Despite being isolationist, Portuguese lessors are doing well,
at least compared with the rest of their country’s economy. The
credit crunch may make things worse, however
With only 23 leasing companies, all bank-owned, and limited
foreign intervention, the Portuguese leasing market, like its
banking sector, is characterised by high consolidation and
virtually non-existent M&A activity.
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The top five leasing companies, which include BCP, Besleasing
& Factoring, Caixa Leasing and Factoring, BPI and Totta
Credito, are all bank-owned and dominate about 82 per cent of the
market. Even the smaller companies are absorbed into the larger
conglomerates.
“It is very different to the rest of Europe,” Jose Antonio Beja
Amaro, president of the Portuguese Leasing and Factoring
association, says.
“All leasing companies must be related to finance or credit
institutions because of funding issues so that they have the
ability to borrow,” Amaro adds.
However, in the areas of auto leasing and specialised credit,
room for further consolidation and M&A activity exists,
according to Jao Paula de Carvalho, a partner at Deloitte in
Portugal.
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By GlobalDataThe auto finance industry also includes foreign players such as
GE Money and French institutions including French group Creditom
and Crédit Agricole.
Competition
Still, as a result of consolidation, there is little in the way
of competition or revolutionary changes in market activity, which,
some lessors say, impacts on its productivity and ability to
emulate neighbouring markets.
“We hear, via the International Leasing and Factoring
Association network, that other countries do better and are more
advanced in leasing,” Jose Lourenco, director of Caixa Leasing and
Factoring says. “We need to learn from other countries.”
Carvalho agrees: “That makes sense. While Portuguese lessors
have some degree of integration with Europe – particularly Spain –
I am not surprised that leasing companies are concerned [at this
situation] and are starting to look to outside performance
standards as their own objectives.”
For example, the used car market, which is one of the most
popular segments for lessors in neighbouring Western and Eastern
European countries, is actually a non-existent investment area for
Portuguese lessors, largely because of its slightly different
emphasis on risk.
“We do business in a different way here. In Portugal all the
leasing is of new cars, as opposed to old ones,” Lourenco said.
Trucks
Used cars are generally financed via other forms, such as
personal credit, while leasing is sometimes used to finance used
trucks.
“This is because in those cases, what you have in front of you
is a client that is a company, and it is all about trying to
evaluate the risk of that company, and not the risk of the
equipment. That’s the way we think in Portugal,” Lourenco
says.
However, Miguel Mira, director of specialised credit at Banco
Big, says this may change given shifts in the Portuguese culture
and consciousness from being a consumer market preoccupied with
ownership in terms of property, cars, goods, retail, to developing
a growing interest in renting without taking out loans.
“That is obtained via leasing and hiring contracts. Nowadays a
greater number of younger people are getting into leasing,” Mira
says.
However, fears that the global credit crunch will affect this
Mediterranean market are real, according to the Portuguese Leasing
and Factoring Association.
In 2007, total volume in new production grew 19 per cent to
€6.7bn, 20 per cent in real estate leasing, and 18 per cent in
equipment leasing, which, according to Amaro, compares favourably
with the European average of 14 per cent growth overall.
But leasing production levels are expected to decrease to about
six or seven per cent, figures from the Portuguese Leasing and
Factoring Association show. For the first two months of 2008, new
leasing business grew by between nine and 10 per cent, and only
nine per cent in equipment leasing specifically.
“Now we’re beginning to feel the market going down,” Margarida
Ferreira, secretary general from Portuguese Leasing and Factoring
Association, says.
“In the last two months we have begun to see problems with
interest rates and people have started avoiding
investments.”
Nevertheless, given the expected decline in the Portuguese
economy in 2008, with GDP growth levels forecast to decrease from
1.9 per cent in 2007 to 1.7 per cent in 2008, according to data
from the Economist Intelligence Unit, the leasing market
should fare comparatively well.
“It is strange that the leasing market is going up,while the
economy is not growing so fast. It is probably because we are
reconverting our debts,” Lourenco says.
Carvalho adds that while Portugal’s GDP levels are not expected
to meet internal government targets of 2.2 per cent growth, most
financial companies, including lessors, foresee that they will grow
above that as a consequence of involvement in international
activity.
“Most Portuguese groups’ international business accounts for 20
to 30 per cent of their book, particularly in sectors like
construction and real estate, which have a considerable presence
abroad. They are, in turn, heavy clients of leasing companies, so
it makes sense that leasing will perform better than internal GDP
growth expectations,” Carvalho says.
Penetration
Furthermore, overall penetration levels in both GDP and gross
fixed capital formation (GFCF) have increased steadily since the
economic low of 2002, up from 15 per cent of GFCF and 3.32 per cent
of GDP in 2005, to a respective 18.6 per cent and 4.13 per cent in
2007.
Meanwhile, total credit gained as a percentage of total
international credit reached 6.2 per cent for 2007, from 5.6 per
cent in 2005.
GFCF is increasing steadily from -1.8 per cent in 2006, to 2.6
per cent in 2007, and 3.3 per cent in 2008 – which reflects
external business demand, stabilisation in public investment, and
evolution in housing and business investment.
“With a lot of public investment programmes, such as the
development of a new train network, new airport etc, leasing levels
should increase because companies will continue to grow and make
business to meet the demands of these investments,” Mira,
says.
However, lessors still have to battle against challenging
macroeconomic indicators such as high household debt, increased
interest rates and weak domestic demand over the next three to five
years, according to data from the Economist Intelligence
Unit.
This is not the first time the Portuguese economy and leasing
industry have shared reciprocal market slow-downs. Leasing volumes
declined in the early years of the new millennium, from a
year-on-year growth rate of 10.25 per cent in 2000, to -0.1 per
cent in 2001, –14.1 per cent in 2002, and 1.87 per cent in 2003.
This, Ferreira says, was a precursor to Portugal’s and the world’s
slight economic breakdown during that period.
“People just weren’t investing, it was part of an international
decrease,” she adds.
Maturity
Despite its comparatively small market, the Portuguese leasing
sector is mature, with over 30 years practice. Its real estate
leasing segment came fourth in Europe in absolute terms in 2007,
and has survived as the longest-serving segment in the country’s
leasing market, Ferreira says.
“It was the way we began the product. Because we have a small
economy, and leasing companies want business sites, real estate
leasing offered the most potential, and still offers the most
future potential,” she adds.
In 2006, Portugal’s real estate leasing production levels
reached €2.19bn, which constituted almost 4.6 per cent of Europe’s
real estate leasing market, according to Leaseurope data.
Meanwhile, equipment leasing levels reached €3.5bn, which
constituted 1.4 per cent of European equipment leasing for
2006.
Still, in terms of penetration levels, equipment leasing
represents 17.7 per cent of all national investment, while real
estate leasing represents 13 per cent, which compares with overall
European penetration levels of 32 per cent for equipment leasing
and 18 per cent for real estate leasing, according to the
Portuguese Leasing and Factoring Association.
Growth in production levels of vehicle leasing stabilised over
2007, despite the fact that it represents 50 per cent of the
equipment leasing financing sector, according to Amaro.
This is because of an increase in the role of operating leasing,
or as the Portuguese prefer to term it, renting, which constituted
50 per cent of all financing of new cars in 2007.
From January 1 this year, the Portuguese Leasing and Factoring
Association created a separate body, APAK, to meet growing demand
for the product.
“Most company cars are bought through either a credit solution,
renting or regular leasing, but operating leasing is gaining market
share because it is a more simplified operating model for companies
as it doesn’t bother about things like car insurance and
maintenance,” Carvalho says.
Carvalho adds that the strong take-up in the last three to four
years is also the result of changes in the legal and taxation
environment.
“Previously employees could buy a car privately at the end of a
normal finance contract, but that was changed so that it was
taxable. Therefore, companies started providing the rental model to
keep up with demand for ownership at the end of the lease
period.”
IT Products
Furthermore, Cisco Capital, the finance arm of technology
provider, Cisco Systems, which has been present in the technology
leasing market for four years, offers operating lease solutions to
suit the nature of IT products.
Having entered the technology leasing market, which is
comparatively small in Portugal and registered a minimal evolution
rate of 3 per cent in 2007, via its local finance partners, Cisco
Systems has been able to grow between US$10m and US$12m per annum,
and hopes to double revenues in the next 12 months.
Guy Smith, spokesman for Cisco Capital, says penetration in the
market has been smooth, which reflects the large potential for
technology financing for SMEs despite the consolidated leasing
marketplace.
