Last month, at Leasing Life’s annual conference and European equipment finance awards, almost 200 delegates from more than 70 companies gathered in Berlin for a day of information sharing and a glittering evening of prize giving. Fred Crawley and Antonio Fabrizio reveal some of the key points raised by the host of eminent speakers
For some time now, senior lessors have been engaged in what has largely been a theoretical debate about whether bank-owned leasing companies might at some stage begin to lose some of their hard won and jealously guarded independence.
Ever since the downturn hit leasing, however, it has become less of a theoretical possibility and more of a reality, with lessors increasingly referring key risk and credit decision-making to their parents.
The extent to which this independence may be sacrificed was at the heart of an important speech at the conference by John Howland Jackson, who made his first speaking appearance since his appointment as CEO of ING Lease Holding earlier this year.
“Leasing will no longer be a remote subsidiary business but a core product of the bank,” he said.
As a result, bank-owned lessors in future will be less and less able to act independently of group policy, meaning leasing will no longer be ‘an industry apart’.
Jackson was keen to stress, however, that he had not predicted an integration of ING Lease Holding into its parent, nor any erosion of leasing’s strengths as a product.
He added: “We must be extremely careful not to bury that product’s qualities in banking. We must keep a firm grasp of operational functions, and product specification – the biggest impact will be on distribution mediums.”
As an eminent wholesale banker of 35 years’ experience, the appointment of Jackson to the leadership of ING’s leasing arm has been, for many, symbolic of a general move by banks to gain closer control of their asset finance subsidiaries.
“Leasing has been described as an ‘industry apart’,” said Jackson, “and that can be a dangerous thing in the current environment.”
He explained this in the context of ING’s recent group-level business review, as a result of which the bank’s insurance business is to be separated and exited by 2013.
As part of the same review, he said, ING’s leasing business had had to reapply to be part of the group at large – and had passed “with flying colours”.
“However,” he said, “the great surprise to me, as someone who had been part of the bank’s management, was the ignorance at the highest level of what leasing actually does.”
Not all predicted a future of greater handing over of power to bank parents. Bill Stephenson, chief commercial officer of De Lage Landen, was convinced leasing would not only maintain its cultural independence, but grow in significance as a business in its own right.
“This industry has never before had a clean slate on which to rebuild business models, and we can afford to do so now because, for the time being, there is much less competition around,” Stephenson said.
Low competition, he added, was allowing respite on margins long enough for lessors to concentrate on their product offering in terms of service and specification.
He warned that if the industry followed the temptation to reduce pricing, however, it would raise the threat of financial products becoming “commoditised” in the eyes of customers, leaving little to separate leasing companies except price.
To Stephenson, retention and development of senior staff with deep product understanding will be a major priority in years to come.
“When recovery occurs, the baby boomers will retire, and a tsunami of departures may occur,” he said. “There needs to be a huge focus on HR now, unless the industry wants a mass exodus of its best and brightest when good times return.”
‘Repositioning’ risk was a widely discussed theme in all sessions of the conference.
UniCredit Leasing’s chief risk officer, Jens Hagen, pointed to a lack of proper risk management structures as being a key reason for lessors’ problems during the downturn.
For Hagen, lessors were often aware of that deficiency, but decided to neglect it because “risk management is simply not seen as cost-effective”.
Since the beginning of the crisis, the Milan-headquartered lessor has tried to approach the problem by dividing the wider issue of risk into specific tasks to tackle. Hagen said these have included tackling non-performing loans, doing “soft collection” whenever possible, having a separate focus on big-ticket contracts, and cautiously looking at “agent-originated business”.
Meanwhile, Nico Uijterwaal, chief risk officer at Amstel Lease, told the audience that his company has tried to “create a sense of urgency” when tackling risk, and looked at large exposures first.
One of the new measures in place at Amstel, he continued, has been a “direct debit monitoring” to accurately know how the situation of the customer base in arrears was evolving.
Captives, too, have been changing their risk procedures. Daniel Benoit, European general manager at Xerox FS, explained that this repositioning included risk function being involved also upstream, in the sales function.
Similarly, Pitney Bowes MD Patrick Jelly explained that his company has been using software tools to define customers at risk, trying to find out potential problems “even before the customer knows that”.
Asset recovery and “RV drama”
There was a general consensus among speakers that drops in residual values should be met with an avoidance of asset repossession wherever possible.
UniCredit Leasing’s Hagen said lessors should take assets back only when it really makes sense, “because you can’t easily sell the asset later”.
The same classification approach used for tackling risk, Hagen said, needs to be used when looking at different classes of impairment and of asset depreciation.
Vincent Rupied, director of corporate relations at Arval, talked about a “residual value drama” in the case of cars and light commercial vehicles. He forecast that, in the long term, RVs for cars will remain at half their pre-crisis values.
As confirmed in a wide ranging survey of leasing companies released last month, the prospect of client insolvency looks likely to remain the paramount risk concern for lessors for a long time yet to come.
Speaking in a session aimed at lessors facing recovery from insolvent clients, insolvency practicioner Dave Standish of KPMG said that 2010 would be just as bad as 2009 in terms of lessee failures, and that lessors would certainly see more multiple financings brought to light in the course of administrations. With many large administrations in 2009 seeing lessors left in the cold as unsecured creditors, discussion is now centring around the idea of all lenders in a case acting together to secure a return.
Standish made reference to collapsed construction support firm Nationwide Site Services and bankrupt vehicle provider Potential Vehicle Hire as examples of insolvencies where lessors made something rather than nothing after working closely with other leasing creditors.
Tobias von Gostomski of Salans Frakfurt explained that German leasing companies faced a slightly more lenient situation in terms of the powers and duties of insolvency practitioners than their English counterparts.
Meanwhile, Sonia Jordan, also of Salans, and Alex Brick, the CEO of turnaround lender Gordon Brothers Group, presented a case for the use of turnaround lending with troubled leasing clients as an alternative to insolvency procedures.