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May 1, 2008updated 12 Apr 2017 4:48pm

The domino effect

The news in early October that Swiss investment bank UBS made a loss of £340m in Q3 2007, and that Deutsche Bank was preparing for a 250m (£175m) shortfall during the same period, were yet two more warning shots across the bows of the leasing industry

By Brian Rogerson

The domino effect

While bank leaders say lenders should not be worrying about the credit squeeze, some funders disagree

The news in early October that Swiss investment bank UBS made a loss of £340m in Q3 2007, and that Deutsche Bank was preparing for a €250m (£175m) shortfall during the same period, were yet two more warning shots across the bows of the leasing industry.

Doug McWilliams, CEO of the Centre for Economics and Business research, told delegates at the Leaseurope/Eurofinas Convention that it was inevitable that the credit squeeze will lead to a drying up of mergers and acquisitions throughout industry. “At the same time,” he stressed, “jobs in the City of London are going to decrease. Over coming months there will be a significant economic slowing down across Europe right through to 2009 and the UK’s growth is unlikely to rise above 1.5 per cent in 2008.”

Indicating the historical growth of financial services in the UK economy, from 7 per cent of gross domestic product in 2003 to 10 per cent in 2007, McWilliams warned that such growth could not continue. “Lenders will experience greater difficulty in raising finance,” he said, “and the European Central Bank is likely to keep interest rates at a high level.”

Lessors’ funds drying up

He believes that there will be less funding for lessors and, thereby, less finance available to leverage some deals. “It could lead,” he said, “to increased caution by banks and the threat of increased regulation by the regulators.”

David Betteley, Finance & Leasing Association chairman and managing director of Toyota Financial Services (UK), urged the leasing industry “to prevail on our regulators not to overact to recent events”.

“If, as a result of recent events,” he said, “they end up over-regulating the industry it will, in the end, be the customer that will suffer.”

Betteley stressed that lessors and asset lenders in general should increase the sharing of data and be ever aware of adhering to sector codes of conduct. “We have a moral responsibility,” he said, “to work ethically.”

John Bennett, managing director of Bank of America’s Global Vendor Finance business for EMEA, believes that the balance between danger and opportunity provided by the credit squeeze is “about 50/50, but pointing more towards the danger end at present”.

“Some pundits believe that the independent leasing sector will suffer most in the credit squeeze,” he said. “I am not so sure. The crucial point is the level of investment in the UK economy – if it reduces then we will all suffer. With the possible exception of those dealing in aircraft leasing which seem to have the market in their favour at present.”

Bennett warned also of default levels rising and residual values falling if there is a slowdown in trade.

Lenders should weather storm

Lord Stevenson of Coddenham is chairman of HBOS and governor of the Bank of Scotland. He stressed: “The end of the world is not nigh – and what is happening to the credit markets is completely predictable. The causes are a three-fold mixture of sub-prime mortgage lending, the world’s banks being left with debt that they cannot syndicate, and some large corporate market losses. All three are still a relatively low part of total global debt.”

Nor, according to Lord Stevenson, did Northern Rock suffer a “run on the bank”. “A run on a bank,” he said, “can be defined as when people who need money queue outside banks that cannot pay them. That was not in any way the case with Northern Rock.”

He predicts that such “bubbles in the international economy” are for lenders to get used to – especially since they are well within the capacity of the global economy to cope with.”

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