A number of years of recession have taken their toll on the Finnish lease market, with the sector’s growth over the next few years likely to do no more than mirror a fragile economic recovery. Paul Golden reports

The Finnish economy has been in recession for three years. Exports have suffered due to the declines of Nokia and the paper industry, compounded by weak external demand, especially from the euro area and Russia.

The IMF projected a modest recovery in 2015 (0.4% growth) that would gradually strengthen this year to 0.9%, but also warned that without further reforms, growth was likely to remain much lower than the years prior to the global financial crisis.

The Finnish government has announced a broad structural reform programme, including labour market and benefits reforms to reduce unit labour costs and improve competitiveness. Pension reforms to lengthen working careers were introduced to parliament and reforms to improve public sector productivity are being developed.

One factor that has worked in the country’s favour is that according to the World Bank, the ongoing crisis in Russia and Ukraine has had limited impact on Finland. Even though the country has sizeable export exposures to Russia, the World Bank estimates that there has been less than 0.5 percentage point decline in growth in response to a negative 1% shock in Russia.

According to the Finnish Federation of Financial Services, which represents banks, insurers, finance houses, securities dealers, fund management companies and financial employers, the total local consumer credit market has experienced some growth over the last few years, although demand for consumer hire purchase (which accounts for 95% of total car financing in Finland) has been more volatile.
The lease market is relatively concentrated and dominated by the universal banks and finance companies that are part of wider (Nordic) banking groups. The Finnish Federation of Financial Services refers to low customer confidence as a factor for its leasing members, who include a universal bank, two specialised credit institutions with a banking licence that are subsidiaries of a universal bank and one universal bank subsidiary without a banking licence.

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Total outstandings for Finnish Federation of Financial Services member firms as of Q3 2015 (the most recent period for which data is available) show an increase of €400m from the end of 2014 to €15.2bn. Non-car leasing is the single largest category of outstanding credit, accounting for approximately €3.7 as of September 2015 (outstanding car leases were approximately €600m for the same period).

However, the figure for non-car leasing is down 3.1% from the end of 2014, which means that it is the only category to register a fall from the end of 2014 (car leasing was up 1.8%). The combined lease market accounted for 28.2% of overall credit in Finland at the end of last September.

New lease business was up 17% for the 12 months to the end of the third quarter of last year, with car leasing recording a 9.5% increase.

Road transport vehicles account for 46.7% of investment finance, followed by machinery and industrial equipment (41.3%). Just under one fifth of new leasing contracts (21.8%) were for passenger cars, with machinery and industrial equipment accounting for 20.2%.

Computing and other business machines represented 18% of new lease contracts, while road transport vehicles were responsible for 11.3%.

At €3.3m, credit losses were at their lowest level for more than a decade and just a small fraction of the €81.5m of losses registered in 2008.

Reima Letto, director of the Federation of the Finnish Financial Services suggests that there are no signs of increased risk taking or credit losses in the market. According to Letto, new leasing business increased by approximately 9% during 2014 and he refers to increasing use of leasing by the public sector, although demand varies significantly between different segments of the market with service linked leasing agreements showing above average growth.

"One specific feature of the Finnish market is the popularity of business hire purchase or investment financing," he says. "Business hire purchase is seen as an alternative to leasing for financing investment in machinery, cars and other vehicles. One of the main reasons for using business hire purchase instead of leasing in Finland is taxation."

Bank owned finance companies continue to dominate the Finnish leasing market, controlling in excess of two thirds of the market. Companies owned by importers or manufacturers also hold a significant market share, mainly in car leasing.

No particular supporting measures for leasing have been presented by the government in recent years, although Letto says the reduction of the general corporate tax rate to 20% from the beginning of 2014 has been a positive development for leasing companies.
His expectations for the leasing market in Finland over the next few years are modest, tempered by a challenging operating environment and future economic outlook as well as companies’ limited willingness to invest.

Handelsbanken lease specialists Torsten Groschup and Seppo Tujunen broadly agree with this assessment of the health of the leasing market in Finland, noting that credit losses have been moderate over the last few years.

When asked how much growth there has been in the Finnish lease market over the last 12 months, Groschup acknowledged that there had been only very limited expansion, but added that demand for and interest in leasing existed across all industry sectors, particularly among larger companies.

Tujunen observes that the Finnish government has not taken any specific steps to support the growth of the lease finance industry, but despite this lack of state support he remains confident that the leasing market will experience modest growth over the next 12 months from its current level of just over €6bn.

Few people have a better understanding of the lease industry in Finland than Korvenpoika Oy senior adviser, Artti Aurasmaa.

Aurasmaa joined 3 Step IT shortly after the company was founded in the last 1990s and was chief executive officer when he left the group in 2014, having overseen its expansion into becoming the leading independent company providing IT leasing and management services in the Nordic countries.

He had previously studied in the US and worked for at Merita Customer Finance (now Nordea Finance) as a finance specialist and as an analyst and project manager at Corporate Advisor Group.

Aurasmaa agrees that the Finnish leasing market has been strongly impacted by the long lasting recession in Finland, which has had a major negative impact on investments in fixed assets. Over the last seven years the Finnish economy has experienced negligible grown and the relative size of the public sector has continued to increase.

"Today, the public sector represents more than 50% of our GDP and the situation is naturally not sustainable," he explains. "In fact, the investments made by the public sector during the recession have temporarily kept investment activity (and hence also leasing) at reasonable level, but as the public deficit is reaching an intolerable level, public sector spending has already been cut and further reductions can be expected.

"In addition, the Finnish culture has been favourable towards ownership (at least until recently) and especially in business to consumer markets, hire purchase has been significantly the preferred choice of financing compared to leasing. On the other hand, according to Finnish GAAP, leasing is always an off-balance sheet item, making it a favourable financing instrument for the small to medium sized businesses that are not using IFRS."

When asked to describe the main challenges (regulatory and otherwise) facing the market, Aurasmaa returns to the themes outlined above. "The main challenge is clearly the long lasting recession and now also the massive public deficit. For the larger and more international corporations (that are using IFRS) the recent changes in the lease accounting rules are naturally causing some concerns, but this is no different to any other country."

So are there any segments of the market that are particularly strong or weak – for example, are small companies using lease services in greater numbers?

"There are small pockets of the leasing market that are booming thanks to innovative use of subsidies, services and market developments by selected leasing companies," observes Aurasmaa. "Within the car leasing market, the most rapid growth in leasing has been witnessed in the electric vehicle (EV) and plug-in electric vehicles (PHEV) segments."

Whereas electric cars are still a small minority of the overall car market in Finland, the size of the market is doubling every year and thanks to innovative bundling of electric vehicle subsidies only to lease vehicles, lease penetration in this segment of the market is very close to 100%.

"As the entire car industry will become completely digital during the next decade, innovative car leasing solutions are on the rise," he continues, suggesting that this development in Finland is especially driven by car leasing firm Secto Leasing.

Secto Automotive has 1400 client companies and fleet of 3800 vehicles, making it the leading privately owned leasing company in Finland. The company puts its growth down to the introduction of the open calculation leasing product to the Finnish market.

Due to massive healthcare reform to take place between 2017 and 2019, the single largest opportunity within Finnish leasing markets in the near future will probably lie in the reorganisation of the healthcare industry, Aurasmaa suggests.

"Currently, medical services are managed by some 300 local communities/cities but after the reforms are completed, medical services will be organised under between 15 and 18 healthcare districts. As a part of the change, the ownership/control of all the assets should be moved from the local communities to the larger districts."

Until recently, Finland could have been considered as a rather service oriented leasing market, with leasing being seen as a tool to better manage financed assets, but Aurasmaa says this is changing surprisingly rapidly as the lengthy economic downturn has made private sector companies as well as public sector organisations extremely short term and cost control focused.

"Therefore, the traditional monthly lease rates have become increasingly important and as interest rates are low (and margins are also low thanks to regulation being practically the same for everyone), this has supported the increase in residual value risks taken," he says. "A couple of internationally well known, residual value-based lessors have successfully entered the Finnish markets over the last two years – the ones to mention from IT leasing side (which I am mostly following) would be Equigroup through its joint venture with Nordea and CHG-Meridian through acquisition of Acento."

Aurasmaa explains that Finland has been traditionally a highly bank-oriented leasing market and the local banks have dominated the market. "We haven’t traditionally had a similar market for lease brokers and independent lessors as the UK. Within the IT leasing market 3 Step IT has been somewhat of an exception, but as the local banks are also their refinanciers, all the volume produced by 3 Step It is actually recorded in the local banks’ books."

The rapid evolution of digitisation is starting to reshape the leasing industry, he continues. "More and more industries are moving to XaaS operating models (everything as a service). These types of business models require end to end packaging from the lease providers as well, which is benefiting the most innovative manufacturer owned lessors. But for the time being the market is still dominated by the bank owned entities."

The next 12 months will be a period of continued difficulties for those operating in the Finnish lease market, concludes Aurasmaa.

"My expectation for 2016 is that it will continue to be a struggle for the entire Finnish economy and hence the leasing market will be difficult as well. However, from 2017 onwards slight growth can be expected, especially if the leasing industry is capable of capturing the opportunities within the healthcare market."