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.

 

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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