A concerted effort by the government in Italy stands to benefit leasing companies in the struggling Mediterranean economy. As the first signs of recovery peek over the horizon, the country’s biggest leasing players stand to reap the benefits of a new policy push towards SME growth, Isabella Grotto reports
The Italian economy has long been as famous for its instability as for its inefficiency. Decades of political turmoil and alternating governments have in many ways hindered the establishment of long-term policies for growth. Particularly in the small and medium tiers, recurrent complaints from businesses include prohibitive tax levels and a lack of incentives for investment, factors often blamed on a lack of foresight within a fractious government.
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However, as manufacturing activity continues to expand and the economy looks poised to see the first signs of recovery, major players in the industry are drawing confidence from a new round of policy incentives.
A law passed in early 2012 removed the previously existing minimum length conditions for lessor fee deductions from all financial leasing contracts signed after 29 April 2012.
A second reform passed in early August 2013 and referred to as the "Nuova Sabatini" law introduced a concession system allowing SMEs to access financing and subsidised contributions for investment in production assets such as machinery, plants and new factory equipment as well as hardware, software and digital technology, including through leasing contracts.
Further, the Ministry for Economic Development established a resource fund capped at 2.5bn, but extendable to 5bn through further provisions, made available through Italy’s Cassa Depositi e Prestiti (CDP) bank to lending projects supporting SMEs. The fund may be used by banks to grant banking and leasing loans until 31 December 2016.
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By GlobalDataThis year saw the "Legge di Stabilità 2014" (the 2014 Stability Law) come into effect as of 1 January, further reducing the duration of lease payment deductions and simultaneously increasing the attractiveness of leasing for businesses from a tax perspective.
Turning a corner
This relatively rapid succession of boosting legislative actions is already having a positive effect on leasing in the country.
Gianluca De Candia, director general of Assilea, Italy’s leasing association, says the period from January to May 2014 saw new business levels increase by 11%, compared to the same period last year, a fact he believes is directly attributable to the Stability Law "allowing businesses and professionals to expense the lease payment in a shorter period of time compared to before."
The industry is still far from recouping its crisis losses: "Consider that in 2007 leasing financed was around 49bn, while last year it fell below 14bn; that gives you an idea of the downscale," explains De Candia. Nonetheless, the message of support conveyed by recent policy action is an important one for the industry: "The data is extremely encouraging, because we have a constantly positive trend," he says.
The focus on small and medium enterprises in the Italian market is a particularly fundamental one, explains Luca Nuvolin, manager for the Italian division of De Lage Landen.
"Personally I think the sector of Italian industry which suffered the least under the crisis was that involved in export,"
he explains. "The real problem was for territory-based industry, which suffered more highly from the reduction in consumption among Italians."
This is not solely due to the enduring high levels of public debt, adds Nuvolin, but also because: "Italian households are saving-prone, so when the moment comes to tighten the belt, they tighten the belt; they scale down consumption. From the point of view of the economy, unfortunately, this means a fall in GDP and leads to a negative spiral."
As such, he says: "I personally believe the idea of incentivising investments and finding fiscal advantages which may prove attractive to businesses which invest in generating value has a higher influence on small to medium enterprises, whose performance is an indicator of market performance."
Corrado Piazzalunga, chief executive officer of UniCredit Leasing, the asset finance arm of Italian banking giant UniCredit and the largest leasing company in the country, adds: "The stability law has reviewed the role of leasing as the financing instrument most able to adapt to the needs and requirements of businesses and the needs of professionals."
He agrees the recent policy shifts demonstrate a significant commitment to the development of small and medium business in the country: "The fiscal and rearrangement interventions in the real estate, equipment and vehicle sectors certainly meet the needs of Italian SMEs, which are at the heart of production and represent over 75% of Italy’s leasing portfolio, with benefits extending to both large operators and professionals."
In particular, through the Nuova Sabatini "support is being given to machinery, plants, capital goods and production equipment," Piazzalunga adds. "A further sign of commitment from the government to businesses came with the recent ‘competitiveness decree’, which includes a concession (a tax credit worth 15% of investments in new capital goods) destined for entrepreneurs across the Italian territory who renew their production equipment by 30 June 2015."
However, Piazzalunga concludes, more needs to be done to cement the impact of such policies: "To become more appealing, we hope when the decree is passed into law, the incentive will also be extended to fleet vehicles and the percentage of tax credit will be raised," he says.
De Lage Landen’s Nuvolin expresses the same cautious optimism, and says: "In Italy the attitude towards the signs of recovery are positive, more positive than in the past, and we’re seeing a reduction in overdue payments on public administration contracts, according to the official data, which lends hope for the future.
"There’s also an ongoing attempt to simplify bureaucracy and enable solutions linked to municipalisation, so there’s a positive message from abroad as well," he adds. "The crisis is not over, we are still witnessing a tense period, but I personally think there are encouraging signs for the future."
As tentative as market performance may be in the country, Nuvolin insists De Lage Landen Italy is well ahead of the trend. "We’re an operator undergoing a full expansion, bucking the current trend in the market," he explains, and adds: "We’ve risen to second place, from ninth two years ago, in Assilea’s country-wide equipment leasing ranking."
The reasons for this growth, he believes, can be found first in the company’s global approach, guaranteed by its presence in 35 countries, and secondly by its investment in relationship-building with clients in the Italian market. "As such, I believe the focus on our clients’ needs has transformed into profitability and market penetration."
UniCredit Leasing has also performed beyond the market average. Piazzalunga is also upbeat, adding: "The data from the first six months of 2014 presents a positive dynamic for the leasing industry, highlighting the return of interest among entrepreneurs and corporates towards leasing as a financing instrument.
"Indeed, an analysis of the data from June 2014 shows a half-year characterised by recovery in the sector. The value of the leasing market, compared to 2013, has grown by almost 7%, reaching 7.7bn," he says.
In particular, Piazzalunga confirms the importance of the policy changes for the market, and says Assilea’s efforts have been central to securing them: "Thanks to the efforts of Assilea, several supporting policies have been put forward and taken on board, first by the government via the fiscal changes enacted through the so-called "stability law" and, secondly by single players capable of investing towards facing the new market."
As far as his firm is concerned, Piazzalunga says UniCredit remains safely ahead of the trend in the wider industry. He says: "During this first semester of 2014, UniCredit Leasing has reconfirmed its primacy in the industry, with a contracted value of around 1bn, equivalent to a 12.7% market share."
"In terms of product mix, UniCredit Leasing has seen both its equipment (up to 32.4% from 27.6%) and its real estate (up to 40% from 26.3%) industries grow."
Mixed picture
Overall: "We have 60 leasing businesses whose results feed into our reports" says Assilea’s De Candia, adding: "Another highly positive factor, as far as our monthly data is concerned is that there has been an increase in the number of organisations reporting positive trends in terms of new business, compared to the previous observation period [January to May 2013]."
Testament to the possible impact of regulation on the performance of leasing in the country, Assilea’s breakdown by sector paints a mixed picture.
Considering leasing performance in the Italian market by sector, real estate and vehicles remain the highest performers in terms of new business volumes, growing by 16% and almost 10% respectively between January and May 2014, compared to the same period in 2013. Equipment and aeronautical and rail leasing follow, with growth rates of 7% and 6% respectively, but the energy sector provides the real exception, having plummeted 81% over the same period.
The reason for the dramatic decrease can be found in unfavourable regulation, according to the sector’s experts and indeed, De Candia observes, the overall leasing growth figures are significantly affected by the energy sector’s outlay. "If we don’t consider energy, a sector currently suffering under the recently introduced "Spalma Incentivi" [the so-called "Incentive-spreading" decree proposing to slash government subsidies to renewable energy], in reality leasing is performing even better," he explains.
Despite the setback, De Lage Landen’s Nuvolin believes there’s hope for the country’s struggling energy industry. "I believe it’s a sector which could have developments in the future," he says, "because it, as a sector, is linked to the fact that energy costs in Italy are very high. Innovative businesses need to reduce this cost and as such will be investing in this area."
Other sectors set to perform well, according to Nuvolin, are technology and medical.
"In the informatics sector years ago the discussion was around computers," he says. "Now we are much closer to the concept of software, informatics solutions, smart objects and devices, and so on." As far as the medical equipment industry is concerned, he adds: "It’s a sector I find very interesting. I think especially in the private sector there may be growth possibilities. The dental market is mature, but there are other niches which could be explored and become opportunities."
Moreover, equipment leasing continues to constitute a major area in the industry. "Equipment leasing represents the sector most easily comparable to industrial development and now makes up 40% of production," explains Piazzalunga: "This means that attention is being paid to replacing equipment and to grasping opportunities for renewal and for technological innovation in production equipment."
Looking to the future, several hurdles remain to be overcome by leasing companies wishing to take advantage of future developments in the industry. Despite a static number of players in the market facing "increasing demand" for leasing, competition is becoming increasingly fierce, explains De Candia. Risk costs remain prohibitive for new entrants, he adds, however there is "great interest" and even talk of acquisition offers among some groups, a sign that "there’s interest in working in leasing in Italy".
"As far as competition is concerned," says Nuvolin, "I think the years of hardship led to a dramatic selection and, as such, the number of players has been reduced." That said, the Italian market remains both large and relatively competitive, and as the economy struggles to get back on track leasing operators are aware of the challenges to their survival and the accompanying risks.
Nuvolin adds: "If we want to grow leasing in terms of services, I think it’s going to be increasingly important to be fast, to offer answers within short time frames, to maintain the flexibility to build financial solutions in line with our clients’ expectations, and also to succeed in providing the counsel small businesses require when investing.
"I find there is a returning, strong pressure on margins and I personally think it would be healthier for us to compete on innovation, on technology, on products and services to the final user, where you can really make a difference.
"In the past some leasing providers have witnessed considerable pressure, thanks to the battle over margins. I think they have been further, violently, reduced compared to 12 months ago and I personally don’t think a price war constitutes the right choice, because in the end there’s a very real risk of selling below the industrial cost of leasing and foregoing value in the medium to long term."
As such, he says: "I think the fundamental thing is to bear in mind is the importance of adding value to the businesses, obviously trying to remain competitive, but without accepting cost as the only variable."
"The level of competitiveness in the Italian leasing market is very high," confirms Piazzalunga.
"It’s worth remembering that over the past few years, thanks both to the economic cycle and technological progress, we’ve seen a radical change in customers’ lifestyles and habits which has pushed financial operators to redefine their commercial approach to final clients," he adds.
With "three out of ten of the businesses in our ranking of foreign origin", says De Candia.
"The presence of providers active under non-Italian parent companies is significant," adds Piazzalunga.
"In particular, these organisations are stronger in the equipment and vehicle leasing sectors, where they provide targeted operational models and they have the opportunity to replicate mechanisms easily that they have already adopted in other locations."
Conversely, he says: "In the real estate sector, distinguished by greater complexity, Italian firms have a more entrenched presence."
Cautious optimism
All in all, the experts’ view of the future of the industry is optimistic, while remaining highly cautious.
"I believe there are three main challenges to face," says Nuvolin. "The first is continuing to be profitable, because that’s the foundation of our work and if there is a positive result we can reinvest and create jobs. Our contribution, in the medium to long term, is supporting the economy, allowing firms and businesses to make investments."
Regulation, he adds, will also continue to be a factor: "The second challenge, from our point of view, is posed by technological innovation and mindset, insomuch as the lessor business is typically an older business, prone to frequent divergences with the regulator. I think it’s fundamental to respect all the rules, while focusing our attention and retaining the ability to take advantage of new models which cater to the needs of our clients. We need to give the client a voice, listen to the client and understand what the client needs.
"From my point of view, the third thing we need to do is find increasing integration with the manufacturer, the distributor. Together we can do more and better. We can provide better solutions for the final utiliser as well."
Piazzalunga adds: "Simplification and information can certainly help the leasing market. Simplification here has two meanings: the ability to respond to the needs of the client with linear operative models and definite timelines; and a normative meaning which renders leasing a "typical" contract within Italian legislation, a feature which is currently missing, as opposed to within international financial markets where it is a "vanilla finance" type of product, one which is seen as traditional and secure."
Moreover: "Increased information for the final user, both potential and actual, can help spread the message that leasing is highly advantageous for medium to long-term investments."
In the future, Piazzalunga says: "The service models for financial institutions will be ever-more heavily oriented towards providing a complete service and product offering to final customers, and will be centred on the idea that the latter can choose the product he or she needs. Leasing comes into this context as well, as it’s a medium to long-term product with typical characteristics answering to specific client requirements."
As such, he explains: "The leasing business’s job is to sustain market growth through a greater knowledge of the final user, both potential and realised. We also have to enact an operative and commercial simplification enabling the client to have a greater perception of the product and an increasingly direct and facilitated access."
In terms of predictions, "we’re still waiting," says De Candia. "Over the next few months there will be data on the Italian economy. We hope it will be positive as leasing usually acts as a precursor to economic recovery."
He concludes: "If leasing has performed well in the first six months, we hope the second half of 2014 heralds good news for the Italian economy."
