In April, a business confidence
survey published by Leasing Life and researched by the
consultancy Invigors revealed that the European leasing sector was
reeling from the effects of the recession. Similar research carried
out last month shows much has changed for the better. Over the next
four pages, Richard Ryan of Invigors looks over the
findings
During November, Leasing
Life, in conjunction with finance consultancy firm Invigors,
carried out its third pan-European survey of asset finance industry
professionals. The survey aimed to monitor how sentiment in the
industry had changed since the previous surveys in April this year
and September 2008.
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The three surveys span a period in which the
financial services sector has experienced the severest global
recession in the post-war period. The asset finance industry has
been heavily affected by this downturn and these sentiments have
been consistently reflected in the survey findings. In the latest
survey over 80 leasing professionals from 13 countries across
Europe took part, representing a cross-section of opinion from
independent finance companies, banks and bank-owned lessors,
brokers and captives.
Compared to the survey in April, some of the
widespread pessimism expressed previously appears to have
dissipated, though it is clearly not time to break open the
champagne yet. Many respondents reported that new business volumes
are recovering, bad debt is being brought under control, profits
are up and they are moving from retrenchment to strategies
targeting growth. In contrast to these positive trends, though, the
improvement in margins evident in the previous survey appears to
have stalled.
Costs remain under pressure, although the
situation has eased somewhat with a greater number of lessors
reporting increases in spend in areas such as marketing, systems
and general operating expenses. This is also reflected in the
outlook for staff numbers with the proportion of respondents
expecting staff levels to increase at its highest level recorded in
our three surveys.
Are we out of the woods? The research suggests
not yet, as it appears that any recovery is patchy and not shared
by all. However, it is clear that many believe their businesses
have turned the corner and that grounds for optimism prevail.
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By GlobalDataDespite the reporting of dramatic falls in new
business by national leasing associations over recent months,
respondents were more positive in their expectations of the
future.
Nearly two-thirds expect new business volumes
to increase over the next six months, up from 45 percent in April.
Only 10 percent expect further falls, down from 42 percent in
April, while the remainder anticipate no change.
Of those predicting growth next year, most
expected an increase of between 5 and 20 percent. Tracking the
change in sentiment since the initial survey in September 2008,
there is some evidence to suggest that, for business volumes at
least, the trough of the recession may well have now passed. There
was no significant difference in responses between bank-owned
lessors and independent finance companies.
Volumes are improving
Although business volumes are
improving, it appears that the improvement in margins, identified
in previous surveys, has reached a plateau for many. Only 27
percent of respondents expect margins to improve over the next six
months, just half the same proportion in April.
Some 48 percent predict margins to remain the
same, double the number in April, while just 15 percent anticipate
margins will fall. Bank-owned lessors are slightly more positive
about margins than independent finance companies, though the
differences in opinion were marginal.
The survey provides some evidence that lessors
are gaining better control over bad debt. Only 35% of respondents
expected bad debt to increase in the next six months, down from a
high of 77% in April. Some 25% anticipated bad debt would fall,
compared to only 2% in April while the remainder expected no
change. Of those predicting a decline, the majority expected a
decline of between 25 and 100 basis points.
A combination of rising new business volumes
and improving bad debt is feeding through into expectations of
increased profits. Half of those surveyed in November believe their
organisation’s profits will increase over the next six months, up
from 40 percent in the April research. In fact, 19 percent expect
their profits to increase significantly compared to only 6 percent
previously.
The squeeze on capital availability appears to
be easing, enabling lessors to meet rising demand for finance. Only
9 percent of respondents expected capital availability to decrease
over the next six months, compared to over 30 percent in the
previous two surveys. One-third of those surveyed in expect
availability to improve, up from 27 percent in April and just 11
percent in September 2008. The remainder anticipated no change.
With improvements in liquidity, more
financiers are targeting growth. Two-thirds of respondents believe
that their companies are specifically seeking growth, an increase
from just 40 percent in April. The areas being targeted vary
considerably, although health care and green assets such as waste
management and renewable energy were mentioned by several.
Feedback from the survey suggests that, for
many lessors, the competitive landscape is changing. Although 55
percent of respondents expect the number of competitors in their
home market to decrease, this is down from 79 percent in April.
Some 13 percent anticipate an increase, compared to zero in the
previous survey.
Interestingly, 36 percent feel that it is
likely they will see new entrants in their home market in the near
future, up from just 20 percent in April, while those who thought
this an unlikely scenario fell from just under 80 percent in April
to 64 percent in November. Despite this anticipated increase in
competitive activity, two-thirds of respondents expect their
competitive position to strengthen over the next six months,
unchanged from the previous survey, while only 8 percent think
their position would weaken.
Most of the latter minority are dependent on
external funding and include a number of brokers whose funders have
withdrawn support. Independent finance companies and captives tend
to be more bullish than bank-owned lessors in their perception of
competitive position, while brokers were understandably less
optimistic.
Consolidation in the asset finance industry is
expected to continue. Some 56 percent of respondents anticipate
that M&A activity will increase in the short term, whereas only
8 percent expected a decrease. This represents a change from the
April survey where only 45 percent expect an increase in M&A
activity and nearly half predicted no change.
Service levels are expected to stay the same
for the majority of lessors. Some 64 percent of respondents
anticipate that credit turnaround times will remain unchanged over
the next six months while 30 percent expect them to lengthen. This
represents a reversal of the balance in the April survey when only
45 percent predicted no change and 49 percent believed credit
turnaround would lengthen.
The improving availability of credit is also
reflected in replies to the question on acceptance levels. Some 23
percent think these will increase over the coming months, compared
to only 8 percent who held the same view in April.
Some 51 percent expect no change in acceptance
levels, up from 31 percent in the April survey while, in November,
only 26 percent thought acceptance levels would decrease, a large
decline from around 60 percent in the previous two surveys.
Reviewing credit policies
Many respondents believe
underwriting criteria will remain tight, although a small minority
are reviewing their credit policies and expect this to loosen
slightly. Some say their companies no longer fund certain assets of
which IT, telecoms equipment and vehicles received several
mentions. Others have withdrawn from funding certain sectors, such
as hotels and catering, construction and broker-introduced
business.
There is a small glimmer of hope for the
beleaguered broker community in the November figures.
Three-quarters of those taking part in the
November survey originated business through brokers. Of these, 29
percent predict that the volume of business from brokers would
increase in the next six months, a marginal increase on the 23
percent in April. However most of those rated any increase in
broker business as ‘slight’.
Some 40 percent anticipate no change, up from
29 percent in April, while 31 percent think broker business will
decrease, a reduction from 49 percent in the previous survey.
Lessors increasing their focus on vendor
finance, first identified in the April survey, is even more evident
in the latest research. Some 83 percent of respondents predict the
volume of business originated through vendor finance will increase
over the next six months (up from 55 percent in April), though most
expected this increase to be slight. Only 6 percent expect this
channel to decline, down from 34 percent in the previous survey.
The remaining 11 percent anticipate no change.
In the April survey it was evident that many
lessors were cutting expenditure across the board with 40-50
percent of respondents reporting reductions in general operating,
marketing, training and systems expenditure. The latest research
suggests that the situation has eased for a number of lessors
though there is clearly still pressure to contain costs.
Increase in budgets
Operating and marketing expenditure
appear to be the main beneficiaries over the next six months. Some
22 percent of respondents expect expenditure in these two areas to
increase, up from just 13 percent in April.
However, any increase in budgets is likely to
be modest at under 10 percent for the majority in this category.
Some 37 percent anticipate that budgets will decrease, down from
just under half the respondents in April, while the remainder
forecast no change.
The outlook for training budgets by comparison
is one of stagnation rather than growth. Half of those taking part
in the November survey expect no change in training expenditure
over the next six months, up from 40 percent in April, while only
19 percent anticipate an increase in spend, the same as the
previous two surveys.
On a more positive note, the proportion of
respondents expecting training expenditure to decrease has fallen
from 40 percent in April to 31 percent in November.
Prospects for IT expenditure are a little better, though again,
the outlook is one of cost containment rather than growth. In
November, 48 percent of respondents predict no change in
expenditure on systems over the next six months, up from 38 percent
in April. Some 31 percent anticipate increased expenditure
(compared to 24 percent in April), though most thought that spend
would grow by less than 10 percent.
The proportion of respondents forecasting
systems spend to decrease has fallen from 38 percent in April to
just 20 percent in November.
The April survey painted a fairly pessimistic
picture of the outlook for staffing levels with around a third of
respondents expecting both sales and non-sales staff numbers to
decline. The November research suggests the outlook has improved
with only 15 percent of respondents now expecting sales staff
numbers to decrease over the next six months, and 22 percent
predicting the same for non-sales staff. Most, though, expect the
decline to be small, less than 5 percent.
Just over half of those responding to the
November survey predict that staff numbers will stay the same, an
increase from the April study.
However, a growing proportion of respondents
anticipate that staff numbers will increase, with 31 percent
expecting sales staffing levels to grow over the next six months,
up from 25 percent in April, and a quarter forecast that non-sales
staff numbers will increase, up from just 1 percent in the previous
survey.
This positive news though is tempered by the
fact that any staff increase is likely to be small, the majority of
respondents forecasting growth think this would be less than 5
percent.
In our initial survey, back in September 2008,
respondents were fairly evenly divided between those who were
optimistic about their company’s prospects over the next six
months, those who were pessimistic, and the remainder who expected
no change.
In the November survey, however, 68 percent
were more optimistic about the outlook for their company, compared
to only 9 percent who expressed pessimism.
This trend was apparent across the board,
although a slightly higher proportion of independent finance
companies and captives express optimism about their future
prospects compared to bank-owned lessors and brokers.
In our previous survey report we concluded
that most of the industry was facing up to the twin threats of
reduced capital availability on new business volumes and rising bad
debt on profit expectations. The latest research shows that these
pressures are easing for some, although by all means not all
lessors.
Weathered the recession
It is clear from the comments made
by respondents that some have weathered the recession much better
than others, and are now poised for growth which they plan to
achieve at the expense of the competition, irrespective of whether
the overall market for asset finance recovers, or remains at its
current low level.
These agile and well-funded businesses are
best placed to respond to the rapidly changing economic and
competitive environment, while their less adaptable competitors
will continue to shrink their business and withdraw from sectors of
the market from necessity rather than choice.
The author is a partner at the
leasing consultancy firm Invigors
