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July 1, 2010updated 12 Apr 2017 4:22pm

Return to reality

More new business, less bad debt and higher profits according to the latest Business Confidence Survey produced for Leasing Life by asset finance consultancy Invigors, this is what the second half of 2010 holds in store for Europes lessors

By Richard Ryan

More new business, less bad debt and higher profits – according to the latest Business Confidence Survey produced for Leasing Life by asset finance consultancy Invigors, this is what the second half of 2010 holds in store for Europe’s lessors. But good news brings its own challenges. Over the next four pages, Richard Ryan of Invigors looks over the findings.

 

In June, Leasing Life, in conjunction with asset finance consultancy firm Invigors, conducted its latest pan-European survey of asset finance professionals. This was the fourth in a series of surveys aimed at monitoring how business confidence in the industry has changed since the initial research was carried out in September 2008.

The four surveys have charted the course of the asset finance industry through the trough of the recession and, more recently, have highlighted a number of trends pointing towards recovery. Like the global economy as a whole, these findings have indicated that the recovery is patchy and, while the industry is clearly returning to growth, many companies remain under pressure.

The latest survey covers views from 12 countries across Europe, and represents the opinions of a cross-section of banks and bank-owned lessors, independent finance companies and captives.

 

Anticipated change in level of acceptances over next 6 monthsNew business optimism maintained

A key feature of the last two surveys has been the increasing percentage of respondents expecting new business volumes to increase in the next six months.

This is particularly marked in the June survey where 74% of those taking part thought new business would increase, up from 65% in November 2009 and 44% in April last year. No respondents in June expected business volumes to fall, while 26% thought they would remain the same, a similar proportion to the previous survey.

More than half the respondents anticipated new business increases of between 5% and 20% over the next six months, again a higher proportion than the November survey, while 8% thought growth would exceed 20%. Another 13% predicted new business growth would be more modest and not exceed 5% during this period.

So, unless Europe is in for a ‘double-dip’ style depression it seems that, for the asset finance industry, the trough of the recession is now past. However it will be interesting to see how the optimistic sentiments expressed in the survey translate into actual lending figures when these are published.

 

Growth in margins has stalled

In stark contrast to the trend in new business volumes it appears that the improvement in margins, which was apparent in the first two surveys, has now stalled.

Only 21% of respondents expected margins to increase over the next six months, compared to 27% in November 2009 and 55% back in April last year. Some 55% of June participants predict no change to margins, a similar percentage to the November survey, while about a quarter actually expect margins to tighten, up from 16% in November and the highest proportion recorded across all four surveys.

Of the 21% expecting margins to increase, most anticipated a modest increase of less than 15 basis points (bps). Only 8% expected an increase of between 15 and 25bps and none an increase greater than that. Respondents anticipating a decrease in margins were more diverse in their predictions, though most expected margins to tighten by less than 25bps.

 

Anticipated change relative to competition over next 6 monthsBad debt continues to improve

The improving trend in bad debt highlighted in the November 2009 survey has continued strongly into 2010. A total of 46% of respondents forecast that bad debt in their business will fall over the next six months, up from 25% in November 2009 and only 2% in April last year. 24% anticipated bad debt reduction would be modest, at less than 25bps with most of the remainder expecting a decrease of between 25 and 100bps. And 39% of respondents predicted no change in bad debt, the same percentage as the November survey whereas only 15% expected bad debt to increase, a significant drop from 25% last year.

 

Short-term profits to rise

Notwithstanding some evidence of pressure on margins, the last two surveys clearly indicate that, for much of the industry, growing new business volumes, combined with a reduction in bad debt, is strongly fuelling profit growth.

About 70% of those taking part in the June survey expect profits in their business to increase over the next few months, up from 50% in November 2009.

Of these, the majority, 43%, anticipate a significant increase in profits, again a higher proportion than in the previous survey. Only 20% thought profits would fall in the next six months, down from 37% in November.

 

Capital availability remains unchanged

Despite the rosy outlook for profits, the constraints on capital availability appear to show few signs of easing compared to the end of last year. Respondents expecting the availability of capital to improve over the next six months accounted for 36% of the total, representing no significant change on the 33% recorded last November. The majority of these anticipated an increase of less than 25%.

By contrast, respondents expecting capital availability to decrease grew from 9% in November to 18% of the total in June.

While this is clearly a negative trend, most of these did not expect capital availability to fall by more than 10%. The balance of respondents, 46%, anticipated no change, a reduction from 57% in November 2009.

With more respondents cautious in respect of future capital availability it was not surprising that fewer were targeting growth compared to the November survey. In June 43% said that their companies were targeting growth, a significant drop from 67% in November. 

 

Competition to increase

A number of growth initiatives were mentioned by respondents though there was consistency with the November survey with a focus on green assets, health care, IT and public sector.

As countries across Europe come to grips with reducing their budget deficits it will be interesting to see if the public sector remains such a strong focus for growth in future surveys.

It appears that competitive pressures within the European market are continuing to increase, though at a lower rate than last year. About 17% of respondents in the June survey thought that the number of competitors in their home market would increase over the next six months, up slightly from 13% in November and zero in April last year. 45% of the June participants expected no change in the competitive landscape, an increase from 33% in November while 38% believed that the number of competitors would decrease, a significant drop from 55% previously.

Although a small minority of those taking part in the June survey expected the number of competitors to increase, overall more thought that new competitors would enter their home market. 41% of respondents thought it likely that new entrants would target their market in the next six months, a small increase from 36% in November 2009. This proportion has been on a steadily rising trend since the first survey was conducted in September 2008.

With growing competitive pressure, respondents in June were somewhat less bullish about their competitive position compared to previous surveys. Some 45% thought the position of their business would strengthen relative to the competition over the next six months, a significant decrease from 68% in November and 67% in April last year.

Reasons given for this improvement included the strength of their balance sheet, liquidity, strength of their brand and investment in their sales force.

More significantly, 48% believed that their competitive position would remain the same, double the 24% recorded in November and well above the 27% in April 2009. Only 7% thought that their competitive position would weaken, primarily due to shortage of funds (two of these were brokers) or due to the rigidity of their credit policy restricting new business growth.

Consolidation within the industry through merger and acquisition activity is also forecast to continue in most markets though most survey participants expect little change over the next six months.

Some 45% of respondents in June expected mergers and acquisitions activity to increase, down from 56% in November, with the balance anticipating no change. In the June survey, no respondents predicted that M&A activity would decrease over the next six months, from 8% previously.

Anticipated change in new business over next 6 months

Service levels are maintained

Expectations on service levels appear to have changed little since last year. On credit turnaround times 62% of respondents in June believed these would not change over the next six months, similar to the 64% in November and maintaining the growth from 45% in April last year.

Some 28% felt that turnaround times would lengthen, again virtually the same proportion as the previous survey but still well down on the high of 49% in April 2009. Only 10% in the June survey expected these to lengthen which was no significant change from the previous surveys.

Expectations on the future level of acceptances showed a similar pattern, reflecting a consistency in credit policies of lenders and some similarities in markets targeted by them.

About 28% of respondents expected acceptance levels to rise over the next six months, a 5% rise since November 2009 and well above percentages of previous surveys. Just over half expected no change, the same proportion as November while 21% thought acceptance levels would decrease, a minor fall from 26% in November 2009, which, in itself, was significantly below previously recorded levels.

On balance, most respondents expected underwriting criteria to loosen slightly over the next six months, or remain the same. One commented that their organisation had over-reacted to the credit crisis and was easing its credit policies as it was losing business to competitors.

Anticipated change in margins

Vendor finance still favoured

Since April 2009 the survey has asked respondents how they expect business volumes through the broker and vendor finance channels to change over the next six months and although the April survey findings were most pessimistic, there was a glimmer of hope for brokers in the November 2009 data. However in the June 2010 survey, the outlook is much more mixed.

Of those businesses represented using brokers, 36% of respondents in the June survey expect to source more business through the broker channel over the next six months, a small but significant increase from 28% in November and 23% in April 2009. However, 45% expect broker introduced volumes to decrease during the same period, up from 31% in November and similar to the 49% recorded in April last year. The remainder (18%) expected broker business volumes to remain the same.

At this stage, it is uncertain whether this reversal in the balance of expectations in the latest survey is due to the respondent sample mix (though this appears similar to the previous studies) or the precursor of a longer term trend. Certainly, some respondents mentioned their companies had exited the broker market, though a few others stated they continued to support it.

The trends in vendor finance business are more clear cut. Some 63% of respondents in the June survey expected vendor finance business to increase over the next six months, which was lower than the 83% recorded in November, but still higher than the equivalent percentage in April 2009. Only 7% expected vendor finance business to decrease, a similar proportion to November while the remaining 30% anticipated no change.

 

Marketing spend to grow

The findings from the November survey suggested some companies were easing the pressure on expenditure and the latest research confirms that trend. However, it appears companies are being selective, with increased spend expected in areas such as marketing and training, while operating costs remain under tight control.

Only 11% of respondents in June expect operating expenses to increase over the next six months, half the percentage in the November survey, while 50% predict they will remain the same. Some 39% forecast that operating expenses will fall, the same proportion as in the November survey.

By contrast the outlook for marketing budgets is looking more rosy. About 36% of June respondents expect that marketing expenditure will increase over the next six months, a significant rise from 22% in November and just 13% in April last year.

Only 25% anticipate marketing budgets will shrink, down from 37% in November and 47% in April 2009.

However, 39% of respondents are expecting no change, a figure which has remained roughly the same across all four surveys.

The outlook for training expenditure also appears to be more positive, though the trend is not as pronounced as for marketing. In the June survey, 25% of respondents expected training expenditure to increase compared to 19% in November and 20% in previous surveys. Only 18% believed that training spend would be cut, a sharp reduction from 31% in November and 40% in April 2009. The majority of respondents, 57%, expected expenditure would remain the same, an increase on previous surveys.

Perception of company’s prospects over next 6 months

Sales staff to increase

The increased investment in marketing and training by asset finance companies is also reflected in the anticipated changes in staffing levels, primarily in terms of sales staff. About 47% of respondents in June expect to increase the number of sales staff over the next six months, compared to 31% in November and 25% in April 2009. As in previous surveys, the majority of those predicting sales staff numbers to increase expect growth to be modest, at less than 5%.

The percentage of respondents anticipating a reduction in sales staff has dropped by more than half over each of the last three surveys and now stands at just 7%, while 46% expect no change.

While sales staff numbers look set to increase, the same cannot be said for other grades. About 25% of respondents taking part in the June survey expected non-sales staff numbers to increase, the same percentage as in November, though this was still an increase on the previous two surveys. By contrast, 29% believed that non-sales staff number would be cut in the next six months, which was higher than the percentage in the November survey. Some 46% in June expected no change, which was lower than in previous studies.

The focus for non-sales staff changes varied considerably, although there was clear evidence that some lenders were increasing staff in front-office functions such as new business processing, underwriting and deal support, while others were reducing back-office administration particularly in functions such as invoicing and collections.

Anticipated change in marketing expenditure over next 6 months

Optimism in uncertain future

Our previous survey report suggested the asset finance industry had started to turn the corner in response to the financial crisis and the twin pressures of reduced capital availability and rising levels of bad debt were beginning to ease. This latest survey confirms these trends have continued and most respondents remain optimistic about the short-term prospects for their business.

In June, 56% of those taking part in the survey expressed optimism about the outlook for their business over the next six months. This was down from the 67% in November but still well ahead of the 41% recorded in the April 2009 research. Some 16% were more pessimistic about the short-term outlook in June which, again, was slightly higher than the equivalent November figure but still much lower than that recorded in earlier surveys.

Despite the optimistic expectations on new business growth, it appears that increasing competition is starting to affect margin growth. Quite possibly the ‘flight to quality’ by lenders has resulted the targeting of similar sectors – health care, public sector and traditional ‘hard’ assets such as agricultural equipment.

These sectors are relatively small in comparison to the major lending markets of motor vehicles and business equipment, so a concerted drive into these smaller sectors by several funders will rapidly build up competitive pressure.

Looking further ahead, there are clearly some clouds on the horizon and the qualified optimism expressed in the latest survey reflects this uncertainty to a degree. While political uncertainty in countries such as the UK has been (partly) resolved, questions remain in others including Germany. More importantly, with the worries over sovereign debt driving the reductions in fiscal deficits planned across Europe and the downside resultant macroeconomic risks, it remains to be seen whether this optimism is misplaced or can be maintained.

 

Richard Ryan is a partner at Invigors  

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