Dr Uwe Hack, chief financial officer at Grenkeleasing, is not
your typical FD of a leasing company. Ask him any question you want
about the financial state of his company and he will provide you
with a full answer. Others are more likely to point to commercial
confidentiality than offer any real response.
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However, Grenkeleasing is not your typical leasing company. It
has been heralded by the German media as a leading light in respect
of its return on capital (15.2 per cent this year), which has been
one of the best in the whole of the German financial sector.
Also, it has continued to grow. By year end 2007, it hopes to
breach the €500m mark in terms of new business for the first time
in the company’s history and predicts profits for the year will
total €32m – slightly up year-on-year, despite seeing its share
price hit by economic disturbances and new legislation eat away at
its bottom line.
Interest rates
Grenkeleasing was first hit in 2007 by the growing interest
rates across the Euro, as well as sterling, which, says Hack, “has
reduced our margin on new business and consequently led to a
situation in which earnings per share [that totalled €2.22] has not
been growing against 2006”.
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By GlobalDataThis was followed in July by the announcement that tax reform
will be introduced in Germany in 2008. Under this new system,
lessees’ interest payments on lease rentals will not be tax
deductible. Hack admits it has affected Grenkeleasing’s share price
in 2007, but, ultimately, it is unlikely to affect the company’s
clients – small- and medium-sized enterprises – because only those
with €1bn or more of business per annum will be hit by the
change.
A third attack on the company occurred just one month later, in
August, with the advent of the credit crunch, which – as a result
of a re-rating of financial stocks – means the price-earnings ratio
is at a “record low”, according to Hack. The crunch, says Hack,
“moved investors away from the financial sector” – even the leasing
part, although, he adds, it has very little to do with the sub
prime sector. “Investors didn’t differentiate between a company
like us, which has nothing to do with sub prime, and one that
does,” Hack says.
Grenkeleasing’s cost of borrowing, however, did not grow as a
result, largely because it acquired all the debt it needed before
the summer – when the credit crisis started – and also because
raising debt is roughly at the same level it was in 2005 (between
50 and 60 basis points above LIBOR) and, therefore, not
particularly high.
Profit maker
Asked why the company has continued to show impressive profits,
despite the harsh trading environment, Hack says: “We have done so
because the impact [of the interest rate increases] wasn’t all that
great. Our margin in a normal situation is 500 basis points and, if
you lose 50 basis points, it is not something that means, all of a
sudden, it’s not a profitable business. Our return on capital was
one of the highest in the financial services sector in 2006 and
2007.”
Germany is one of its slowest growing markets, largely because
of the tax changes and the fact it is highly penetrated –
currently, it sources 60 per cent of business. Overall growth in
Germany for the first three quarters of 2007 totalled 9 per cent,
although 7 per cent of this came from Grenkeleasing’s factoring
business, which was only started last year. Leasing, meanwhile,
represented just 2 per cent of this growth.
While the UK market has slowed down – it saw growth of just 7
per cent – the company plans to drive forward its international
business (it has a presence in 17 countries). “Our German business
[compared to the whole business] will decline over the next two to
three years because of our strategy to build the European business.
Also, international markets are growing more strongly than
Germany,” Hack says. Altogether, international business represented
39.5 per cent of new business for the group for the period under
review, compared with 35.1 per cent for the first nine months of
2006.
New foreign business rose by 27 per cent for the first nine
months, to €148m. New leasing business in France, which represents
one-fifth of Grenkeleasing’s total volumes, rose by 22 per cent, to
€75m.
International growth
However, Hack made it clear that France, like Germany, will
eventually reach “saturation point”, at which stage he expects
similar growth in Switzerland – “where we are the number one
player” – and, later, Italy, Spain and the UK.
Another reason Grenkeleasing has continued to grow, despite
market pressures and flattening margins, has been its ability to
keep costs to a minimum. With a loan-loss ratio of 1.5 per cent as
its target, it is currently at 1.2 per cent, despite the
Europe-wide suggestions that insolvencies are up and debt levels
are rising. It is also efficient in terms of keeping expenses to a
minimum. Its costs-income ratio, at 47 per cent, while high
compared to nine months earlier – when it stood at 43 per cent, the
difference largely being because of an office opening in Genoa – is
low when set against the market as a whole.
While the company showed signs of a willingness to diversify
with the launch of a factoring business in 2006, this, so far, has
been restricted to Germany and is tiny compared to its microleasing
business. Judging by its recent advances, sticking to its core
business seems to be the way forward.
