The European leasing market
Leasing in Europe is a constantly changing picture. The market is diverse, there are different levels of maturity and there many legal frameworks in which leasing operates.
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Introduction from Executive Producer CHRISTIAN ROELOFS
Looking at leasing in terms of Europe we see a constantly changing picture. The market is diverse, there are different levels of maturity and there many legal frameworks in which leasing operates. Derek Soper, Chairman of IAA-Advisory and of the Leasing Foundation, analyses the sweep of European leasing activity and makes some predictions about the future as part of our Leasing Fundamentals series. ”
Who should be interested in this?
New entrants to the leasing and asset finance industry, industry commentators, anyone wanting to understand the context of modern-day leasing.
The European leasing market – diversity, insularity and fragmentation
Writing about the European Leasing Market is always a challenge in view of the diversity and differing maturity of the various markets, but let me start with a few facts that frequently startle many from outside Europe, let alone those from within Europe.
There are 47 countries in Europe who are members of the Council for Europe, only 27 of which are current members of the European Union: the EU alone has over double the population of the US and accounts for a fifth of all world trade. There are 32 primary languages spoken and the number of different legal systems and interpretations of what leasing is and how it features in each countries mix of asset funding is legend.
Top ten Languages Spoken
- Russian over 100 000 000 (mainly in Russia, Ukraine and Belarus)
- German 98 000 000 (mainly in Germany, Austria and Switzerland)
- Turkish 80 000 000 (mainly in Turkey, Germany, Bulgaria and Cyprus)
- French 66 000 000 (mainly in France, Belgium and Switzerland)
- English 65 000 000 (mainly in the UK and Ireland)
- Italian 58 000 000 (mainly in Italy)
- Spanish 45 000 000 (mainly in Spain)
- Polish 39 000 000 (mainly in Poland)
- Ukrainian 39 000 000 (mainly in Ukraine)
- Romanian 24 000 000 (mainly in Romania and Moldova)
Equipment leasing is well established across most of Western Europe; whereas until very recently it could still be interpreted as an ‘emerging market’ in many of the Central and Eastern European countries, including Russia. It is fair to say that in recent times Leasing has ‘come of age’ in many of the Central and Eastern countries of Europe and is a thriving business in many. These markets are following the global pattern of vehicle leasing being the first level of assets being financed and then very slowly building on this and extending into yellow goods and IT. The five largest mature markets are UK, Germany, France, Spain and Italy which are the countries where most external entrants into the market first attempt to do business; of these only the UK is entirely free from regulation. France, Spain and Italy all have a form of Central Bank regulation and the German market has recently followed suit with a new set of leasing regulations
All countries across Europe either have or are establishing local leasing associations who are all affiliated to Leaseurope in Brussels. Leaseurope is in effect an association of associations. The gathering of Leaseurope statistics is inevitably slow and far from detailed; however, they have shown for the last five years that the total European market is larger than that of the US, albeit fragmented. Some of the smaller countries, such as Austria, have sought growth by expanding into the CEE countries and have now reached a position where external business generated year on year is greater than the domestic market.
One of the main features of the European market is the dominance of the banks. Bank owned leasing companies are the major players in each market and it is by looking at the changing activities of these players that it is possible to gauge the future direction of the leasing business. Capital constraints amongst the banks and their reaction to the recent banking crisis are having an effect in three ways. Firstly, on the delivery of services; many banks have downgraded leasing to an additional bank product and the delivery mechanism is via the branch network. A number have backed this up with the establishment of “product factories” within the bank to maintain support from the centre and for the filtration and development of new products. The second, and perhaps mainly for cost saving reasons, many banks have downgraded the leasing activities, dispensing with the “stand alone” nature of the leasing activities – this in many cases has been emphasised by the merging of big ticket leasing activities with the structured Finance Departments of the Banks.
The third aspect which a number of banks are still struggling with is the relevance of the vendor market to their main stream activities. A number of excellent vendor lessors have been established in Europe over the last ten or fifteen years, many of whom have expanded globally and others who service their vendor clients across Europe. The main questions being asked by many parent banks are “what is the connection between our vendor clients and our banking business model” and “how do we service our vendor clients in European markets which have not yet reached critical mass”. Both of these issues revolve around current and future costs as well as “relevance” to the parent banks perception of their ‘client base’, particularly at a time when the ‘client’ is king.
The five largest markets have, not surprisingly, become rather insular. In the main they do not see all of Europe as their market and as a result tend to restrict operations to their own countries. There are some notable exceptions to this, but very few. The main exceptions to this isolationist view are in the Netherlands, Belgium, some of the Scandinavian countries and one or two banks in Spain and Italy who have expanded by acquisition. The upside of crossing borders is a considerably expanded market; the downside is the trauma in merging large organisations with very differing cultures. This latter point is highly important and managed badly it can have devastating consequences.
How does the future look?
With the banks dominating the scene it is inevitable that the current credit crunch will have an effect. Their reluctance to lend to each other seems to have been replaced with an enthusiasm to lend to the main industrials – thus the captive finance company segment of the market is thriving. There is even evidence to suggest that the captive market is expanding as manufacturers decide to promote in house financing facilities to their customers; not just to extend credit, but to ensure that the mix of services inherent in the lease serve to ‘hold’ the customer away from competition.
Many lessors and the country associations are reporting that the new business volumes have declined following the credit crunch. However there is also some gloom amongst the major lessors as they are being asked by their parent banks to ease back on new business, much to the delight of the specialist lessors who see the opportunity of the granting of new credit at increased margins. Most industry commentators are predicting only a very slow return to normality and as always happens in these circumstances there are those who are looking to sell portfolios and leasing businesses and those who seeking out opportunities to buy. Again, as always, the expectation of the two sides differs considerably. The ‘bottom fishers’ are out there but are matched on the other side by those who think their portfolios are worth high prices. Inevitably deals will be done and the excuses will come later.
A brief view of the markets
UK. The banks will take advantage of the credit crunch to re-align their leasing businesses and also perhaps rethink their strategies. There is currently an active market in portfolio sales and due to the restricted credit criteria being applied by the banks the smaller players have a smile on their faces. Rates are on the upward move but there is quite a lot of evidence to suggest that the SME market is being starved of facilities.
France.The French banks are big and powerful and we keep expecting to see their entry into other European markets by acquisition; but so far that has happened only to a small extent. A number of French lessors have established businesses in a variety of European countries. There is a very strong national bond amongst manufacturers and the banks and this has resulted in sales assistance via the French lessors featuring strongly as a driver for expansion. This same national bond is difficult to overcome for new foreign entrants into the French market.
Germany. A very fragmented market with lots of small lessors, many of whom are affiliated to local savings banks. In general the leasing product features on the ‘offerings’ list of most of the banks. It could be said that the country is ‘over banked’ although this is not likely to change soon. There is a very close link between many of the Länder level governments and the Länder banks, including ownership. This brings local loyalties and there are many leasing businesses founded on the basic principal of ‘serving the local community’. There have been acquisitions of German leasing companies by lessors from other countries, some more successful than others. The two main issues which have to be dealt with are ‘the integration of culture’ and finding access to a sustainable part of the market.
Italy. Most of the activity is located in the north of the country and therefore the main leasing centre is Milan. A few lessors from other European countries have ventured into other cities but with little success. There is not a strong national instinct towards local lessors but there is a strong expectation that the lease product will be delivered in a very ‘local’ way. The Bank of Italy regulates leasing and depending upon turnover and portfolio size the level of regulation increases with size. Italy is currently going through a difficult economic period and as a result the local banks and lessors are exercising great caution.
Spain. Notably the largest Spanish banks are using their size and muscle to make acquisitions across Europe. They also continue to be the main link between Europe and South America. The Central Bank regulates leasing and it is important for any new company to establish a good relationship with the regulators before commencing business. Like Italy, Spain is currently going through a hard time at present and it is difficult to see any major market movements in the immediate future.
The CEE Countries. It is now difficult to see the CEE as a single market as some of the individual countries have already established healthy leasing markets. The main external players in the CEE markets are Austrian, German, Belgian and Italian. Much of the expansion has been by way of acquisition. Perhaps the main change in these markets which we have seen in recent times is one of cost. Only a few years ago there was a major move of ‘back offices’ into some CEE countries as a result of the very low cost of quality staff. This is changing and there is evidence to suggest that the very senior leasing management in many of the CEE countries are now costing 120% of many western European leasing companies.
The European leasing market by Derek Soper is licensed under a Creative Commons Attribution 4.0 International License.