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January 12, 2010updated 12 Apr 2017 4:28pm

Siemens Financial Services: what is happening?

After all, many factors contribute to profit and return, so it is usual to see some upward or downward movement.

By Jason T

COMMENT

Jason T Hesse

It is often the case that a company’s profitability will vary over the year. After all, many factors contribute to profit and return, so it is usual to see some upward or downward movement.

However, fourth quarter results at Siemens Financial Services (SFS), were particularly out of the ordinary for a lessor which, over the last few years, had repeatedly reported strong, stable results.

Not only did SFS see profit fall by a third, but perhaps more importantly, return on equity (ROE) was down by over 10 percentage points, to 11.3 percent, well below its 20 percent to 23 percent target range.

Because it is backed by the Siemens conglomerate, ROE is one of the most important key performance indicators for SFS. Historically, the German lessor – whose results also include its equity and project finance divisions – has managed exceptional ROE, even peaking at an eye-watering 46.8 percent in the second quarter of 2008.

Still, a spokesperson for the lessor pointed out that although recording a lower ROE result in the fourth quarter, SFS’s overall return for the whole of 2009 was 25.9 percent. Yes, still above target, but well below 2007’s and 2008’s average ROE of 30+ percent.

“Of course, there can be financial variations here and there during the year, but in the end, the SFS return on equity has been stable for several years now,” the spokesperson said. “We continue to believe that 20 percent to 23 percent ROE pre-tax is a good target range in 2010, too.”

The fall in pre-tax profit, which declined 31 percent from €49 million last year to €34 million in the fourth quarter of 2009 was, according to Siemens, “primarily due to an increase in loss reserves in part related to a commercial finance portfolio in Europe to be liquidated”.

Indeed, last February the decision was taken to cease all new business activities – barring major vendor relationships – at SFS’s Italian subsidiaries, Siemens Finanzaria SpA and Siemens Renting SpA.

At the time, well-placed sources suggested that if large amounts of investment were needed by the Italian arm to reach ROE targets, then it might have been cheaper for Siemens to simply close it down.

“The decision formed part of a strategic review undertaken by the Commercial Finance division of SFS worldwide,” the spokesperson explained.

Regardless, even though, with an 11.3 percent return, SFS remains a profitable division for Siemens, there is little doubt that its masters will want to know how and when the €11.7 billion financing cash-cow will return to target.

Keep your eyes peeled to how SFS will perform in 2010 – I know I certainly will be.

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