With two of the world’s biggest sporting events heading to Brazil in the next four years, Peter Johnstone discovers lessors in Latin America’s largest economy are looking forward to growth after crisis-induced market contraction.
In spite of being heavily regulated, dominated by big banks, and having suffered setbacks in the recent global recession, the future is starting to look brighter for Brazil’s leasing industry.
Go deeper with GlobalData
The Brazilian Central Bank has predicted 4% growth each year for the past two years, but, as we near the end of the year, that
figure for 2012 has been revised down to 1.75%. This has been reflected in the leasing industry, where new business volumes fell steadily between December 2009 and February 2012.
However, leasing companies remain optimistic as they believe trade is starting to pick up after the slump. While the Eurozone crisis and the state of the US finance have impacted on the Brazilian economy in general, there are now emerging signs of recovery.
Rodrigo Luz, sales director of CSI Leasing in Brazil, says while customers are holding off on larger investments because of the impact of the economy and the general downturn in consumption, "some big projects that were frozen in the beginning of the year are starting to be implemented again."
CSI is currently resurgent in the Brazilian leasing market, with its IT leasing business growing at around twice the Brazilian average of 13%.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataAnother company which is doing well is Société Générale Equipment Finance Brazil (SGEF Brazil), which entered the market four years ago and is currently experiencing around 30% growth.
These companies are doing well, but starting from a low threshold. The largest share of Brazilian leasing is provided by large banks, with Banco Itauleasing, Bradesco Leasing and Santander Leasing occupying the top three positions. Banco Itau alone had a 5.4bn portfolio in February 2012, three times the 1.8bn held by fifth place BFB Leasing.
Another swathe of the market is controlled by captive companies, Luz says, with IT giants such as IBM and HP cornering their area of the market, and strong captive performance in major markets such as automotive and machinery.
Independents, he says, are "a small group" and are not at all well known, but without being tied to one sector they have more flexibility.
Mohcine Busta, managing director of SGEF Brazil, agrees. "[Leasing] activity suffers from fierce competition", he says, not only from "existing equipment finance players but also from large commercial banks."
Change ahead
The main market in Brazil remains automotive, with Brazilian leasing association ABEL reporting in February that car and truck financing accounted for 66% of all leasing business transacted.
The next biggest sector was machinery and equipment, which covered 25% of the market, and then IT, worth 4%.
But a change is underway, says Luz, as the IT sector expands.
The phenomenon is partly relative, he says, with the automotive market share decreasing due to regulations as big banks are leaving leasing for direct loans .
"That is now the common transaction for financing cars,"he adds.
At the same time, says Busta, "demand for IT in Brazil is still strong and the sector should continue to grow at an average pace of 10% to 15% per year".
Equipment and machinery for the construction sector is doing well, with CSI’s Luz believing civic projects such as airports and other transportation infrastructure will pick up again soon.
Corporate aviation is also strong including leasing for large-ticket items such as jets and helicopters, which Busta believes will grow at 10 to 15% per year.
Growth in this sector reflects the size of the country, which makes easy air travel a necessity for a successful business.
There are challenges however, and with Busta citing both a high level of informality among SMEs, which leads to more credit risk, and a complex legal framework which can make recovery more difficult.
Heavy regulation
Regulation is a major issue, Busta says, with all leasing companies subject to "heavy" regulations and controls, meaning the "cost of compliance is expensive mainly for smaller specialized actors.
"Leasing in Brazil is considered as a financial transaction, so although the leasing companies aren’t banks they are treated in a similar way by the Central Bank of Brazil," says Luz.
Any lessor operating in Brazil needs to get a licence from the Central Bank, which takes a year to be processed and approved. Luz says there is also a minimal support network, with a lot of preparation needed to keep the business moving.
Cesar Zarate, CSI Brazil’s general manager, says heavy taxation is another burden, at all levels from the state right down to individual cities, meaning the level of market complexity is the highest in Latin America.
However, he points outs it is a trade off as the country is the region’s biggest market.
"In the end, he says, "if you want to trade in Brazil you have to put up with the regulations."
And there is more to come, with the implementation of International Financial Reporting Standards (IFRS) due in the next year, and the industry waiting to see how this latest development will impact business.
As the world economy appears to be recovering, lessors in Brazil are poised to reap the benefits.
Leasing companies should gain from outside investment in big projects, says Busta.
"The country is one of the worlds’ major recipients of foreign firect investments [over 48bn in 2012], anticipating strong developments for coming years in the infrastructure, construction and energy sectors," he says.
The main target market for lessors is big business. CSI says that most of its business is done with the top 500 companies in the country, with "some penetration" for medium enterprises.
There is very little penetration in the public sector, with regulation once again proving an issue. Brazilian law 8666, known as the Brazilian Procurement Law, provides another layer of regulation as it lays down requirements for public sector spending.
SGEF Brazil, says Busta, has a portfolio split of 65% large companies and multinationals and 35% small and medium businesses.
Busta has a positive view of public sector potential, as he expects spending on housing, infrastructure, oil and gas, and transportation all to build between now and 2015, citing government estimates of 480bn of investment, which will all require equipment and IT services.
Olympic growth
The biggest projects on the horizon are the 2014 football World Cup and 2016 Olympic Games and the next few years appear promising for Brazilian leasing, with plenty of opportunities to help fund these major projects.
Lessors expect business to really start picking up through the second half of 2013, and on into 2014.
Luz says that as well as construction, many TV stations and service providers will be investing in telecommunications and infrastructure, making the next 18 months "very critical" for the industry as well as providing many opportunities.
Zarate echoes this, pointing out that the hospitality and IT sectors will be very important when the two events roll around, and companies are beginning to invest now.
Perhaps by the time the World Cup rolls into town, it won’t just be the spectators who are cheering.
