In the first part of our special report on leasing arms of
banks, we report on challenges they face.
A decade ago the leasing arms of European banks were in a state
of flux. Their parents were busy expanding across the European
continent, and their leasing subsidiaries were following suit. With
this went increased risk and greater uncertainty. Consequently,
lessors were the subject of greater scrutiny from their banking
overlords – and continue to be so to this day.
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The form in which this scrutiny occurs is subtle, and it often
goes past unnoticed, which is why it does not feature much in this
16-page special report, which looks at recent developments in the
leasing operations of a range of European banks. Nonetheless, the
greater the influence a bank has on its leasing subsidiary, the
more the lessor’s back office functionality, the type of deal it
transacts, the staff it recruits, and so on, will be defined by
it.
Derek Soper, a principal at The Alta Group, the leasing
consultancy, who has some 40 years of experience in the asset
finance industry, said the integration of lessor and bank is
“gathering pace” at present. “It’s already happened in Italy and
Spain, and to some extent in France, and is now happening
elsewhere,” he said. In some cases this has involved the leasing
company no longer being a separate company, with a different legal
identity, but rather being integrated into the bank’s culture and
its financials. Increased levels of cross-selling and cooperation
between departments are occurring, as expected, as a result.
This is being driven by the advent of Basel II which, said
Soper, “has started banks thinking about how they control and fully
integrate their business”, and the development of a “recognition
that they have got to keep their hands on lessors”. Also, he added,
lessors can use their skills sets, in particular their “more
inventive minds” and imaginative flair when doing deals, in order
to assist in project and structured finance transactions.
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By GlobalDataWhile this is happening quite subtly, elsewhere some more
obvious developments are afoot, according to the research done for
this special report.
Generally the volume of operating leases remains low, largely
because of concerns around taking and managing residual value risk,
and because IFRS interpretation of an operating lease is being
recognised more widely across Europe. No longer should there be
individual country interpretations of “off balance sheet”
treatment. This applies to leasing arms of banks across Europe,
although some are more willing to take risk than others. However,
there is potential for growing the use of operating leases,
particularly as in some countries it is popular among clients as
they can keep them off balance sheet. Moves are afoot, for
instance, in the Czech Republic to grow this finance product, and
Nordea Finance is increasing the number it transacts in a bid to
grow its portfolio.
Perhaps more pressing is aligning systems and operations with
Basel II requirements. Crucially, they will have a large impact on
lessors’ debt, important not least as it occurs at a time when
lessors increasingly are faced with higher levels of unpaid bills.
Under Basel I, the minimum amounted to some 10 per cent of the
amount of funds raised – under Basel II it is now between 6 and 8
per cent.
As a result, under Basel II, companies are far more likely to
increase the amount of capital market debt they have – and decrease
the amount of raised shareholder capital, or equity. It is the
profitable portfolios which can still give good returns, even with
the increase in debt burden, and will be the ones which the banks
will concentrate their resources on. Much depends on how the banks
measure success – much of the thinking around Basel II concentrates
on “return on capital”.
Leasing companies, according to lessors spoken to for this
piece, said they are unlikely to be directly affected by this: they
tend not to lend money themselves to riskier companies, and in turn
are able to control their own debts.
Indirectly Basel II may create difficulties, albeit in the long
term. Alun Richards, managing director of Key Equipment Finance’s
European business, commented: “Basel II allows people to allocate
less equity, and get more debt. This is a bad thing for leasing
companies because it encourages them to drop their prices as they
think they can allocate less equity and get bigger returns.
Potentially this can force down prices on better credit deals.”
Others, however, view Basel II more positively. According to
Mark De Waele, managing director of KBC Lease Group, it gears banks
towards risk adjustment capital systems, in other words, those
financial products that have a low weight or use of capital, such
as leasing. Also, with greater access to credit, lessors will be
more likely to take bigger risks. This means signing bigger deals
with greater potential returns.
Assets
Meanwhile, banks continue to struggle with their reputation for
not being asset focused. Few banks express real desire for
concentrating on particular types of kit.
Real estate generally appears to be booming, and some bank
lessors are taking advantage of this, particularly in Italy and
Eastern Europe. ING
Lease, for instance, in Poland is now ranked among the top
lessors in the country, largely on the back of investment in real
estate leasing.
However, this market fluctuates wildly, and in Germany is under
performing with new contracts overall dipping 11.4 per cent during
Q1 2007, and business and office finance deals by as much as 87 per
cent.
Generally, cars and machinery are regarded by European banks as
low risk assets because of big demand, although both assets suffer
from high levels of market penetration. Everywhere there has been a
slow down in take-up of trucks and trailers, largely because of
legislative demands on the industry, while the light commercial
vehicle market is picking up. Banks everywhere see corporate jets
as safe assets, and financing levels are high.
Depressed markets
The effects of downturns in some leasing markets are bound to
have trickled down to some of the bigger lessors.
Leasing in Germany, while not in the doldrums, is experiencing a
less profitable period. While there was solid growth in 2006, it
was less spectacular than in 2005 (although €54bn of new business
during this period is no mean feat). Only 23.6 per cent of all
investments in equipment were made by means of leasing agreements,
compared with 24.1 percent in 2005. This slight slide is largely
attributable to the below-average performance of private leasing
companies.
Also, the increase in value added tax that came into force at
the beginning of 2007 prompted banks linked closely to car
manufacturers to offer their private customers credit rather than
leasing facilities in the second half of 2006. Although this was a
purely temporary phenomenon, it nevertheless had a significant
overall effect on the leasing of movable assets.
Taking the plunge
Elsewhere, however, there have been upturns in the leasing
market. ING Lease has made terrific headway in Poland over the last
year, growing from a relative minnow with PLN 150m (€39.1m) at end
of H1 2006, to PLN 1.05bn (€274m) one year later. Raiffeisen
Leasing has almost doubled the size of its business.
The biggest shift in the Romanian leasing market so far in 2007
has been the growth in real estate, increasing from 3 per cent of
the market in March 2006 to a whopping 9 per cent on the same date
in 2007.
Banks are driving this growth – at year end 2006 they held a 91
per cent share of the real estate leasing market. This, however,
matches the continued domination of banks in the leasing sector,
with a 50 per cent market share of the vehicle leasing market
(against 29 per cent and 21 per cent respectively for captives and
independent lessors), and an 83 per cent market share of Romania’s
equipment leasing market. In addition, while banks had a 56 per
cent market share in March 2005, come March 2007 they had a 65 per
cent share.
