, the rules regarding community funds theoretically allow the use of leasing for the financing of the acquisition of assets, but in practical terms, the inability to calculate capital amortisation variable and legal issues related to property ownership, make the use of leasing as a financing instrument unviable. According to Deloitte, this blocks community funds from capitalising on all the advantages inherent to specialised financing, including the guarantee that the planned investment is made.

In the factoring market, the study predicts a future trend for standardising products for the mass market markets, while developing tailor-made packages for the medium and large companies’ sector. The collection process needs a radical overhaul in Portugal, as it remains entirely manual. An electronic invoicing system is urgently needed to improve access to information for financial companies and customers while simplifying the collection process.

The study identified factoring as the sector where products of specialised financing would have the greatest growth potential in the short term. It predicts the economic crisis caused by the pandemic will lead to an increase in payments terms by debtors, which may result in a greater demand for factoring products as an alternative way of financing and collection management.

At the same time, higher state expenditure is expected in payments for services to Portuguese companies – this increase in credit sales may lead to an increase in the hiring of factoring products. Factoring can also assume a crucial role in boosting the economy. From the perspective of the banks, there is an incentive to support the treasury and liquidity of companies through products with shorter response times. From the point of view of companies, since payment periods are likely to be extended, there is a possibility of using these products as a flexible and agile way to accommodate the liquidity needs they will face in the near future.

As the stress of the pandemic subsides and countries can once again concentrate on planning for the future, specialised financing could put the leasing sector at the heart of Portugal’s circular economy.

A study carried out in 2018, by the Bucharest University of Economic Studies, entitled Business models for circular economy and sustainable development: the case of lease transactions, where 266 companies listed on Bucharest Stock Exchange were surveyed, claimed that the use of leasing operations optimises the market value of companies and is well interpreted by investors and financial analysts.

However, Portugal currently has one of the lowest levels of company activity in the circular economy in Europe, where in total the circular economy is responsible for approximately 2 per cent of jobs.

The Portuguese government has drawn up an action plan and the Deloitte study claims specialised financing would make the Portuguese leasing sector better able to adapt to a circular economy.

Leasing in Portugal: recognition and growing SME demand