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EUROPEAN LEASING An Industry Prospectus
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Ten Reasons to Invest in Leasing
1. Unique business models based on asset ownership
2. Resilience and stability in times of economic crisis
3. Low cost/income levels
4. Low cost of risk, in line with provisions
5. Consistently profitable business
6. Flexibility to manage changes in funding & liquidity costs
7. Leasing is extremely capital efficient
8. Strong internal controls tailored to deal with asset specificity
9. Asset ownership ensures few defaults and low losses
10. Asset expertise and management are the core of leasing
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CONTENT
Purpose of this document ............................................................................................................................................... 4
About European leasing ...................................................................................................................................................... 5 What is leasing
European leasing market
Leasing to European SMEs
Key features of the European leasing industry ................................................................... 8 1. Unique business models based on asset ownership ....................................................................... 8
2. Resilience and stability in times of economic crisis .................................................................... 11
3. Low cost/income levels ................................................................................................................................................ 13
4. Low cost of risk, in line with provisions ...................................................................................................... 14
5. Consistently profitable business ....................................................................................................................... 15
6. Flexibility to manage changes in funding & liquidity costs ............................................... 17
7. Leasing is extremely capital efficient ........................................................................................................... 18
8. Strong internal controls tailored to deal with asset specificity ...................................... 19
9. Asset ownership ensures few defaults and low losses .............................................................. 20
10. Asset expertise and management are the core of leasing .................................................... 22
Data Sources ........................................................................................................................................................................................... 24 Overview
Presentation of the Leaseurope Index
Benchmark sources (OECD, Eurostat/AMECO & ECB)
Leaseurope Index Glossary ..................................................................................................................................... 26 Definitions
Ratios
Contact ................................................................................................................................................................................................................ 273
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PURPOSE OF THIS DOCUMENT
This document describes the
business models and value-
addition of the European leasing
industry, with an emphasis on the
features that make it an attractive
investment proposition.
It analyses the industry's
performance and returns over
recent years, contains information
proving that leasing is a capital
efficient activity and provides
an overview of industry risk
management practice.
Data from the Leaseurope Index
and Annual Survey are used to
quantify the leasing sector, while
banking figures from the OECD
and Eurostat are used to quantify
traditional lending. Wherever
possible, leasing figures are
compared to traditional lending
figures in order to show the
leasing industry in a comparable
context. In addition, the findings
from the Deloitte reports Implicit
Risk Weights for SME Leasing
in Europe and The Risk Profile
of Leasing in Europe: The Role
of the Leased Asset have been
integrated.
All of this information is distilled
into ten key reasons why leasing
is a good investment, with
supporting data and analysis.
Disclaimer
Deloitte Conseil SAS France was commissioned by Leaseurope to produce a Deloitte point
of view paper on European Leasing: An Industry Prospectus. Data presented in the report
were obtained from sources which we considered reliable and coherent. Deloitte Conseil
has retained a strictly independent and impartial view in the creation of this report and
the conclusions presented therein are, and will remain, those of Deloitte. Consequently,
Deloitte Conseil shall not have any liability to any third party in respect of this report
or any actions taken or decisions made as a consequence of the results, advice or
recommendations set forth herein.4
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What is leasing?
A lease is a contract whereby a
leasing company (known as a
lessor) makes an asset it owns
available to another party (called
a lessee) for a period of time and
in exchange for payment. Across
Europe, a range of different types
of contractual agreements fall
under the notion of leasing.
The common feature of all these
arrangements is that the lessor
retains ownership of the leased
asset throughout the contract
term. It is the inbuilt security
provided by the retention of
ownership rights that allows
lessors to provide businesses with
the use of assets in situations
where traditional loans to obtain
equipment would not be available
to these firms.
Almost any type of physical asset
can be leased, as can certain
intangible assets. Examples
of leased assets include: plant
and manufacturing equipment,
IT equipment and software,
printers, photocopiers and
telecommunication equipment,
construction and logistics
equipment, vehicles and other
means of transport, medical
equipment, renewable energy
equipment, infrastructure, utilities
and property, to name but a few.
Leasing companies can be
banks, bank-owned subsidiaries,
independent firms or the financing
arms of manufacturing companies,
known as captive lessors. Leasing
is used by businesses of all sizes
and the public sector (e.g. leasing
to schools, hospitals, etc.) to
obtain the use of assets. According
to Leaseurope calculations, the
majority of leasing is for SME
clients, with SMEs accounting
for approximately 50% of all
new leasing business. Leasing is
easy to access and is distributed
via many channels; for instance
through retail banking networks,
directly from leasing companies,
through brokers or from vendors
and dealers of assets at their point
of sale.
Leases fit on a continuum ...
The leasing industry dynamic
Leasing company
Asset supplier
Payment for asset
Asset title (lessor has ownership)
Rental payments
Right to use the asset
Customer
Funder
finan
ce
serv
ice
... with most leases being a combination of an asset finance
and service solution
... financing the use of an asset
... providing an asset-related service solution
ABOUT EUROPEAN LEASING
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Leasing allows businesses and
other types of lessees to manage
their working capital more
effectively by spreading payments
for the use of the asset over the
contract period. It also allows
clients to finance 100% of the
purchase price of the asset without
requiring additional collateral.
Asset ownership also makes
a lease an ideal product for
securitisation. With regular
income flows from the lease
contract combined with the
additional security provided by
the underlying physical asset,
lease contracts are well suited to
creating low risk ABSs.
European leasing market
Leasings economic importance
lies in the fact that it is a major
source of investment support for
European businesses. In 2012,
European lessors granted new
leases worth almost 253 billion
and the portfolio of leased assets in
their hands at the end of that year
was worth almost 732 billion,
according to Leaseuropes Annual
Survey. In 2012, leasing enabled
20% of all equipment investment
in Europe.1
By helping its clients to invest
more, leasing can foster greater
economic growth. Oxford
Economics finds that a relatively
small increase in the uptake of
leasing would create an important
boost in European GDP growth.2
Leasing to European SMEs
According to Eurostat, one of
the main reasons SMEs report
as creating difficulties in their
accessing financing is their
inability to provide sufficient
collateral or guarantees to the
lender.3 In comparison to other
forms of finance, leasing is ideally
positioned to assist SMEs as it
allows them to finance up to the
full purchase price of an asset
without requiring any collateral
because the leased asset being
leased is the collateral. For start-
up SME that do not have a strong
credit history, for those who
may not be in a position to post
collateral, or for SMEs in sectors
that are generally perceived as
being riskier, leasing is particularly
advantageous in comparison to
other types of finance.4 Leasing
also caters well to the needs of
very small firms (micro entities)
which form the category of small
business that suffers the most
from a lack of access to finance.
Lastly, while some forms of finance
are better suited for companies
that are at a certain point in their
lifecycle, leasing is appropriate for
use throughout the lifespan of any
SMEs business.Total new business volumes
by asset type (%) - 2012
Real estate
Machines & equipment
CVs
Cars
ICT
Big/other
43%7%
16%
6% 17%11%
253 billion
Total equipment volumes
granted by client type (%) - 2011
28.1%17.2%
4.5% 1.6%
48.5%
Corporate
SME
Consumer
Public sector
Unknown
Source: Leaseurope Annual Survey & Oxford Economic
Fina
nce
need
Shor
t te
rm
(ST)
Younger / smaller /no collateral / no credit history
Long
ter
m
(LT)
Older / Larger / known risk and track record
SME lifecycle
Leasing
Private equity
SME banking
Trade financeMicrofinance
SME finance landscape
1 Leaseurope calculation based on new equipment leasing volumes as a percentage of GFCF for equipment.2 Oxford Economics (2011) The Use of Leasing Amongst European SMEs.3 Eurostat (2011) Access to Finance Statistics.4 European Investment Fund (2012) The importance of leasing for SME finance
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Leasing has been a constant
source of support for millions of
European SMEs, providing finance
during times of crisis. Around
40% of all European SMEs make
use of leasing, which is more
than any other individual form of
lending.5 Additionally, according
to the OECD, it is the financing
source with the highest rate of
successful applications amongst
SMEs.6 Studies have shown that
the majority of small businesses
witness an increase in their
business as a result of leasing.7
Additionally, SMEs that use leasing
invest on average 57% more
than those who do not.8 Leasing
is therefore not only a reliable
source of support for SMEs even
in the most uncertain economic
conditions, but it also contributes
to the success of their businesses
and helps them increase their
investment levels.
2010 2007
Int'l trade or export finance
Advanced payments (by customers)
Trade credit (by suppliers)
Bank overdraft or credit line
Factoring
Leasing
Bank loans
0 20 40 60 80 100Application success rate
SME Application Success Rates (OECD)
5 Oxford Economics (2011).6 OECD (2012) Measuring Entrepreneurial Finance: A European Survey of SMEs.7 European Bank for Reconstruction & Development EBRD (2011) Special Study: Banks Leasing Operations
(Regional).8 Oxford Economics (2011).
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Much more than a financial service a complete asset solution
Leasing companies dont just fund
assets. They build comprehensive
asset solutions for their clients,
meeting both their financial needs
and operational requirements in
one packaged product. Lessors
can take on and manage residual
value risk so their clients need not
worry about second hand asset
values. They are also able to work
in partnership with a network
of various service and asset
specialists, integrating their skills
into a seamless leasing solution
for the client. At the macro level,
because lessors possess in-depth
asset knowledge, leasing allows for
more efficient resource allocation
compared to when a client owns
an asset outright. Lessors may also
offer other financial products in
some cases financing the entire
value chain of their corporate
clients, including stock and floor
plan financing, factoring services
and other loans.
A variety of business models that adapt to clients specific needs
A range of business models can
be found within the European
leasing industry. These depend
on the leasing firms strategy and
market position and may often be
combined to best address client
needs.
The specialised finance model
refers to independent finance
companies or bank owned
leasing companies who position
Basic business model
Function Features Distribution channel
Specialised Finance
Alternative source of finance to banks/bank loans
Independent finance companies or bank owned leasing companies
Direct/ brokers
Vendor Supports manufacturer sales
Leasing company (Independent or bank owned) accompanies the development of their manufacturer and dealer clients by providing sales finance support
Point of sale
Product Additional service for bank clients
Leasing is part of a range of financial solutions provided by a bank to its clients, when this is the product that best suits the clients financing needs
Banking networks
Captive Support a brand Financing arm of a manufacturer
Point of sale
Asset specialist
Specialises in asset risk managements
Focuses its business on specific asset categories, building asset expertise and taking on residual value risk
Direct/point of sale
1. UNIQUE BUSINESS MODELS BASED ON ASSET OWNERSHIP
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leasing as an alternative source
of finance to bank loans. In these
cases, business is done directly
or through brokers. The product
model is usually carried out
by a bank or a bank owned-
leasing company. Here, leasing
is viewed as being one of a range
of financial solutions that can be
provided by a bank to its clients
through the banking network. The
vendor model involves a leasing
company (either independent
or bank-owned) supporting the
sales of their manufacturer or
dealer partners. Here the leasing
company accompanies the
development of manufacturer and
dealer clients by providing sales
finance support and other services
such as back-office support and
sales staff training. While the
lease is funded by the 3rd party
lessor, these programmes can
still be manufacturer branded
and the leases will granted by
the manufacturer at their point
of sale. The captive model is
similar but the lessor (funder) in
this case is the financing arm of
a specific manufacturer or dealer
and supports that particular brand
by providing lease solutions at the
point of sale. The asset specialist
model focuses on leasing specific
asset categories (often car, trucks,
IT solutions, etc.), building asset
expertise and taking on residual
value risk as an integral part
of their business model. These
companies specialise in asset risk
management and either provide
their services directly or at the
point of sale.
This wide variety of business
models, and leasing companies
capacity to combine and adapt
them, means that they are in a
uniquely flexible position to match
their product offer to client needs.
Additionally, lessors can choose
to focus on leasing specific assets,
such as vehicles or IT equipment
for instance, or remain generalists
providing all types of assets. They
may also make use of a wide range
of distribution channels, including
banking networks, manufacturer/
dealer points of sale, brokers and
direct sales.
A lease is a multipartite relationship supporting asset manufacturers, supplier sales, and the asset needs of end-user clients
Bank-owned or independent
lessors (also known as third party
lessors) will typically work with
a range of asset suppliers, either
with manufacturers or with their
distribution networks and dealers.
The close partnerships they forge
enable mutual added-value
exchanges, such as information on
asset values for the lessor, or back-
office functions such as collections
management for the supplier.
Captive leasing companies support
their parent companys sales, and
can cooperate with third party
leasing companies for the provision
of certain services, including
funding, if that will better suit their
clients needs.
Clients can either decide
themselves which asset best suits
their need or, if theyre not sure,
turn to the leasing company for
advice. They can also rely on the
The wide variety of business
models, and leasing companies
capacity to combine and adapt
them, means that they are in a
unique position to match their
product offer to client needs
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leasing company to take care
of asset-related services, such
as consumables, spare parts,
software, insurance, and asset
replacements.
When it comes time for the asset
to be replaced or upgraded, the
client can easily turn to the lessor
for this without any interruption in
the services provided. For lessors,
this ensures a very stable client
base, with a high degree of repeat
business and an uninterrupted
stream of income flows.
Multiple and diversified sources of income through the provision of services
Leased contracts are modular
products, where multiple service
components can be packaged
together into a single monthly fee
for the client. The total fee thus
covers the use of the asset itself, as
well as its insurance, maintenance
and many other services. In
addition to asset-related end-
user client services, lessors who
partner with manufacturers are
able to provide these vendors with
tools such as back-office support,
reporting or collection services.
Lessor-vendor relationships also
often give rise to bulk discounts
or subsidies for the lessors from
manufacturers, which in turn can
be passed on to clients in the form
of lower rentals.
The chart below summarises the
variety of income streams lessors
can benefit from.
Multiple income sources
Early termination fees
Discounts/subsidies from the asset supplier
Services to vendor partners (back-office, collection)
Service-related income (maintenance, replacement, insurance, etc.)
Residual value gains
10
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A resilient business
The leasing business is
impressively resilient. While
European leasing activities have
not been immune to the adverse
economic conditions of past years,
the business has been much less
affected than general banking
activities. Over the 2009-2012
period the European leasing
portfolio9 remained broadly stable,
while classic lending product
outstandings decreased. A slight
reduction in the lease portfolio
was seen in 2012, but this was
far less severe than for European
bank loans in the same year.
Comparing the 2009-2012
Leaseurope data for total new
European business volumes
for equipment leases10 with
gross fixed capital formation
for equipment provides an
additional perspective on the
stability of European leasing
through the economic cycle.
As show in the graph above,
new lease production usually
follows the same path as total
equipment investment in the
overall economy. However,
it actually exceeded total
equipment investment in 2011
and 2012, implying that leasing
was responsible for financing
a greater share of investment
in these difficult years. Lastly,
leasing support real investment,
is popular amongst businesses
(SMEs and corporates) and lease
contracts are mostly medium-
term in length, features which
further contribute a certain
stability to the business model.
2. RESILIENCE AND STABILITY IN TIMES OF ECONOMIC CRISIS 9 Source : Leaseurope Index10 Source : Leaseurope Annual Survey
Leasing vs. banks lending activity (Index = 100)
110
100
90
80 09 10 11 12 full year full year full year full year
Leasing portfolio (Source: Leaseurope Index) Bank portfolio (Source: OECD)
Leasing new business growth vs. gross fixed capital formation growth
20%
10%
0%
-10%
-20%
-30% 01 02 03 04 05 06 07 08 09 10 11 12
European Union (27 countries) Euro area (17 countries) Leasing-Equipment
11
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Income resilient to reductions in new volumes
The leasing industry has also
demonstrated the capacity
to maintain income levels in
tough economic conditions as
evidenced over the 2009-2012
period when its new business
volumes declined by 5.29%, but
its operating income increased by
13.53%. This can be attributed
to the unique characteristics
of the leasing business model
discussed above. Moreover,
leasing company turnover tends
to be structurally stable due to a
positive time lag between leasing
income and the evolution of new
business. Moreover, lease income
includes interest income as well as
additional fee and service income
which are spread linearly over
the life of the lease contract (as
opposed to interest income which
decreases over the contract life).
Strong revenue in crisis periods compared to classic banking
A comparison of Leaseurope figures
with ECB statistics on medium-
sized banks shows that lessor and
bank operating income levels have
diverged significantly. Medium-
sized banks operating income
decreased considerably between
2009 and 2010, while lessors
steadily increased theirs between
2009 and 2011. This probably
reflects the deep deleveraging
medium-sized banks went through
up to 2010. Despite this however,
European lessors were able to
manage the impact of the liquidity
crisis more efficiently (see point 6)
Leasing vs. banks operating income (Index = 100)
120
115
110
105
100
95
90
85 09 10 11 12 13
Leasing Medium-sized banks (source: ECB)
Over the 2009-2012 period, the
European leasing portfolio remained
broadly stable, while classic lending
product outstandings decreased
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Stable cost/income compared to classic banking
The leasing industry has
managed to keep their cost/
income ratio stable over what has
been a very challenging 5 year
period. Varying between 45% and
50%, this level of cost/income is
consistently lower than that of
classical banking and is evidence
that leasing firms commercial
revenues are strong and stable.
Moreover, it shows that lessors
manage their costs proactively.
Between 2009 and 2012,
medium-sized banks total cost/
income ratio increased by 9.6
percentage points, while over the
same period leasings cost/income
ratio decreased by 0.2 percentage
points.
This stability in leasing cost/
income can be traced back to
the fact that any slowdown
in operating income growth is
mirrored by an equal or greater
slowdown in cost growth. For
example, in 2013 operating
income increased by 1.2% while
operating expenses decreased by
-2.4%, a testament to the leasing
industrys capacity to adjust
their expenses to their forecasted
income quickly.
Several different factors help to
explain why leasing cost/income
is so stable, particularly in relation
to classic banking. Firstly the
nature of structural costs are
different from those of classical
banks, for instance, lessors do
not have their own network of
bank agencies. The monoline
nature of lessors means that by
definition they specialise and can
put in place more focussed and
efficient processes than universal
banks, helping to keep costs low.
Secondly, lessors enjoy a diversity
of income sources with many
benefits compared to classical
banking (see point 1). These
include a higher share of non-
interest income (fees and services)
and interest margins may also be
higher.
Leasing vs. banks cost/income (%)
70%
60%
50%
40%
30% 09 10 11 12 13
Leasing Medium-sized banks (source: ECB)
3. LOW COST/INCOME LEVELS
Between 2009 and
2012, medium-
sized banks total
cost/income ratio
increased by 9.6
percentage points,
while over the same
period leasings
cost/income ratio
decreased by 0.2
percentage points
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Cost of risk for the leasing industry
is appropriate and remains quite
low over the period, varying
between 0.65% and 0.9%.
These figures are particularly low
in comparison to ECB banking
figures, which reached 1.95% in
2012.3 The evolution of leasings
cost of risk is mainly due to the
volatility of loan loss provisions,
since the average portfolio
remains stable over the period
(variation of less than 1% over the
period). Low loss provisions are
due to low leasing loss rates as
discussed in point 7.
Moreover, the cost of risk for
leasing has remained much more
stable than that for medium-
sized banks. The leasing figure
decreased by 0.13 percentage
points between 2010 and 2012
while the bank figure escalated by
0.74 percentage points over that
time. This indicates that European
lessors generally hold a better
quality portfolio than mid-sized
EU banks.4. LOW COST OF RISK, IN LINE WITH PROVISIONS 11 ECB cost of risk is calculated as Impairments loans and receivables in the income statement / Assets Loan and receivables
Leasing vs. banks cost of risk (%)
2.0%
1.5%
1.0%
0.5%
0.0% 10 11 12 13
Leasing - weighted average value Leasing - median value Medium-sized banks (source: ECB)
European lessors generally
hold a better quality portfolio
than mid-sized EU banks
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Growing profitability levels
The profitability of the European
leasing industry is relatively
high and has managed to stay
out of negative territory despite
the recent crisis, remaining in a
range of approximately 20% to
30% between 2009 and 2013.
This contrasts sharply with the
profitability levels of medium-size
banks, which are substantially
lower and have steadily declined
from 2009, reaching an all-time
low of -30% in 2013.
Despite the challenging economic
conditions of the last few years,
including stalling new business
and rising loan loss provisions,
European lessors have managed
to not only maintain profitability,
but enjoy increases. Average
annual profitability increased from
2009 and 2013, dropping slightly
from 2011 to 2012, due to a rise
in cost of risk for a small number
of companies. The median ratio
however, which represents the
typical leasing firm in the data
sample, continued to increase
steadily. Profitability is partially
immune to any pressures on
new volumes and consistently
outperforms this metric: for
example, new business increased
by 0.8% from 2012 to 2013
whereas profitability increased at
a much higher rate of 7.2% over
the same period.
Net profits high compared to risk-weighted assets
Other important KPIs include
return on equity and return on
assets. Given a lack of information
sources on leasing company
equity levels, we proxy equity by
using regulatory capital for credit
risk fixed at 8% of risk weighted
assets. We use this Return
on Regulatory Requirements
(RORR) as a measure of the
structural profitability of the
leasing business. Net profits
are high when compared to the
risk-weighted assets of leasing
companies, with the weighted
average RORR varying between
15% and 17% over the period
and median RORR increasing to
24% in 2013. These high levels
of RORR imply that the European
lessors have room to build up
reserves, enhance the quality of
5. CONSISTENTLY PROFITABLE BUSINESS
Leasing vs. banks profitability (%)
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40% 09 10 11 12 13
Leasing - weighted average value Leasing - median value Medium-sized banks (source: ECB)
15
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their own funds by increasing
the level of Core Tier 1 capital
and reinforce the level of their
own funds in general, should
their RWAs increase. Leasing is
therefore well placed to meet
incremental requirements of the
Basel 3 framework.
In addition, the leasing industrys
return on assets (which in this
case is a return on leased assets
or ROLA) remained relatively
stable between 2010 and 2013,
between 0.8% and 1% for the
weighted average ratio and
slightly higher for the median. It
is important to put the level of
this ratio into perspective. Lease
contracts typically last for around
4 years and are thus medium-
term contracts, where annual
ROLA only covers on average a
quarter of the return on a leasing
contract. In contrast, medium-
size banking contracts will cover
a much wider portfolio of different
durations, including short term
lending.
Return on regulatory requirements (%)
30%
25%
20%
15%
10%
5%
0% 10 11 12 13
Leasing - weighted average value Leasing - median value
Return on leased assets (%)
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0% 10 11 12 13
Leasing - weighted average value Leasing - median value
Despite the challenging economic
conditions of the last few years,
European lessors have managed
to not only maintain, but enjoy
increases in profitability
16
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The sources of funding for European lessors typically depend on their business models and ownership structures:
1) Liquidity and funding are
managed centrally at the
parent company level
Bank-owned leasing companies
benefit from the various sources
of liquidity and funding of their
parent company (deposits,
direct loans, inter-bank markets,
access to ECB refinancing, etc.).
2) Liquidity and funding is
directly managed by the
leasing company (independent
funding
This funding model involves
diversified means and
instruments of funding,
combining long-term assets
with good returns to target
long-term investors. Favoured
instruments include:
securitisation programs
bond issuance programs
EIF/EIB funding support and
specific financing programs
with clients.
In the context of Basel 3
implementation, an increase in
the cost of funding and the need
to seek new funding sources is
expected to occur across the entire
spectrum of the financial services
industry. Leasing companies,
including bank-owned firms, just
like all financial industry players,
are looking to find alternative
sources of funding (capital markets,
institutional investors, etc.).
Securitisations are a particularly
promising funding tool for the
leasing industry. They provide
investors with additional security
thanks to the presence of the
leased asset underlying each
individual lease contract in the
securitisation. As the securitisation
market picks up, we expect to see
increasing volumes of SME-lease,
auto-lease and other lease backed
transactions. Like other market
players, lessors also have to deal
with the issue of funding becoming
increasingly local with liquidity
having a tendency to concentrate
in country/regional pockets.
The flexibility to manage funding/liquidity costs
With base rates currently being
quite low and margins performing
well, the cost of funding/liquidity
has not been a major issue so far
for many lessors. This is because
leasing companies benefit from
income flexibility that is simply not
available to other types of players,
rendering them less sensitive to
these general increases in funding/
liquidity costs.
While bank parent companies or
other funders normally pass on
any increased cost of funding/
liquidity they experience to leasing
companies, lessors themselves
are often able to pass this on via
new business. Lessors can also
rely on adjustment mechanisms
built into the existing portfolio. For
instance, the service elements of
leases can be linked to an index
that fluctuates according to costs.
On top of interest and service
income, lessors also earn income
on residual values, which are part
of the original structure of the
contract.
6. FLEXIBILITY TO MANAGE CHANGES IN FUNDING & LIQUIDITY COSTS
Leasing
companies benefit
from income
flexibility that
is simply not
available to other
types of players
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The unique feature of a lease is the
lessors ownership of the leased
asset.
These ownership rights provide
lessors with an extremely valuable
and efficient form of in-built
security which makes leasing
extremely low-risk and thus
capital efficient. Asset ownership
represents a major advantage for
lessors compared to other financial
products such as traditional loans,
which are typically not secured
on physical assets but rather with
financial collateral or personal
guarantees.
Our recent reports Implicit Risk
Weights for SME Leasing in
Europe and The Risk Profile of
Leasing in Europe: The role of the
leased asset demonstrate that
default and loss rates for leases
are significantly lower than for
traditional lending. According
to the latter study, which was
based on a portfolio of 3.3 million
lease contracts in 15 European
countries, loss rates on Corporate
and Retail SME exposures were
19.3% and 25.6% respectively.
This compares very favourably to
the figures of the EBAs EU-wide
2011 stress test where equivalent
loss rates for Corporate and Retail
SME lending were 31% and 36%
respectively.
Why are lease default rates low?
Default rates within the leasing
activity are low because the leased
asset is crucial to the clients core
business activities. Businesses
therefore prioritise lease payments
because they need these assets to
run their business.
Why are lease loss rates low?
As the asset is a key working tool
for the lessee, many defaulted
leases regrade to a healthy
situation with a zero loss.
Additionally, ownership of the
asset makes repossession fast and
straightforward for the lessor (if it
is necessary at all). The lessor can
then sell or re-lease the asset in
order to decrease any losses on
the default. If the value of the asset
exceeds the amount outstanding
at default, the lessor would
actually make a gain in the case of
a default.
Capital requirement regulation
(CRD4/CRR) recognises the low risk
nature of leases, particularly under
the advanced internal ratings
based approach.
There are additional capital
benefits for leases beyond those
described above. With more
than half of all leasing volumes
being granted to SMEs, lessors
benefit from the scaling factor
(reduction) in risk weights applied
by the European legislator to SME
exposures in the context of the
CRD4/CRR.
7. LEASING IS EXTREMELY CAPITAL EFFICIENT
Default and loss
rates for leases are
significantly lower
than for traditional
lending
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The focus of lessors on assets (e.g.
valuation, tracking, repossession,
re-marketing) as well as on their
clients (e.g. their knowledge of
asset distribution chains or the
development of credit policies)
has led to the development of
a specific control culture within
leasing companies. Lessors are
also acutely aware of the need to
ensure sound reporting, monitoring
and controls in order to maintain
transparent business relationships
with their owners, regulators,
clients and other partners. In
addition to the organisational and
management benefits of controls,
lessors are able to leverage
these skills to offer sophisticated
reporting tools to their vendor or
service partners. This information
provides partners with added-
value, in-depth insight into the
behaviour of their clients that they
would not otherwise have access
to.
Controls in the leasing businesses are ensured through various means:
Internal procedures and controls
Controls by the internal audit function
Reporting to the parent company: control of data and analysis
External audit
Supervision by regulators
Communication with partners
(asset manufacturers, service providers, etc.)
The following chart looks at the typical internal procedures and controls
leasing companies put in place. They are usually built on five main pillars:
* The asset management function is responsible for modelling
asset value curves for each asset category
** Details on credit and asset risk policies are found below:
Lease origination:
Instructions and limits for residual values and contract durations
Controlling the purchase price compared to the underlying assets
market value
Contract management:
Monitoring the value of the asset and its evolution over time
Controlling and updating asset value assessment curves
Breach of contract:
Controlling second-hand market prices and costs relating of the
assets resale
8. STRONG INTERNAL CONTROLS TAILORED TO DEAL WITH ASSET SPECIFICITY
Three levels of control Direct management Risk functions Internal audit
Independence of sales, asset management* and risk management functions
Backtesting of estimated exposure and residual values with observed historical data
Special committees dedicated to monitoring and improving asset management
Credit and asset risk policies for each asset and each market**
The focus of lessors on
assets, as well as on
their clients, has led
to the development
of a specific control
culture within leasing
companies
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Pre-default management
Lessors are able to use a variety of
tools to avoid default situations.
Firstly, they have the ability to
share risk with their customers. For
example, when second hand asset
prices suddenly decrease, lessors
can negotiate contract extensions,
formally or informally, and avoid
potential losses. When contracts
are extended, not only do asset
values have time to recover, the
client is also paying for additional
use of the asset. Extensions will
be designed so that (revised)
expected future market value will
be sufficient to cover the lessors
remaining asset exposure. Clients
benefit from this strategy too as
they are obtaining prolonged
use of an asset they know for a
cheaper price.
Lessors also benefit from a certain
amount of leverage vis--vis
customers simply through their
ability to exercise their ownership
rights and repossess the leased
asset in default situations.
Ownership rights serve as deterrent
to the client defaulting in the first
place.
Moreover, lessors proximity
to and understanding of their
clients business means they have
early insight into any potential
difficulties their customers may
face. Since rentals are (typically)
monthly payments, any
missed lease payment is a red
light. Lessors also benefit from
early warning signals through
partnerships with vendors and
service providers should any
missed payment of other services
or fees occur.
Bank-owned lessors are also in
the unique position to provide
their banking groups with early
warning signals on the behaviour
of group clients. While increases
in bank credit lines could be
due to a number of factors, if a
client struggles to make a lease
payment, despite the importance
of the asset to their business,
they are likely to be in financial
difficulty.
Default management
Leasing companies have two
routes at their disposal to manage
defaults.
1) If a low recovery amount is
expected on the asset, the best
outcome is to get the contract
to regrade.
In such cases, the client needs
to be assessed in terms of
how important the asset is in
running their business and
their probability of regrading.
As discussed earlier, altering
the duration or terms of the
contract in order to keep
contracts performing can be
beneficial to both the leasing
company and the client.
According to our research,
around 60% of defaulted lease
contracts return to a healthy
position.
2) If a regrade is unlikely, and/
or high recovery amount is
expected on the asset, the
default is handed over to the
recovery team
9. ASSET OWNERSHIP ENSURES FEW DEFAULTS AND LOW LOSSES
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Recovery is performed according
to the asset type, involving
remarketing experts who assess
the best course of action, including
re-lease possibilities and/or the
potential disposal value of the
asset if it is sold. Again, according
to our research, asset sale proceeds
contribute significantly to low
losses for leasing, accounting for
around 80% of total recoveries.
Moreover, since the leasing
company is the legal owner of the
asset, repossession is much quicker
and simpler than in cases where a
loan is backed with other collateral
(e.g. no need to force bankruptcy).
Other sources of recovery, aside
from the asset itself, are also
possible. For instance, in cases
where the lessee has breached
the contract, the lessor can seek
recourse and/or require the
customer to pay penalty if contract
terms are not respected, regardless
of asset repossession (e.g. early
termination penalties).
Leasing
losses low
Defaults
regrade with
zero loss
Asset re-deployment
minimises losses
Asset sale proceeds
substantial
If no regrade,
quick & efficient
repossession
The risk mitigating power of asset ownership in leasing
Asset sale proceeds contribute
significantly to low losses for
leasing, accounting for around
80% of total recoveries
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Asset management is key to the industrys success
As shown in point 2, the leasing
sector has proven to be resilient
to the financial and economic
crisis. Asset expertise and high
quality asset management skills
have played an important role in
achieving this through:
Asset specialisation which
ensures predictable and stable
returns
Excellent supplier/client
relationships which facilitate
negotiations and ensure
sustainable, long-term
partnerships where risks are
shared to the benefit of all
parties
Knowledge of and participation
in the entire business
process/value chain of their
partners/clients
Maximising returns on
asset sales through the
understanding and use of
multiple remarketing channels
and geographies
Different facets of asset risk
The general term asset risk
covers a number of aspects:
Residual value risk, or the risk that
the future second hand value of
the leased asset, predicted at the
start of the contract, will be lower
than expected. Depending on the
lessors business model, lessors will
either decide to take residual value
risk and will then manage this as
part of their core business through
the skills described in more detail
below. In other cases, lessors may
decide that they do not want to
take on significant asset exposure
and will then either seek to
protect themselves through lease
payments that cover the entire
asset value or by taking out asset
protection. This is often provided
through manufacturer or dealer
buy-back agreements, other forms
of residual value guarantees or
third-party insurance.
Risks related to asset sales: here
lessors have developed thorough
understanding of secondary asset
markets including their levels
of liquidity, their geographical
location and the benefits of
different resale channels. This
knowledge ensures that asset
sales are timely and maximise the
potential resale value of the asset.
Risks related to asset suppliers:
to avoid liability, lessors seek to
work with high quality asset and
service providers with excellent
products and after-sale services.
Additionally, lessors will have
contingency plans in place should
an agreed upon supplier fail in its
duties.
Asset risk management tools
Expertise and independence is
crucial in achieving high quality
asset management. Lessors have
developed teams of asset experts
and business specialists by country
and product market, operating
both centrally and locally and who
make use of the following asset
management tools:
Asset valuation curves
These are granular down to each
asset type and include market
values and asset depreciation
curves, with risk assumptions for
residual values.
10. ASSET EXPERTISE AND MANAGEMENT ARE THE CORE OF LEASING
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Valuation methodologies, which
rely on:
proprietary databases
internal resale data
internal asset experts
second hand market data and
backtesting
Asset committees, which monitor
collateral values and special
provision committees that evaluate
the effect of market downturns on
asset values
Expected asset values are audited
by the Risk Department and
compared to what is observed in
cases of actual recovery
The remarketing department, in
charge of maximising recovery,
by choosing the most appropriate
resale channel (auction, vendor
network, wholesale, direct, etc.)
and the best market (local market,
global markets)
Beyond the above asset
management strategies, lessors
also put additional, back-up
tools in place. For instance, to
mitigate the effects of an asset
supplier not fulfilling a buy-
back agreement, networks of
alternative buyers are established
or other tools such as online sales
platforms are used. Lessors also
closely monitor the number of
repossessions achieved compared
to the total number of mandates
given. This is in order to assess the
effectiveness of their repossession
networks which include a variety
of subcontractors and brokers
so as to avoid overreliance on a
particular organisation. Moreover,
resale prices are compared to the
net book value of the asset and
outstanding financial amounts to
ensure that asset sales perform
well and as expected. Lastly,
special attention is paid to the
rare cases where assets are never
returned or sold. Conclusions
drawn from these cases are then
integrated into future decision-
making processes.
Lessors have developed teams
of asset experts and business
specialists, operating both
centrally and locally
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Overview
The analysis herein is based on
two main types of data:
1) Qualitative data collected from
a panel of European leasing
companies12 covering the
following themes:
Leasing business model and
profitability
Leasing companies financial
structure
Quality of risk management
and internal control
2) Quantitative data
Key performance indicators
from the Leaseurope Index,
based on detailed data from
a sample of 17 European
leasing firms, which is used
to carry out a top-to-bottom
income statement analysis
New European equipment
and automotive leasing
volumes as reported
annually in the Leaseurope
Annual Survey by its
Member Associations.
Annual percentage changes
are calculated on the basis of
a homogenous sample and
are adjusted for fluctuations
in exchange rate
ECB and OECD European
banking sector figures are
used as point of comparison
Macro-economic data is
taken from Eurostat and
the European Commissions
AMECO database
Presentation of the Leaseurope Index
Conducted by Leaseurope, the
Leaseurope Index is a unique
survey that tracks key performance
indicators of a sample of 17
European lessors on a quarterly
basis. Its purpose is to provide
timely and regular information
on the European leasing and
automotive rental market.
The term leasing is used in its
broadest sense, covering hire
purchase, finance and operating
leasing which includes long term
rental. Leasing is defined according
to International Financial
Reporting Standards (IAS17).
Sample:
The following leasing companies
report the required figures on a
voluntary and confidential basis,
which Leaseurope then aggregates
to get European results:
DATA SOURCES
ABN AMRO Lease Credit Agricole Leasing & Factoring Nordea Finance
ALD Automotive De Lage Landen UniCredit Leasing
Arval DnB Finans Societe Generale Equipment Finance
Iccrea BancaImpresa ING Lease UBI Leasing
BNP Paribas Leasing Solutions LeasePlan Xerox Financial
Services EuropeCaterpillar S.A.R.L. Leasint
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Coverage:
This sample is broadly
representative of the European
market in terms of geographic
coverage and asset coverage and
it represents a significant share of
the total European leasing market.
Scope:
Consolidated figures are reported
for the entire European activities
of the participating companies.
Europe is defined in the widest
sense as EU27 + EFTA + other
countries e.g. Turkey, Ukraine,
Russia, Serbia, Croatia etc. Each
company reports figures in euro
regardless of which countries they
operate in or which currencies they
report in.
More information on the
Leaseurope Index can be found on
the Leaseurope website.
Definitions of the Index variables
and ratios can be found on pages
50 and 51.
Benchmark sources (OECD, Eurostat/AMECO & ECB)
Leasing data is compared to the
overall banking context in Europe
by benchmarking volumes,
earnings and various KPIs to those
of general banking activities in the
EU and with the same business
capacity as lessors (i.e. medium-
sized banks).
OECD:
In The Role of Banks, Equity
Markets and Institutional Investors
in Long-term Financing for Growth
and Development (Report for G20
Leaders) February 2013, the
OECD provides quarterly figures
on the sum of a large numbers
of banks business activities in
derivatives, lending, and all other
activities (securities etc.).13
We use the lending figures to
compare to the evolution of the
leasing portfolio, bearing in mind
that these lending figures will
include both short and long term
loans.
Eurostat / AMECO:
AMECO is the macro-economic
database of the European
Commission's Directorate General
for Economic and Financial Affairs.
It contains data for EU-27, the
euro area, EU Member States,
candidate countries and other
OECD countries. Data for Member
States and candidate countries are
based on the ESA 95 system.
We contrast gross fixed capital
formation for equipment to new
leasing volumes.
ECB:
Since 2007, the ECB collects and
aggregates EU banking sector
income statements and balance
sheets.
Banks are classified according
to their size and origin (e.g. large
domestic banks, medium-sized
domestic banks, small domestic
banks and foreign banks). The
most relevant subpopulation for
comparison purposes is medium-
sized banks as both businesses
deal with medium-sized deals
(determined by the ECB according
to the size of their total assets
reported to the EU banks total
consolidated assets - between
0.5% and 0.005%).
We use ECB raw data from 2009
to 2012 and compute ratios to
compare them to Leaseurope
indexs figures in the corresponding
period.
12 Leasing companies taking part in a Deloitte research project on the riskiness of European leasing activities on behalf of Leaseurope
13 This study is available on the OECD website at: http://www.oecd.org/finance/private-pensions/G20reportLTFinancingForGrowthRussianPresidency2013.pdf
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Definitions
Total operating income: Net
interest income + net fee and
commission income + net
insurance result + trading profit
+ other net income (including
rental income net of depreciation
on operating leases and profit on
sales of assets linked to leasing
activities)
Total operating expenses:
includes inter alia staff costs,
other administrative expenses,
depreciation and amortisation
Loan loss provision: Net loan loss
provision - write offs + recoveries
over the period (including write-
offs/recoveries of assets)
Pre-tax profit: Total operating
income costs provisions
Portfolio at end of period: Total
portfolio of leased assets including
outstanding loans to customers
and assets on operating lease
at the end of each period (non-
performing loans are included). The
figures reflect the depreciated value
of assets at the end of the period.
New business volumes: Total
value of new contracts approved
& signed by both sides (lessor and
lessee) during the period during
the reporting period, excluding VAT
and finance charges
RWA: Total risk weighted assets
(RWA) as defined by currently
applicable prudential requirements
(under the approach used by each
firm, be it standardised or IRB) at
the end of each period
Ratios
Profitability: weighted average of
all companies' pre-tax profit as a
% of total operating income. The
weight used is the new business
volume for the relevant period.
Cost/Income: weighted average of
all companies' operating expenses
as a % of operating income. The
weight used is the new business
volume for the relevant period.
Cost of risk: weighted average of
all companies' loan loss provision
(annualised) as a percentage of
average portfolio over the period.
The weight used is the average
portfolio over the period. Average
portfolio is calculated as the mean
of the value of the portfolio of
leased assets at the beginning and
end of each period.
Return on assets: weighted
average of all companies net profit
(annualised) as a percentage of
average portfolio over the period.
The weight used is the average
portfolio over the period. Average
portfolio is calculated as the mean
of the value of the portfolio of
leased assets at the beginning and
end of each period.
Return on equity: weighted
average of all companies net
profit (annualised) as a percentage
of 8% of average risk weighted
assets over the period. The weight
used is the average portfolio over
the period. Average portfolio is
calculated as the mean of the
value of the portfolio of leased
assets at the beginning and end of
each period. LEASEUROPE
INDEX GLOSSARY26
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CONTACT
European Federation of Leasing and
Automotive Rental Associations
Boulevard Louis Schmidt 87
1040 Brussels
Belgium
Hayley McEwen
Advisor, Statistics & Economic Affairs
Telephone: +32 2 778 0571
Fax: +32 2 778 0578
E-mail: [email protected]
Website: www.leaseurope.org
April 2014