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August 1, 2009updated 12 Apr 2017 4:34pm

Tough decisions

In a six-page special report, Leasing Life examines the declining state of Europes bank-owned leasing industry and discovers there is still hope for the future.

By Verdict Staff

In a six-page special report, Leasing Life examines the
declining state of Europe’s bank-owned leasing industry – and
discovers there is still hope for the future.

Brendan Malkin, Fred Crawley, Jason T Hesse and Antonio

Midway through last month, a
letter arrived at the offices of a leasing broker based in Dublin.
On the envelope was the logo of the Allied Irish Bank.

The contents of the letter were
strikingly similar to other letters sent to the same broker – one
dated 26 June from the Bank of Ireland, and another sent during
late April which had on its front the orange livery of Lombard

In each case, the bank involved
essentially said that, following a business review, asset finance
proposals from intermediaries were no longer being considered.

Such letters, which were sent to
brokers throughout southern Ireland, showed not only that Irish
banks have stopped doing business with brokers, but also that the
Irish leasing sector, if not ground to a halt, has slowed down
considerably (see Heart ripped out of
Irish lease banking sector

Ultimately, this reflects the
generally poor state of the leasing operations of European banks –
the bank-owned lessors.

Part of this is attributable to a
Europe-wide collapse in business volumes. A quick glance at some
headline figures reflects the sheer scale of the downturn that has
hit European bank-owned lessors.

In Turkey new business volumes fell by
74 percent in the first six months of 2009, and its largest sector,
manufacturing machinery leasing, fell year-on-year from $402
million (€282 million) to $165 million during the first quarter of

In Romania, according to the Romanian
daily Ziarul Financiar, during the first quarter volumes dropped by
a whopping 75 percent – although Adriana Ahciarliu, the president
of the Romanian Leasing Association said the correct figure is more
likely to be circa 60 percent.

Meanwhile, in Estonia, in the year to
May, new business volumes fell 73 percent year-on-year, while
Germany is expected to see a 25 percent decline in new business
volumes. In Italy, predicted year-end figures are expected to be
more than 30 percent below equivalent figures in 2008.

Against this tidal wave of declining
volumes, it comes as no surprise that many of Europe’s largest
bank-owned lessors have reported bleak financial results during
2009 (see Latest results of major
banked-owned lessors

Last month,
managing directors of leasing companies from across the continent
Leasing Life just how
difficult business is for them at present.

Not long ago Austria was the centre of
a booming market – yet last month Dieter Scheidl, the managing
director of Raiffeisen Leasing International, said that Austria and
most other parts of central and eastern Europe were in free fall:
“Demand in many local markets has dropped significantly. Even if we
applied no restrictions and applied similar funds as in previous
years, we still wouldn’t see the same volumes as in 2006, 2007, due
to a general lack of demand. Companies are simply being very
cautious, and trying to postpone investments.”

Also, in Lithuania, Aurelijus
Šveikauskas, managing director of large local lessor, Snoro
Lizingas, commented: “Leasing in Lithuania is sharply down this
year, and it is still difficult to foresee any improvement.”

Such comments could equally be
attributed to the MDs of scores of other bank-owned lessors as they
all struggle to hold up during the recession.


It does not require too much
investigation to find out the cause of all this. Rüdiger von
Fölkersamb, Leaseurope’s chairman and also managing director of
Deutsche Leasing, pointed to “liquidity costs” as a key problem
facing bank-owned lessors.

Some lessors expanded on Fölkersamb’s
points – one senior lessor in Greece commented: “Spreads over
Euribor applied to new leases are very high, due to the high cost
of funding for mid- and long-term loans obtained to finance new

Others interviewed made similar
comments – including London-based John Bennett, managing director
of Bank of America Leasing, who said: “There is more internal
competition within banks as different product groups, including
leasing, fight for limited capital. 12 to 18 months ago, leasing
was well placed as leasing margins, relative to other bank
products, were generally higher. Today, the gap has closed and
pricing for all credit products has significantly increased.”

This point was echoed by Fölkersamb,
who remarked that “allocated equity to leasing subsidiaries with
regard to worsening of credit risks” was another one of the root
causes of the blight for bank-owned lessors.

In addition to recent accounting
changes – particularly the “new IFRS lease accounting according to
IASB approach” – other legislation has also taken its toll on the
bank-owned leasing sector.

An obvious example was the hike in VAT
in Turkey from 1 to 18 percent.

According to Bülent Tasar, the
chairman of the Turkish leasing association: “The VAT increase has
had a detrimental impact on leasing volumes and current estimates
are that 50 percent of the decrease in volumes is attributable to
the VAT effect.”

Growing arrears levels are also taking
their toll – in the UK, according to latest statistics, they
reached almost 4 percent in respect of leasing residual risk and an
incredible 10 percent in hire purchase point of sale loans.

Bennett commented: “I don’t believe we
have seen leasing bad debts reach their peak in the current credit
cycle, and there is more pain to come.”

However, there is some room for
optimism as a number of lessors reported that while arrears were
up, they were at lower levels that in other areas of financial

“Arrears have increased slightly,
although less than the industry average,” said Cem Surmen, managing
director of Garanti Leasing in Turkey.

Also, the Estonian Leasing Association
(ELA) has not seen particularly strong rises in bad debts –
according to Reet Hääl, the association’s head, they are currently
at around 3 percent. Nordea Finans, meanwhile, said it has not had
too much trouble with bad debts, even in the troubled Baltics.

Besides customer insolvencies, arrears
are being forced upwards by a general upsurge in fraud. This
magazine has for several months published the plight of leasing
companies that have been victims of malpractice and fraud – and it
comes as little surprise that in recent weeks the UK has launched
an asset register to keep tabs of what assets have been

A similar register is being planned in
Austria – and the Romanian leasing association told Leasing
last month that it plans to do the same in the

The Romanian association has also
recently signed a national agreement with the Romanian police to
exchange information on fraud.

“Within half a year, I am confident
that the number of fraud incidents will start to diminish,” a
spokesperson said.

The collapse of local currencies
against the Euro is causing a headache for many bank-owned lessors.
For instance, Romania’s Impuls Leasing receives its lease rentals
in euros – while Impuls itself trades in the local Romanian
currency which has dropped sharply against the euro.

The declines in residual values – a
problem which has hit bank-owned lessors right across Europe – are
also making life harder for the blighted leasing sector (see
Transport and construction equipment
finance: two sectors in the doldrums

Response to the

While bank-owned lessors all face
similar problems, many are dealing with them in different ways –
although, of course, almost all are investing heavily in their back
office departments and scaling back their sales and marketing

Some, however, are taking some
original steps to cope with the crisis – one being to wind-down
non-core businesses, even if, in some cases, they are not even

For instance, last month Fortis Lease
UK, which specialises in general equipment and car financing,
closed its yacht and jet business – which has a portfolio of around
€500 million and around 25 high value assets – to new business. It
is believed it did so because it was “non-core” to the main

Another possible reason is that while
Fortis Lease UK is based in Glasgow, the jet and yacht business was
headquartered in far-away London.

John Stephens, who ran the jet and
yacht finance business, sat with other members of Fortis Bank’s
corporate banking employees at offices in London – a long way from
his leasing colleagues in Glasgow.

It is unclear whether Stephens, who is
a respected figure in his specialist field, will stay while the
existing portfolio – which, it is understood, includes assets on 10
year leases and mortgages – is run down.

It is understood the decision to close
the jet and yacht section to new business was not connected to the
acquisition of Fortis by French bank BNP Paribas.

Fortis Lease UK is ultimately managed
by directors of its Brussels-based parent, Fortis Lease, while Paul
Burgess runs the business on a day-to-day basis. Burgess replaced
Gerry Moon, who stepped down in April 2008.

As well as having encouraged banks to
get rid of non-core assets, the recession has also given rise to
widespread staff downsizing.

One such scalp in recent weeks was
Isobel McEwan, the well-known sales director of Fortis Lease UK.
Neither Fortis Lease UK nor McEwan commented on the reasons for her

Also, across the board, lessor
subsidiaries of banks are being more careful about who they lend

Given the huge volumes of
irresponsible lending in equipment finance over many months prior
to the downturn, it is a good thing lessors are now taking a more
cautious approach.

State Securities, a well-known
mid-market UK player, which for many years specialised in signing
large volumes of business, has markedly reduced monthly new
business levels (see A look at the UK’s
State Securities sheds light on the state of subprime asset

Another change has been the shift by
some bank-owned lessors from the more risky small ticket area and
into medium and big ticket. This is particularly prevalent in
Turkey, despite the historic focus by bank-owned lessors to small
ticket deals. In 2007 Turkey’s average deal size was $125,000 – in
2009 it was $300,000.

Also, HSBC Equipment Finance told
Leasing Life last month that a major element of its growth
strategy will be investing in its structured finance team led by
Bill Cuff, which arranges deals worth between £5 million and £50

Other lessors, particularly Lombard in
the UK, have commitments to their governments to invest in the
small ticket sector.

Another response to the crisis by
bank-owned lessors has been what one lessor described as “greater
leniency to customers”.

UniCredit Leasing in Romania is
commonly offering grace periods of up to six months to distressed
clients, the company revealed in July.

The Italian giant is also offering
exceptional payment holidays of up to one year to clients waiting
on payment from the state, such as construction companies working
on public sector projects, it has been reported.

“The longest grace period we have
granted this year is a six-month one, for a client who has problems
at present but is to collect money from the state. Now we are
analysing the cases of two clients to whom we are thinking about
granting one-year grace periods,” commented Dan Constantinescu,
executive sales manager of UniCredit Leasing in Romania.

Separately, in neighbouring Bulgaria,
Raiffeisen Leasing has relaxed its car leasing requirements by
lowering down payments to 15 percent of the vehicle’s cost. It
hopes that the offer, available on low- to medium-range vehicles
purchased on leasing contracts of up to 60 months, will boost new

Contract terms are also generally
lengthening. Hääl, for instance, noted that before the economic
crisis average contract term for vehicles was 30 months – while now
average terms are significantly longer. Such a point would ring
true among many European lessors.

Almost universally, bank-owned lessors
are seeking to improve their back office systems. For those lucky
bank-owned lessors with available cash, this means investing in
improved IT systems as well as sharpening their risk and credit

HSBC Equipment Finance, for instance,
is currently installing a system produced by SunGard and
Durham-based Northgate Systems.

Meanwhile, other bank-owned lessors
are doing everything they can to improve customer relations –
clearly holding onto existing customers rather than gaining new
ones is now a priority.

Barclays Asset & Sales Finance
last month told Leasing Life that over recent months it
has pulled together its marketing and communications divisions in
order to “improve communications and customer service” (see
Building Bridges).

The recession has also forced lessors
to think differently about which assets they finance. This explains
the notable shift to financing higher value assets – and many are
also seeing a hike in public sector business.

One bank-owned lessor in the UK
recently reported a 90 percent increase in public sector business,
while a glance at our deals page in this issue (see Demand
grinding to a halt
) shows demand for leasing from local
authorities remains relatively strong.

Changing face of bank-owned

Things are not all bleak, however
– indeed, some banks, particularly ones in the UK (which admittedly
do not publish full results for their leasing subsidiaries as many
of their continental counterparts do) are reasonably positive about
their future prospects.

So, how can they grow when elsewhere
leasing is in crisis?

Bank-owned lessors, which have
relatively stable and liquid parents, are potentially able to grow
during the recession. After all, lessors in developed leasing
markets have commented that their concern now is not whether there
is enough business – but whether demand will outstrip supply.

HSBC Equipment Finance is one such
lessor. With a small-ish portfolio and with a parent that has money
to spare, it is hardly surprising that it is currently working out
“how to grow [the business] in the medium- to long-term”, according
to Richard Carter, its managing director (see Growth in a

Another success story is the leasing
arm of Crédit Agricole which saw net income grow 15 percent up to
€77 million during the first quarter of this year.

German lessor IKB Leasing is also
growing – despite its parent having been forced to receive
guarantees from the German government. New business volumes at IKB
Leasing in the CEE totalled €260 million in 2008 – and are
predicted to total €305 million this year.

Ultimately, the recession has meant
lessors will have to think differently about what type of companies
they want to be. Leaner, better equipped to deal with fraud and bad
debt, supported by good IT systems – these are obvious.

They need to be cautious not to return
to the pre-recession days of silly lending – not easy when their
cost of money is so much cheaper than it is for the likes of GE
Capital and the captive finance companies.

Their route to business will change –
less driven by brokers, increasingly lessors are muscling in on the
turf of the vendor finance specialists.

Bank-owned lessors will also become
increasingly centralised by becoming ever more reliant on their
parents’ customers for business – Barclays’ leasing division
reported last month that it plans to become even more integrated
into the operations of the bank’s commercial banking arm.

There is another sea change taking
place – the shift being made by bank-owned lessors to blend better
with their sales finance counterparts. Barclays made this
transition some time ago – while forward planning ING Lease became
fully integrated into the parent’s commercial finance arm, which
includes factoring, in March 2007.

Close Asset Finance recently grouped
its SME focussed lending businesses into the Close Commercial
Finance division, its head Mike Barley told Leasing Life
last month.

Like anything in finance these days,
such steps, while considered to be a strategically wise move in the
current economic climate, can be fraught with difficulties. For
instance, last year ING Lease’s commercial finance’s mid-term
strategy plan was “re-orientated” after it was “severely impacted”
by the credit crisis.

Then again, survival these days is all
about making tough decisions – as opposed to standing still and
seeing what happens.


results of major bank-owned lessors

ripped out of Irish lease banking sector

A look
at the UK’s State Securities sheds light on the state of subprime
asset finance

Transport and construction equipment finance: two
sectors in the doldrums

Analysis: Bank-owned lessors/

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