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.
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.
Despite 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