global asset and auto finance survey may 2015

Global Asset & Auto Finance SurveyMAY 2015

ASSET FINANCE INTERNATIONAL IN ASSOCIATION WITH WHITE CLARKE GROUP

GLOBAL ASSET AND AUTO FINANCE SURVEY MAY 2015

White Clarke Group

White Clarke Group is the market leader in software solutions and business consultancy to the automotive and asset finance sector for retail, fleet and wholesale. White Clarke Group solutions enable end-to-end credit processing and administration to streamline business practice, cut operational cost and deliver outstanding customer service. White Clarke Group has a 23 year track record of leadership and innovation in finance technology, consultancy and new market entry. Clients value White Clarke Group's industry knowledge, market intelligence and innovation. The company employs some 600 finance and technology professionals, with offices in the UK, USA, Canada, China, Australia, Austria and Germany.

Acknowledgements

Jonathan Andrew, global CEO, commercial finance business, Siemens Financial ServicesJohn Bills, director, Australian Equipment Leasing Association (AELA)Philippe Bismut, CEO of ArvalNidhi Bothra, Vinod Kothari ConsultantsJurgita Bucyte, Leaseurope adviser in statistics and economic affairs Rafael Castillo-Triana, CEO of The Alta Group Latin American RegionBill Choi, vice president of research and industry services, US Equipment Leasing and Finance Association (ELFA)Carl Chrappa, senior managing director/asset management practice leader of the Independent Equipment CompanyRichard Cordray, director Consumer Financial Protection Bureau Felix Daniliuc, President of ALBWilliam Douglass, group head and managing director, CIT corporate finance, healthcarePaul Errington, CEO, Connaught Finance InvestmentsRich Green, President of CIT International FinanceGeraldine Kilkelly, FLA head of research and chief economistGeorge Lagos, senior general manager of Canon Finance AustraliaHugh Lander, CEO, BOQ Finance, Bank of QueenslandKai Ostermann, CEO of Deutsche Leasing GroupJeff Schuster, senior vice president of forecasting, LMC AutomotiveWilliam Sutton, president and CEO, US Equipment Leasing and Finance Association (ELFA)Hugh Swandel , managing director of The Alta Group in CanadaMelinda Zabritski, senior director at Experian Automotive http://www.whiteclarkegroup.com/http://www.assetfinanceinternational.com

Publisher: Edward Peck Editor: Brian Rogerson Author: Pat Sweet Asset Finance International Ltd.

39 Manor Way,London SE3 9XGUNITED KINGDOMTelephone: +44 (0) 207 617 7830

© Asset Finance International, 2015, All rights reserved No part of this publication may be reproduced or used in any form or by any means – graphic; electronic; or mechanical, including photocopying, recording, taping or information storage and retrieval systems – without the written permission from the publishers.


Contents

Introduction 4

NORTH AMERICA 6

What’s happened since the financial crisis? 6What are the challenges? 8What does the future hold? 12Rules and regulations 13

EUROPE 20


ASIA PACIFIC 28

What’s happened since the financial crisis? 28What are the challenges? 31What does the future hold? 32Rules and regulation 36

SOUTH AMERICA 41


Conclusion 47


4 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Introduction

The outlook for the asset and auto finance industry worldwide brightened in the immediate aftermath of the first Global Asset and Auto Finance Survey in 2013, when key players in North America, Europe, Asia Pacific and South America regions were all reporting only limited growth as most were still struggling to deal with the fall-out from the financial crisis.

Updates during 2014 suggested real improvements were on their way, starting in the US where leasing business volumes showed signs of reaching new highs. Business volume was also on the increase in Europe, admittedly from low levels in those countries which have been worse affected by the Eurozone crisis, although the situation was more mixed in the Asia Pacific markets. There, changes in government in Australia coupled with an economic revival based on a residential property boom have had a dampening effect on the traditional mining services and manufacturing asset finance sectors, but the Chinese market had started to expand markedly, and new markets were starting to open up across south east Asia.

Lenders and the commercial organisations they support have come to see the corporate belt tightening forced on them as a result of the shortage of available credit as a virtue, rather than a limitation. Austerity has brought with it a focus on value for money which, in the immediate short term, translates into opportunities to offer funding for replacement equipment now reaching capacity.

Longer term, contributors to the report indicate finance companies are starting to develop innovative approaches to help companies unlock capital tied up in plant and equipment so it can be used for investment.

Indeed, over the last three or four years, asset based finance of all kinds has had the opportunity to demonstrate both its resilience and the role

GLOBAL ASSET ANDAUTO FINANCE SURVEY

Introduction

The equipment and automotive leasing industry around the globe has beennavigating a path through some choppy waters in the aftermath of thefinancial crisis of 2008. After the tidal wave of problems which submergedthe industry in 2009 and 2010, the sector started to right itself in 2011 andhas since been on course for calmer waters, with new business volumesbuilding and revenues starting to grow in many countries.

Indeed, over the last three or four years, asset based finance of all kinds hashad the opportunity to demonstrate both its resilience and the role it can playwhen credit, generally, is in short supply. In response, the industry has donemuch to get itself ship shape, with leaner finance providers emerging whomake greater use of technology to tighten underwriting approaches, introduceefficiencies across a range of back office processes and improve customerservice.

However, the leasing industry’s fortunes are inextricably linked to those of theeconomies of the countries in which finance providers operate, and there isstill considerable instability and nervousness about economic prospectsglobally.

While mature markets in North America and Europe have started to moveback towards pre-recession levels of activity, growth in asset finance remainsmuted as many companies and individuals continue to prove reluctant toinvest. Leasing here has been characterized by replacement cycles, ratherthan by a surge in new investment.

© A

sset

Fin

ance

Int

erna

tion

al, A

ll r

ight

s re

serv

ed.

4

Written by Dara Clarke and Ed White,founders of White Clarke Group


5 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

it can play when credit, generally, is in short supply. In response, the industry has done much to get itself ship shape, with leaner finance providers emerging who make greater use of technology to tighten underwriting approaches, introduce efficiencies across a range of back office processes and improve customer service.

However, the leasing industry’s fortunes are inextricably linked to those of the economies of the countries in which finance providers operate. Looking ahead to 2015, while prospects now appear considerably better than they did in the darkest days of the Great Recession, they are not currently shining quite as brightly as some may have hoped.

Political worries and economic uncertainties have re-surfaced, resulting in some investment decisions being delayed, while poor weather in the first three months resulted in a slow down in production and product delivery in some of the key markets for asset finance.

In the Asia Pacific and South America regions leasing is a less mature form of finance. A year ago, it looked as if the opportunities for growth in the leasing market were also strong here, and certainly major finance providers, seeing the slow pace of pick-up in their long standing areas of activity, started to look closely at both areas as a potential source of new business.

However, these countries bring their own challenges. Cultural differences, difficulties in establishing due diligence and the widely differing political regimes can all prove barriers to entry for finance providers keen to investigate new markets, while local players sometimes struggle to find ways to illustrate the benefits of leasing in markets dominated by other forms of finance provision. Brazil, once viewed as the powerhouse of South America, has seen its leasing market decline very markedly, while the economic slowdown in China is also having an impact on the leasing industry there.

Around the world, regulation and new legislation remain a concern, particularly in North America and Europe, where many jurisdictions in these two regions have sought to address what were widely perceived as the financial excesses of the pre-crisis years with stringent new regulations on tax and on the use of capital.

The beginning of 2015 marked yet another update on the latest round of deliberations on new international accounting rules on leasing which are likely to see most leases brought onto company balance sheets in the longer term. With the two main standards-setting boards indicating that there is still some distance between their views on the most appropriate model for achieving this, there remains considerable uncertainty in the short term as to how the proposed “two model” approach will work in practice, but both regulators have committed to producing a standard by the end of this year. Many companies will be fearful that a complex and costly compliance burden may jeopardise future prospects, while changes to the tax regime for leasing may serve to undermine its appeal.

Worldwide, the biggest issue now for many in the asset finance industry is find ways to navigate the regulatory uncertainties, keep tight control on costs, and push forward with innovations. But while lessors have got their own house in order, they are now operating in a business climate dominated by issues over which they have no control: a predicted rise in US interest rates; electoral uncertainty in the UK; a potential Greek exit from the Eurozone; and militant terrorist action in the Middle East and Russia are all factors which are combining to build a sense of unease which is proving a drag on investment.


6 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

NORTH AMERICA

What’s happened since the financial crisis?

The US leasing market was hit by a perfect storm during the financial turmoil which followed the collapse of Lehman Brothers in 2008. Accessing capital markets for debt became increasingly difficult and the finance that was accessible came at significantly higher rates than before. Customers’ businesses were adversely impacted by the crisis, so that they found it difficult to make payments and attempted to delay payments as well, leading to significantly higher delinquency and potential write-offs, especially in the automotive leasing arena. At the same time, leasing volumes declined substantially as customers postponed equipment acquisition.

Bill Choi, vice president of research and industry services for the US Equipment Leasing and Finance Association (ELFA), highlights that the fallout from the banking crisis was not immediate, with the market dropping by around 5% to 6% in 2008, but when the downturn did arrive it was very steep. His estimate suggests the leasing market there then fell by 30% in 2009 alone.

Bill Choi, ELFA vice president, research and industry services


7 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

The situation was even more stark in the wider North America region, with the leasing market in Canada undergoing a major reversal due in part to the particularities of how the different categories of lenders operated in that country.

Hugh Swandel is managing director of The Alta Group in Canada and a board director of the Canadian Finance & Leasing Association (CLFA). He reported the financial crisis had a significant impact on both equipment and automotive leasing activity in the country.

“The global financial crisis caused major paradigm shifts in Canadian auto financing. In Canada, banks are not permitted to provide vehicle leasing to consumers, so at the time of the crisis captive lessors controlled a large share of the Canadian auto financing market and their inability to access securitization markets caused a rapid decline in the leasing share of the market,” Swandel explained.

Moving up

Since then, developments have been on a much more positive upwards trend. The Equipment Leasing and Finance Association(ELFA) annual survey of equipment finance activity (SEFA) reported a 16.5% increase in new business volume in 2011, with a similar rate of growth (16.4%) in 2012. This contrasts with an increase of just 3.9% reported for 2010 and the 30.3% decline in 2009.

Source: ELFA 2014 Survey of Equipment Finance Activity

However, ELFA’s latest SEFA report shows that, while the industry is performing well, the rate of growth eased as the year went on, with new business volume growing 9.3% in in 2013. ELFA’s data indicates that after lagging for several years, independent equipment finance organizations led the industry in new business volume growth rates. Independents saw the strongest increase in new business volume (17.7%) over the year, while captives saw their volume grow by 11.3% and banks posted a 6.2% increase. The top-five most-financed equipment types were transportation, computer equipment, agricultural, construction and medical equipment.

A companion report from the association focused on small-ticket and micro-ticket equipment transactions among the SEFA respondents and found that new business volume in this market sector grew by 10.2% in 2013. Indeed, small businesses seem to have become the strongest growing segment of the lending market.


8 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

The Thomson Reuters/PayNet Small Business Lending Index hit a record high at the end of 2014, with a December reading of 133.5, the highest since the index’s launch in January 2005. That fell back to 120.9 in the early months of 2015, but with the index up 5% PayNet’s president, William Phelan, said the US economy is “still on track with continued expansion.”

“We’re finally seeing what looks to be a period of sustained growth and expansion in the economy – and this is good news for the equipment finance industry,” Phelan said. “We track the small business sector as a leading economic indicator. When a small business owner invests to expand or replace worn out equipment, he/she does so based on current and anticipated growth in demand for goods and services, which is what we are seeing now, and this is causing business owners to

increase capacity to some level. We are seeing consistent single-digit growth, which leads us to conclude that there is demand to replace worn out equipment and purchase new equipment.”

At the same time, 30-day delinquency rates are well below the highs seen in 2005 and 2006, leading to much improved credit conditions for small businesses, who now have the financial capacity to take on more debt and expand their operations. In doing so, they will fuel more growth, and be looking to make more equipment acquisitions. The equipment finance industry’s ability to offer and complete loans very quickly compared to other forms of finance is a significant advantage in this market.

What are the challenges?

The worst effects of the financial crisis may be well behind as the US economy is starting to steady but the North America leasing market is by no means completely out of the woods.

Back in 2011 and 2012, the main issue for leasing companies was the lack of new business, because companies were not expanding and so not buying new equipment. Most of the business that did come in was the result of companies replacing old or worn out equipment, although typically organisations held off for as long as possible before making any purchasing decision.

While the situation remained broadly the same in 2013, by 2014 it looked as if new business might be about to take off. In April, the Equipment Leasing and Finance Foundation’s (ELFF’s) Monthly Confidence Index (MCI-EFI) stood at 65.1, recording the highest index level in two years for the second consecutive month. However, by August the MCI-EFI had dipped to 58.9, easing from the previous two months’ indexes of 61.4, which were themselves below the April high.

There were fears that the drop might signal a long term trend. These seem misplaced at the start of 2015, when the previous summer’s slump was a distant memory. In March 2015, the MCI-EFI recorded its highest level in four years, at 72.1, an increase from the February index of 66.3

William Phelan, president of PayNet


9 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Separately ELFA’s Monthly Leasing and Finance Index (MLFI-25) reports economic activity from 25 companies representing a cross section of the equipment finance sector. Midway through 2014 this showed their overall new business volume for July was $7.8 billion, up 8% from new business volume in July 2013. However, month over month, new business volume was down 13% from June. Year to date, cumulative new business volume increased 4% compared to 2013.

By early 2015, all the signs are that performance is starting to pick up. Latest figures from ELFA indicate a strong start in the first quarter of the year for many lenders, with business volumes 25% higher in March than they were twelve months ago, and prospects looking good for the immediate future.

The MLFI-25 shows overall new business volume for March was $8.9 billion. Volume was up 46% from $6.1 billion in February, while year to date, cumulative new business volume has increased 17% compared to 2014.

The data suggests that receivables over 30 days are creeping up a little and are now standing at 1.2%, up from 1.1% the previous month and from 1% the same period in 2014. Charge-offs were at an all-time low of 0.2% for the 13th consecutive month.

ELFA president and CEO William G. Sutton, said: ‘The March new business volume is indicative of strong capital spending, influenced by businesses taking advantage of continued low interest rates, perhaps in anticipation of reported tightening of monetary policy by the Fed. Credit quality metrics are mixed, with delinquencies edging upward counterbalanced by monthly losses remaining at historic lows.’

Separately, the ELFA’s Monthly Confidence Index (MCI-EFI) for April remained higher than throughout the whole of 2014, now standing at 70.7. However, this marks an easing from the March index of 72.1, which was the highest level in four years, suggesting that while prospects look good, lenders have their doubts.

Sutton went on to issue this caution: “The wild card, of course, is US monetary policy, with the Fed poised to raise interest rates in the not-too-distant future. While higher interest rates typically favor the fixed-rate structure of most equipment finance transactions, it remains to be seen if volume growth can be sustained going forward.”

http://www.elfaonline.org/Research/MLFI/


10 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Auto finance drives growth

A significant element of the growth in the leasing market is coming from the auto finance sector. As the US economy starts to strengthen and the jobs market picks up, so has country’s appetite for buying cars. New-vehicle retail and total sales in February 2015 reached their highest levels for the month since 2002, according to a monthly sales forecast developed jointly by J.D. Power and LMC Automotive. The retail seasonally adjusted annualized selling rate (SAAR) in February is 13.5 million units, 1.1 million units stronger than February 2014 and the highest retail SAAR for the month since February 2004 (13.6 million).

Source: J.D. Power and LMC Automotive

“Strength at the start of 2015 is a key factor in keeping the industry on target to surpass annual vehicle sales of 17 million units for the first time since 2001,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive. “Given all the positive factors, including the economy, gas prices and fresh new products in showrooms, rain clouds are expected to stay out of the auto sales forecast for the duration of 2015.”

More sales overall is translating into greater demand for finance products, with the J. D Power figures showing lease penetration at 27.4% of retail, its highest level ever.

Melinda Zabritski, senior director at Experian Automotive, which surveys the auto lending market regularly, agrees: “From the latest data, we see that leasing remains very dominant in the marketplace. It accounts for 14% of all transactions, both new and used, and has been following an upward trend over several years.”

“A quarter (25%) of all new auto purchases are via a lease, which means one in four new vehicles, and approximately 30% of all finance transactions are leases,” Zabritski said.

After the years of austerity, booming car sales looks like a welcome development, but some commentators have started to suggest that it may bring with it the return of some very unwelcome trends.

Melinda Zabritski, senior director, Experian Automotive


11 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Pre-2008, the auto lending market saw a loosening of underwriting controls which led to an increase in sub-prime loans to consumers with poor credit ratings, who were in trouble as soon as the recession started to bite. In 2015, there are some signs that the sub-prime lending sector is back on the boil.

Sub-prime worries

The Center for Responsible Lending (CRL), a not-for-profit organisation which looks at household finances, released a report in January 2015 called “Reckless Driving”: Implications of Recent Subprime Auto Finance Growth. This points out that in Q3 2014, nearly 39% of open auto loans worth $337 billion were for customers with below-prime credit. That marks an increase from $304 billion owing in the sub-prime category in 2013 and just $255 billion in 2012.

This trend has also been observed by the Federal Reserve, which stated: “The dollar value of originations to people with credit scores below 660 has roughly doubled since 2009, while originations for the other credit score groups increased by only about half.”

The Federal Reserve’s data suggests that in tandem with an increase in the number of auto loans made to borrowers with poor credit histories, more individuals are having problems with auto loans, pointing to a rise in the delinquency rate in late 2014 to 3.5%, from 3.1% in the previous quarter.

In addition, there is also a trend towards longer loans, which has been highlighted by the Office of the Comptroller of the Currency (OCC). Its research suggests lenders are now extending repayment periods up to 84 months on new and used vehicles, compared with the 60 months seen traditionally. The OCC calculates that in the past two years, the share of 73-month to 84-month loans for new cars has doubled as a percentage of the total market, from 12% to 24%. The share of long-term loans for used vehicles also doubled from 7% to 14%.

Data like this indicates growing worries that lenders are, once again, starting to flex underwriting rules in pursuit of bigger market share. However, Zabritski says that such concerns are, for the moment, likely to prove misplaced.

“Whenever there is an uptick in the number of loans to sub-prime and deep sub-prime customers, there is the potential for a ‘sky is falling’ type of reaction,” Zabritski said. “The reality is we are looking at a remarkably stable automotive loan market, in part because consumers are continuing to stay on top of their payments.”

The average credit score for leasing dipped a little in the first quarter of 2015, down from 719 to 717, but 75% of leasing occurs in either the prime or super-prime segment. The Experian figures also challenge the view that the length of the lease is going up. Two thirds of leases are in the 25 months to 36 months category, with 35 months the overall average, while a quarter run for between 37 months and 48 months. The proportion of leases longer than that is extremely small.

“There has been growth across all the risk ranges as the volume of loans increases, but it is important to note that the distribution of loans is stable,” says Zabritski. “In fact, comparing Q4 2013 to this year, there has been no change in the proportion of loans in the deep sub-prime category, which stands at 3.75%, and sub-prime has actually dropped a little. The largest volume gain is in super-prime.”


12 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Moreover, the push towards securing a bigger share of the prime lending market is down to the fact that this represents the biggest area of opportunity, rather than a flight from the more problematic sub-prime segment. Indeed, so far there is little reason according to Experian to think this sector is proving particularly risky.

“The percentage of loans running at 30-day delinquencies is at 2.62% for the market as a whole, which suggests a pretty strong payment performance. And if we look at 60-day delinquencies, again the year-on-year change is very small – in fact, those are down one point at 0.72%. There’s no increase in delinquencies in the sub-prime range compared with last year,” Zabritski explained.

In contrast to those who fear that these increases mean the auto lending market is veering out of control, Zabritski is firm in her view that the stable rate of delinquencies as a percentage of the total lending is a strong indicator that lenders have not taken their foot off the brake. Delinquency balances as an overall financial total are up purely because US car sales are also on the up. However, there are those who argue that it would only take a small change in economic circumstances for delinquencies to creep up, and with them the risks to the auto lending sector.

What does the future hold?

Back in mid 2013, Choi described the views of the ELFA as “very cautiously optimistic”, putting growth at around 5% going forward, although he said the challenges of an uncertain recovery in the global economy made predictions for growth over the next year or two hard to quantify.

Since then, prospects for the leasing industry have improved markedly. The most recent research publication from the Equipment Leasing and Finance Foundation (ELFF), its Equipment & Software Investment Outlook, concludes: “The equipment finance industry started 2015 on solid footing, and industry confidence is at a multi-year high. Improved business confidence and a healing labor market are the principle bases for industry growth in 2015. Oil prices, capacity utilization, and Fed interest-rate policy are key developments to watch this year.”

The ELFF estimated growth in investment in equipment and software would rise 4.2% in 2014. Overall growth in 2014 was 5.8%, and the ELFF says it expects slightly slower growth of 5% in 2015, down from 6% growth forecast in its 2015 Annual Outlook released in December 2014.

The data shows equipment and software investment was subdued in Q4 2014, after two quarters of strong performance. Growth slowed from 10.5% in Q3 to just 1.6%. Even with a slightly slower expected pace of growth in 2015, ELFF’s report forecasts businesses will be encouraged to increase their capital spending with the overall economic expansion.

The Foundation notes that positive drivers of business investment include healthy credit markets, robust job growth, and improving business and consumer confidence, while investment headwinds include a strong dollar, with the risk that poses to exports, and low oil prices, which are likely to see reduced investment in the energy industry.

The 2015 “What’s Hot/What’s Not” Equipment Leasing Trends survey, prepared for ELFA, indicates that, for the second year in a row, construction equipment is the area where lessors are expecting the


13 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

biggest level of investment to occur and this market also takes first place in residual value increase. As the health of the US economy improves, so does demand for construction services

The report suggests that the trucks and trailers market will also prove strong. New truck sales increased by 19% in 2014, and new trailer orders by 50%, and sales of used vehicles in this sector are good with high resale values. Similarly, prospects for the rail sector are largely positive, along with those for the machine tools sector, where the secondary market remains buoyant.

The picture in the medical equipment market is more mixed. This industry has traditionally had a preference for leased equipment, partly as a result of the pace of technological change, but uncertainties over the impact of the new Affordable Care Act saw demand dampen for a while. After eight years tipped as the top area for investment in the ELFA study, this sector dropped to fifth place for 2015.

However, a recent survey of the sector by CIT’s corporate finance, healthcare division in early 2015 found healthcare executives are positive on the major financial metrics for 2015, including revenue, price growth and volume growth, believing that all three are likely to increase relative to the previous year. Very few expect a decrease.

Getting on for half (44%) expect their company to seek financing in the coming year, based on requirements for new hires, information technology, and construction or renovation.

William Douglass, group head and managing director of CIT corporate finance, healthcare, said: “Executives are optimistic, and while they continue to confront new challenges, they believe 2015 will be a year for growth.”

However, all lenders are only too well aware that events may move out of their control. ELFA’s 2015 survey found that the oil, gas and energy sector, which had been named as the second most likely area for major investment the previous year, had plummeted to 13th place. This decline in opportunities in the sector was a reflection of the worldwide plunge in oil prices, which has negatively affected the values of oil and gas production and hit demand for exploration equipment.

Carl Chrappa, senior managing director/asset management practice leader of the Independent Equipment Company, an Alta Group company, and the report’s author, summed up the main challenge for the equipment finance industry in 2015: “Overall, it is clear from the comments received that the biggest threat to the secondary market this year appears to come mainly from the health of the global and domestic economies.”

Rules and regulations

Patchy and volatile growth rates are only one of the challenges facing the North American leasing market. The US has taken the lead, along with several other countries around the world, in tightening up on regulation as a response to the problems uncovered when it was discovered just how poor risk management had been in some sectors of the finance industry.

Leasing companies, which have already had to cope with a raft of new rules and regulations, might have hoped that the tide had turned. Over the past few years, bank-owned lessors in particular have had to come


14 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

to terms with new requirements for the financial services sector at a global level, such as the changes in banking liquidity rules ushered in with Basel III. This global voluntary regulatory standard on bank capital bank adequacy means that the larger US banks, including those with significant market share in the auto and asset finance space, may be required to hold up to three times as much high quality capital as before.

Consumer Financial Protection Bureau bares its teeth

Closer to home the US auto finance industry has to assimilate and respond to a barrage of new home-grown regulatory requirements including the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. However, by far the greatest cause of concern for lenders and dealers alike in this section of the leasing industry lies in meeting the requirements of the Consumer Financial Protection Bureau (CFPB).

Created as a result of changes to the financial services sector brought in under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB is the first US federal agency dedicated to protecting consumers in the marketplace for financial products and services. Noncompliance with CFPB rules can result in millions of dollars in fines and penalties and even lawsuits.

Since its inception most of the focus of CFPB’s work has been on the mortgage market, and on loans to students, vulnerable older citizens and service veterans. However, the bureau has always made clear that combating discrimination in all areas of lending is high on the its agenda, and that this embraces any unequal treatment in financial affairs based on characteristics such as race or gender, and also on factors such as credit history or credit rating.

At the end of 2013, the CFPB ordered Ally Financial to pay $98 million to resolve claims that it charged approximately 235,000 minority car buyers higher interest rates than non-Hispanic white borrowers. The lender was also required to pay $18 million in penalties.

In this case the CFPB and the US Department of Justice examined some 800,000 auto loans originated from April 2011 to March 2012, with the analysis suggesting, according to the CFPB, that minority customers paid an additional $200 to $300 over the life of the average loan.

In a statement released in December 2013, Ally said it “does not engage in or condone violations of law or discriminatory practices,” and that based on its own analysis, Ally “does not believe that there is measurable discrimination by auto dealers.” In a further twist to the case, the CFPB said it was not accusing Ally of intentionally discriminating, noting that “Whether or not Ally consciously intended to discriminate makes no practical difference. In fact, we do not allege that Ally did so.”

The CFPB has since shown no let-up in its investigations into alleged discrimination, stating in a recent report it had reached confidential agreements with several other lenders to provide a total of $56 million in refunds for alleged discriminatory practices.

In 2014, the agency signalled its intention to turn up the heat on the auto loans sector. In August 2014 the CFPB fined Texas-based First Investors Financial Services Group $2.75m after concluding the auto


15 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

finance company had knowingly provided inaccurate information to credit reporting agencies, potentially harming the credit ratings of tens of thousands of vulnerable consumers.

The company lends primarily to sub-prime borrowers, including those who have gone through bankruptcy, both directly and via auto dealers. A CFPB investigation found it had first identified flaws in the third party computer system used to record customer details in 2011. While First Investors advised the unnamed software vendor about the problems, the company did not replace the system or take any steps to correct the inaccurate information it had supplied to Experian, TransUnion, and other credit rating agencies.

“First Investors showed careless disregard for its customers’ financial lives by knowingly distorting their credit profiles for years,” said CFPB director Richard Cordray. “Companies cannot pass the buck by blaming a computer system or vendor for their mistakes.”

The incorrect information included wrong payments and overdue amounts; distorted dates; inflated delinquencies, with one customer reported as delinquent 11 times in 24 months when the true figure was twice; and reporting vehicles as repossessed when in fact they had been voluntarily surrendered. Up to

12% of borrowers accounts were affected by credit reporting issues.

Under the terms of the settlement, First Investors must identify all consumer accounts affected by its reporting errors and fix any inaccuracies. It is also required to help consumers obtain free copies of their credit reports so they can check the reports’ accuracy for themselves, and establish consumer safeguards.

First Investors has said it agreed to the consent order to “resolve the matter and to avoid the expense and business disruption associated with defending any lawsuit,” and admits no wrongdoing.

Cordray warned the CFPB planned to monitor the auto lending market closely, stating: “Data furnishers have the legal duty to identify consumers accurately, correctly recount the consumers’ payment histories, and keep their own information and record-keeping in order.”

Just how long CFPB would like its reach to be was revealed in mid September 2014, when the agency announced a proposal to extend its supervisory oversight to larger non-bank auto lenders, including “captive” lenders such as the finance arms of Honda and Toyota. It said these lenders had never been subject to any supervisory oversight at the federal level.

The agency said it wanted to supervise non-bank auto finance companies that enter into or otherwise acquire 10,000 or more loans, leases, and/or loan refinances per year. Its estimates suggest this would extend its authority to around 90% of the non-bank auto finance market activity, and would affect 38 lenders that provided financing to 6.8 million consumers last year.

The CFPB said it plans to scrutinize whether non-bank car-loan providers are discriminating against minorities, using deceptive tactics in marketing loans to consumers and following debt-collection laws.

Richard Cordray, director Consumer Financial Protection Bureau


16 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

In a statement Cordray explained: “This proposal is needed to level the playing field for banks and non-banks in the auto lending market. We already supervise the auto lending practices of banks with more than $10 billion in assets, and this step would extend our supervision to the larger non-bank companies as well. It should not matter whether you get a loan or lease from a company that has a banking charter versus one that does not – every auto lender should be following the law and be subject to the same level of oversight.”

The CFPB plans have been subject to a public consultation but there has been, as yet, no confirmation of whether or not the agency will be extending its remit. However, there was a strong hint of how its role may develop from Massachusetts Senator Elizabeth Warren, a former Wall Street lawyer who was the guiding force behind the establishment of the CFPB.

In early 2015 Warren used a major public speech on financial regulation to take aim at the auto finance market, warning that: “Right now, the auto loan market looks increasingly like the pre-crisis housing market, with good actors and bad actors mixed together. The market is now thick with loose underwriting standards, predatory and discriminatory lending practices, and increasing repossessions.”

Warren called for a strengthening of the CFPB’s powers, claiming this would see some $26 billion of what she described as monies taken unfairly in commissions and other means back in consumers’ pockets. In the meantime, the agency has continued to pursue cases of alleged irregularities within the auto finance industry with some vigour.

It slapped a $8 million penalty on “buy-here, pay-here” auto dealer DriveTime, the largest such operation in the US, over claims the company made harassing debt collection calls to customers and provided inaccurate credit information to credit reporting agencies.

In its first ever action against a dealer in this sector, the CFPB ordered DriveTime to end debt collection tactics such as repeated calls to consumers’ workplaces, and make it explicitly clear how consumers can initiate “do not call” requests. Additionally, the sub-prime specialist has to fix its credit reporting practices, and arrange for harmed consumers to obtain free credit reports.

Cordray said: “DriveTime harassed and harmed countless consumers, many of whom were economically vulnerable. Our action today forces DriveTime to pay the price for its illegal debt collection tactics and for neglecting the accuracy of consumers’ credit information.”

In a statement, DriveTime executive vice president and general counsel Jon Ehlinger said the company was continuing to take steps to enhance its customer experience, and loan servicing activities, and stated: “We look forward to an ongoing relationship with the agency, and hope to establish a constructive dialogue designed to improve our customer service and compliance practices in the years ahead.”

The CFPB’s approach has itself come under attack with a coalition representing over 50 of the largest US auto finance sources claiming there is “bias and error” in the method used to determine whether an indirect auto lender’s portfolio shows evidence of unintentional discrimination in the terms offered to specific groups of consumers.

In a letter to the regulator the group, led by the American Financial Services Association (AFSA), says the CFPB should revisit its enforcement approach in the light of an independent study carried out


17 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

in November 2014 by Charles River Associates (CRA). This cast doubt on the reliability of many of the bureau’s findings, saying the methodology it used to analyse lending patterns overstated the impact on minorities.

The CRA study, based on 8.2 million vehicle contracts originated in 2012 and 2013, suggested that the CFPB’s method overestimates minorities by as much as 41%. While the CFPB has conducted its own analysis of its methodology, which concluded that the margin of error was around 21%, it has not explained what, if any action, it has taken to address the discrepancy.

The National Automobile Dealers Association (NADA), the American International Automobile Dealers Association (AIADA), and the National Association of Minority Automobile Dealers (NAMAD) have all pledged their support to the coalition’s campaign.

“Discrimination in the market simply cannot be tolerated,” said NADA president Peter Welch. “However, in light of the rigorous peer-review that has cast significant doubt on the CFPB’s findings, the bureau should change course – or at least hit the pause button – and address these new concerns. We applaud the courage of these organizations for speaking up.”

While there may be question marks over the methodology in use, there are no doubts that the CFPB’s push to increase its oversight of the auto lending market is part of a wider trend to bring in greater regulation.

Spotlight on loan discrimination

At the end of 2014 Honda’s US captive financing unit revealed that the CFPB and the US Department of Justice (DoJ) are set to file charges alleging it discriminates against some categories of borrowers in its pricing practices for loans made through auto dealerships.

Honda Finance said the federal agencies are seeking financial compensation for customers, and changes in the company’s pricing policies and practices, but were willing to re-consider legal action if the company co-operated with the authorities. Its disclosure followed news of a similar Securities and Exchange Commission (SEC) filing in late November from Toyota Motor Credit Corp. saying it faced enforcement action over alleged discriminatory pricing of loans to certain borrowers.

The Toyota Motor Credit Corp filing stated: “The agencies have indicated that they are seeking monetary relief and implementation of changes to our discretionary pricing practices and policies, which changes could adversely affect our business. We intend to continue to cooperate with the agencies to achieve a mutually satisfactory resolution.”

In a subsequent press statement the company said it has been working for the past two and a half years to improve its compliance with fair lending regulations.

Meanwhile, auto lender Santander Consumer USA has reached a $9.35 million settlement with the DoJ over claims the company illegally repossessed cars from members of the military on active service.

The deal, which relates to 1,112 automobile repossessions, is the largest ever levied under the Service members Civil Relief Act (SCRA).


18 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

The SCRA legislation protects serving personnel against certain civil proceedings that could affect their legal rights while they are in military service.

The DoJ lawsuit alleges that Santander initiated and completed 760 repossessions without court orders, which it said prevented service members from obtaining a court’s review of whether their repossessions should be delayed or adjusted in light of their military service.

The repossessions involved took place between January 2008 and February 2013 and the matter came to light following a complaint from a serving solder who told lawyers that Santander illegally repossessed his car in the middle of the night while he was at basic training.

“Those who answer this nation’s call to duty understandably have much on their minds while they are in military service,” said acting assistant attorney general Vanita Gupta of the DoJ’s civil rights division. “Whether their car will be seized and sold at auction should not be an additional worry. We will continue to vigorously pursue lenders who fail to take the simple steps necessary to determine, before repossessing a car, whether it is owned by a service member.”

Separately, JPMorgan Chase & Co revealed in an SEC filing that it is in discussions with the DoJ related to loans originating with auto dealers and financed by the bank that show “potential statistical disparities in markups charged to different races and ethnicities.”

Lease accounting uncertainty

On top of this, accounting convergence remains a critical topic for the US leasing industry, as it does globally. Companies are likely to see many more operational leases brought on balance sheet as a result of planned changes to current accounting rules (IAS 17) for leasing. The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) issued their revised exposure draft (ED) on the proposals in 2013 and the plans have been subject to much debate, and strong criticism, in the months since.

This represents the last ongoing main convergence project in their joint attempt to harmonise US and international financial standards. Although some changes to lessor accounting are expected, lessee accounting is the area of biggest impact which will affect most companies and is likely to cause big changes to balance sheets.

Since the project originally got underway in 2008, the two regulators have published a discussion paper and two exposure drafts, changing their proposed model along the way. It is now clear that they are heading down differing accounting paths, although they continue to share one overriding goal, which is to bring leases on balance sheet. However, for some types of lease this will be carried out in two different ways, so P&L treatments will differ.

The IASB prefers a single method. Under this approach, when leases come on balance sheet there would be both a “right-of-use asset” and a lease liability initially measured at the net present value of the relevant lease payments. Two charges would then go through the income statement: amortisation of the right-of-use asset, and interest expense.


19 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

For its part, the FASB, is proposing a dual method whereby most existing capital/finance leases would be treated in the same way as IASB proposes (Type A, with separate amortisation and interest). Most operating leases would be classed as Type B, with a single straight line lease expense in the income statement.

After eight years of discussions, reversals and differences of opinion, IASB is now due to publish the amended lease accounting standard by Q3 2015. Whilst the equipment and auto finance industry will welcome an end to the uncertainty, no one can be sure just what impact the changes will have.

In response to concerns about cost and complexity, the boards have simplified both the measurement of lease assets and liabilities, and the reassessment requirements. In addition, the boards have clarified that a lessee can apply the requirements to a portfolio of similar leases, rather than to each individual lease.

Where cash flow presentation is concerned, a lessee would classify cash payments for the principal portion of the lease liability within financing activities and cash payments for the interest portion of the lease liability in accordance with the requirements relating to other interest paid. The boards have tentatively decided that lessor accounting will remain unchanged.

However, for some finance providers, the proposed changes to accounting for leases have served to underline how developing a new approach can lead to greater market share, by standing out from the crowd, as Jonathan Andrew, global CEO of the commercial finance business of Siemens Financial Services explains: “When considered on a global basis, the tax advantages of leasing are becoming less relevant. Innovative lessors such as Siemens are bringing to the marketplace new approaches and flexible financing solutions, creating demand based on factors beyond simply the tax advantages.”


20 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

EUROPE


While North America may be the dominant leasing market, the rest of the world was certainly not immune to the problems created by the crisis in the wider economy and a general tightening of credit.

The situation is summed up by Andrew, who explains that: “The impact of significantly reduced levels of confidence and investment at the time of the financial crisis negatively impacted the leasing market development throughout the globe.”

The situation in Europe was mixed, with the fallout from the financial crisis serving to highlight the longstanding divide between leasing activity in the southern and northern regions. Summing up what happened in the region as a whole, Servi de Vette, director strategy and geographic expansion at automotive finance specialists LeasePlan, notes a material impact in Spain, Portugal and Greece, and to a lesser extent France and Italy, with the significant decline in new car sales playing a major role.

Societe Generale Equipment Finance estimates growth in the leasing market in France came to a standstill in 2009, with a reported decline of 25%. However, in the years that followed the impact was less marked, with a decline of around 2% between 2010 and 2012.

Kai-Otto Landwehr, head of the commercial finance business of Siemens Financial Services in Germany says 2009 witnessed a sharp drop in equipment leasing investment, which was down by 20%. Since then


EUROPE


While North America may be the dominant leasing market, the rest of theworld was certainly not immune to the problems created by the crisis in thewider economy and a general tightening of credit.

The situation is summed up by Jonathan Andrew, global CEO of thecommercial finance business of Siemens Financial Services, who explainsthat: “The impact of significantly reduced levels of confidence and investmentat the time of the financial crisis negatively impacted the leasing marketdevelopment throughout the globe.”

The situation in Europe was mixed, with the fallout from the financial crisisserving to highlight the longstanding divide between leasing activity in thesouthern and northern regions. Summing up what happened in the region asa whole Servi de Vette, director strategy and geographic expansion atautomotive finance specialists LeasePlan, notes a material impact in Spain,Portugal and Greece, and to a lesser extent France and Italy, with thesignificant decline in new car sales playing a major role.

Société Générale Equipment Finance estimates growth in the leasing marketin France came to a standstill in 2009, with a reported decline of 25%.However, in the years that followed the impact was less marked, with adecline of around 2% between 2010 and 2012.

Kai-Otto Landwehr, head of the commercial finance business of SiemensFinancial Services in Germany says 2009 witnessed a sharp drop in equipmentleasing investment, which was down by 20%. Since then equipment leasinghas started picking up, reaching €47.2bn in 2012, though still short of the pre-crisis level of €51.1bn in 2008.

© A

sset

Fin

ance

Int

erna

tion

al, A

ll r

ight

s re

serv

ed.

14


21 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

equipment leasing has started picking up, reaching €47.2 billion in 2012, though still short of the pre-crisis level of €51.1 billion in 2008.

The Nordic region fared rather better than many others, with de Vette singling it out as one of the few parts of northern Europe to emerge relatively unscathed from the financial crisis, along with Switzerland, although the strength of the Swiss franc during that period created some challenges in areas such as the second hand car market.

More specifically Sjur Loen, managing director of Nordea Finance Norway, says while the Nordic region as a whole was less affected that the rest of Europe, there was some variation between the different countries, with Denmark the most affected and Norway the least.

However, since then prospects have started to improve markedly. Research published in August 2014 by Leaseurope together with specialist consultancy Invigors EMEA suggested that many of the European markets had turned the corner. The results of the biannual Leaseurope/Invigors European Business Confidence Survey confirm the optimism evident at the beginning of the year, with many of the survey’s measures showing continued improvement from the previous survey conducted in December 2013. The outlook for new business volumes over the remaining six months of 2014 was particularly positive, with 90% of those surveyed expecting new business volumes to increase, compared to just 2% who anticipated a decline. Expectations on the level of bad debt remained at a similar level to the previous survey, while over 58% of survey respondents forecast that net profits for their business will increase over the same period, again a similar percentage to that recorded last December. Industry expectations on a number of key indicators covering service levels, expenditure and staffing also indicated improvements for the second half of 2014, and over half of respondents (57%) said that their organisations are targeting expansion. Growth was focused on asset classes such as vehicles, agriculture and technology as well as geographic expansion within and outside of Europe.

European performance strengthens

After 2013’s flat performance, 2014 had all the hallmarks of a strong year for the European asset finance industry, with confidence improving markedly and the Leaseurope/Invigors survey identified strong growth and improvements in key performance indicators for many of the companies who participated.

These predictions have turned out to have considerable substance and are backed up by preliminary results from Leaseurope’s survey of the European leasing market at the start of 2015. This suggests that new leasing business in Europe expanded by 8.4% in 2014, reaching its highest annual rate of growth in volume since 2007.

Growth was observed across all main asset categories, with an especially strong performance in the auto sector, with new leasing volumes in this segment rising by 12.4% on 2013. The equipment leasing segment saw a moderate increase of nearly 1%, while real estate leasing picked up by 7.6% in 2014, witnessing the first year of growth since 2010.


22 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

However, the trend for growth to be uneven across all the European countries remained a challenge. Nevertheless, the survey found that most of national leasing markets saw positive results in 2014, which is an improvement compared to 2013, where just under half recorded negative performance.

Overall, the increase in new business volumes in 2014 was largely driven by Europe’s four largest economies, although some of the leasing markets in Southern Europe saw double digit growth.


The biggest challenge for all of the countries in Europe has been the eurozone crisis, which has seen countries such as Greece, Spain and Portugal forced to introduce drastic measures to tackle ballooning government debt. The consequent impact on businesses and investment in this region has been severe, with many organizations struggling to survive, let along take on new equipment or other assets. While the situation is at its most desperate in the southern parts of Europe, since there is a single market and the other countries rely on the neighbours for trade, they have also felt the effects.

Assessing market developments since 2012 Kai Ostermann, CEO of Deutsche Leasing Group, says: “The main challenge is that the current economic situation is still insecure. The overall economic environment was characterized by a downturn in the real economy which reflected the uncertainty surrounding the continuing sovereign debt crisis. In particular, the tense situation and the ongoing consolidation in the crisis countries triggered a decline in market participants’ confidence in the stability of the financial system from the spring of 2012 onwards.”

Landwehr points out that German companies have put their investment plans on ice in recent times due to falling demand from eurozone countries, which account for around 40% of German exports, and the resulting drop in manufacturing orders in 2012 and Q1 2013. Latest figures from the German leasing association suggest that new business volumes remain subdued.

It is a similar story in France. “Our business is closely linked to the ability of industries to make investments, and when this becomes difficult, or when investments stop the leasing finance sector slows down as well,” Societe Generale Equipment Finance reports.

Even in the Nordic region, which has been largely insulated from the worst of the downturn, Loen notes that in the auto finance market car dealers’ earnings, profitability and solvency are all under pressure. “Finance companies are providing wholesale solutions, demo financing as well as residual value positions. It is likely there will be some consolidation of car dealers into larger units in the Nordic region in the coming years, especially in Denmark and Norway,” he said.

Societe Generale Equipment Finance sums up the current challenges for lessors as “to continue to grow, to maintain the risk level and to adapt the prices to the capital required for our activities. To achieve these goals, the appetite for investment in France must be restarted.”

Jonathan Andrew does not underplay the potential difficulties ahead, noting that although there are positive signs of economic recovery in many parts of the world, business confidence remains fragile, and overall has yet to fully recover to pre-crisis levels. He said: “Geopolitical


23 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

factors continue to underpin business confidence, the world’s economies and ultimately the development of the leasing markets. Accordingly the activities of leasing players in countries grappling with a slowing or declining macro-economic outlook or an uncertain or changing political environment particularly face challenges.”


Leaseurope’s survey of members suggests the outlook for new business volumes over the first half of 2015 remains positive, with 84% of those polled expecting new business volumes to increase, while just 7% anticipate a decline. Expectations on the level of bad debt are stable at similar levels to the previous survey with the majority of participants (62%) forecasting that bad debt will remain unchanged over the coming six months.

Similarly, 52% expect no change in margins, although 31% predict that margins will decrease in their organisations, slightly above the percentage recorded in the previous survey. However, the results for net profits show a marginal improvement, with 63% of survey respondents forecasting that net profits for their business will increase over the next six months, a small increase on that recorded last June.

Industry expectations on a number of key indicators covering service levels, expenditure and staffing show either small improvements or little change for the first half of 2015, while exactly half of respondents said that their organisations are targeting expansion. Growth was focused in particular on areas such as vendor finance as well as on asset classes such as vehicles and technology. There was also interest in geographic expansion, primarily in Europe as well as in new product areas such as invoice discounting and wholesale finance.

Commenting on the figures, Leaseurope’s adviser in statistics and economic affairs, Jurgita Bucyte said: “Against the backdrop of faltering European equipment investment throughout 2014, it is particularly encouraging to see that our industry is able to gather momentum across the board. Businesses were keen to use leasing to invest in a wide range of assets, particularly in vehicles.”

“This trend supports the findings of our latest Business Confidence Survey, which demonstrates a positive sentiment in the leasing market for new business growth. While near-term European investment is likely to be subdued and some degree of economic uncertainty remains, equipment investment growth is projected to gradually pick up, which should bode well for the leasing business in 2015,” Bucyte confirmed.

Eastern European countries, now emerging from many years of centralised control and with a burgeoning middle class, are proving to be one of the leasing industry’s high spots. According to statistics from ALB, the leasing association of Romania, that country’s financial leasing market recorded a 7% increase in new business by the end of 2014 compared to performance in 2013, with the total amounting to 1,324 million euros. Of this, 76 % (1,001 million euros) was down to leasing for vehicles, 21% (282 million euros) for equipment and 3% (41 million euros) for real estate.

“We are pleased that the leasing market continues to gradually consolidate its results. The market advance this year should be seen in terms of the crisis years. Since 2009, as we have seen, financed


24 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

volumes have been stabilized around an annual average of 1,300 million euros. The market still has ground to recover and we shall see, most likely, the continuation of the growth dynamics also in 2015,” declared Felix Daniliuc, President of ALB.

For the future, ALB expects to see continued growth in vehicle and agricultural leasing, as well as medical equipment, but predicts that volumes will drop in construction and the energy sector.

The biggest share of the market is held by the banks’ subsidiaries, with 75% out of the total, followed by the captive companies sector with 20% and by the independent companies sector with 5%.

Eastern Europe takes the lead

Progress in the Polish leasing market was especially strong, with the Polish Leasing Association (ZLP) reporting that the market grew by 21.3% in 2014, which it pointed out was over 2.5 times higher than the average for the European market as a whole. As the Polish economy has improved so has the jobs market, which has driven strong demand for car leasing. Alongside this, up until now there has been a lot of activity in the agricultural machinery and equipment leasing sector, as a result of three years of funding from the European Union.

Looking ahead, the association forecasts that the first few months of 2015 will see lower levels of financing for light vehicles and little change in the demand for financing for fixed assets connected with heavy transport and real estate. The best prospects for the growth are identified as being within machinery and IT equipment financing.

Experienced observers of the market suggest that these predicted improvements are no mere flash in the pan, but the result of substantial regrouping and rethinking within the leasing industry. Philippe Bismut, CEO of Arval said: “The leasing industry proved itself able to weather one of the most difficult downturn periods of recent history and is now positioned to capitalise on market recoveries. Consolidated recovery will bring some long-awaited breathing room and future opportunities for industry development.”

At the start of 2015, for example, the Spanish Leasing and Renting Association (AELR) reported the number of vehicle purchases funded by leasing agreements in January reached 10,803, an increase of 41% on the same month the previous year. There was also a 28% rise in the number of new cars registered, of which over 40% purchased by companies rather than individuals. AELR suggested this showed a strengthening in the Spanish economy and that growing confidence levels were translating into business investment.

While there are clearly opportunities for improvements from a low base in some of the Southern European countries, Leaseurope’s survey highlighted the fact that some of the larger mature markets, especially the UK, are the key drivers behind overall growth. This trend is acknowledged by Rich Green, President of CIT International Finance, who pointed out that the credit crunch had drawn in new potential customers for leasing options.

“We are seeing increased opportunities to support the Small and Medium Sized Businesses (SMEs) in the UK, either through adjacent market segments or the development of new products. SMEs are looking to access funding from new sources including leasing,” Green said.


25 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Figures released by the UK’s Finance & Leasing Association (FLA) show growth in asset finance new business of 13% in January 2015, compared with the same month in 2014. New business was up by the same rate in the twelve months to January 2015.

Plant and machinery finance grew by 12% in January compared with the same month a year earlier, while IT equipment finance and business equipment finance grew by 49% and by 10% respectively over the same period.

Commenting on the figures, Geraldine Kilkelly, FLA’s head of research and chief economist, said: “The asset finance market has made a good start to 2015, with growth continuing across key asset sectors. The percentage of UK investment in machinery, equipment and purchased software financed by FLA members increased from 26.2% in 2013 to 27.2% in 2014, reaching its highest level since 2011.”

Despite the slow down in business activity caused by an impending general election, and associated uncertainty about future tax changes and the possibility of a coalition government, the FLA data suggests growth in the market has a firm base. Its data indicates 12% growth in asset finance new business in February 2015, marking the market’s seventeenth consecutive month of growth. February saw strong growth in IT equipment finance and commercial vehicle finance, up by 84% and 10% respectively. Business equipment finance and car finance each grew by 5% over the same period.


France’s decision in 2013 to tighten the tax regime is not an isolated occurrence, with many of the eurozone countries taking similar steps to try to repair large government deficits. In addition to the decision taken in individual countries, changes in regulation at the EU level are also having an impact on the leasing market.

“The expanded regulatory requirements under Basel III in terms of credit institutions’ equity and liquidity have generally reduced the availability of funds. For many leasing companies this has been a big issue,” notes Ostermann. He also says that Deutsche Leasing has worked to develop its existing risk-bearing capacity concept and its risk measurement methods to comply with the requirements for modern risk management as well as current regulatory trends.

More significant for many in the leasing industry in Europe, as in the US, are planned changes to accounting for leases which are likely to see many more operational leases brought on balance sheet as a result of changes to current accounting rules (IAS17) for the leasing industry.

When the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) issued their long-awaited exposure draft (ED) on the proposals in 2013, this drew strong criticism from organizations such as the Societe Generale Group which stated that “the conceptual basis of the proposals remains unclear and the complexity of the proposed model is still high and raising significant operational issues.”

“The current leasing accounting ED is creating uncertainty and has the potential to affect both leasing companies and companies that use leasing. It could create an immense amount of work and expense for both to implement,” CIT confirms.


26 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

High hopes that this fog of confusion would be lifted at the March 2014 meeting of IASB and FASB to consider responses to the ED and the way forward have been dashed by the growing view that the two standards bodies are now bound to diverge in some areas at least, with the original declared intention of creating a single global standard proving too challenging to achieve.

News that there was no agreement on several critical elements of the proposals is a major concern for multinational companies which use leasing options across their business streams in different countries and for leasing companies which operate both in the US and in Europe.

The concern for the leasing industry arises over the resulting complexity and ensuing cost in adjusting accounts to include leases of “big-ticket” items such as manufacturing facilities and aircraft, which under the single model approach would need to be accounted for in the same way as leases of office space and smaller items such as company cars and computers.

Both boards have affirmed that there would be an exemption for short-term leases, which would be accounted for in the same manner as today’s operating leases. “Short-term” would mean 12 months or less, using the same definition of the term as used elsewhere in the standard.

Although the IASB supported a recognition and measurement exemption for small assets, the FASB asked its staff to do more research on the magnitude of leases of small ticket items to get a sense of the possible impact. The boards were in agreement that there should not be specific materiality guidance as to what would qualify as a “small ticket” lease.

Past experience suggests that the increasing complexity and uncertainty around regulation will deter overseas players from making a move to acquire leasing operators in national markets such as French and Germany.

However, the prospect of an increasing tough regulatory environment may prompt mergers amongst some smaller national players. Landwehr indicated there is the potential for mergers and acquisitions amongst the 183 members of the German Leasing Association (BDL), whose numbers have already fallen from 227 in 2001, as he outlines: “More than three quarters of those in the BDL have fewer than 50 employees, and many lessors in the German market are small and medium sized companies. Just under 50% of the association’s members are manufacturer or bank-owned leasing companies, with the rest being independent businesses. Many of the smaller leasing companies were forced to exit the sector as they struggled to compete under increasing administrative costs associated with supervisory regulations. Consolidation in the industry is likely to continue.”

While agreeing that this is a potential future trend, Andrew suggests that a shortage of skilled personnel may come to represent as much of a difficulty as new regulations. “Tightening regulation continues to challenge the equipment leasing market, and as a result further structural changes are to be expected. Players are expected to nevertheless grow their businesses and portfolios, which in turn will create challenges relating to talent management – attracting, developing and retaining the best employees – particularly in those geographies where leasing is still developing,” Andrew said.


27 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

In addition to the long-standing concerns over the future of lease accounting, Leaseurope has joined forces with ELFA and the Canadian Finance and Leasing Association (CFLA) to raise queries about the impact of a new proposal regarding credit risk set out under the Basel framework, which is on course to become an EU-wide requirement.

Responding to the consultative document on Revisions to the Standardised Approach for Credit Risk issued by the Bank of International Settlements (BIS), the three associations are arguing there should be risk weighting treatment for commercial leases and loans backed by capital equipment. They recommend enhanced granularity and risk sensitivity, updated risk weight calibrations and better clarity on the application of the standards in order to achieve BIS’s goal of strengthening the regulatory capital standard.

The associations point out that corporate exposures consist of various types such as investment grade bonds, non-investment grade bonds, bank corporate loans, small and medium sized business loans, municipal loans and other types of debt. Each business type presents a unique risk profile that calls for treatment as specialized lending. They would like to see risk weightings on commercial leases and loans that reflect the default risk of their customers and the security offered by equipment collateral. The associations argue, and say they have supporting historical data to back up their view, that default rates are lower for equipment finance debt when compared against other forms of corporate exposures such as non-investment grade bonds or bank corporate loans.

However, the current risk weightings from BIS treat corporate lending the same by applying a 100% risk weighting across all corporate exposures or a 75% risk weighting across most retail exposures (including many small business leases and loans). Commercial loans and leases backed by equipment have a history of lower credit losses than other exposures, which qualifies them for risk weightings different than the riskier corporate exposures.


28 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

ASIA PACIFIC


In general, the mature leasing markets in North America and Europe were much more affected by the global financial crisis than leasing operations in emerging markets, at least at first. While asset backed finance was an intrinsic part of the US and European economies, it played a much smaller role in the Asia Pacific region.

Paul Errington, CEO of Hong Kong-based Connaught Finance Investments explains: “As the leasing market in Asia is still developing, with market awareness on the increase and lessors attempting to be proactive, the global financial crisis had little impact on the overall growth of equipment leasing. Those lessors that were entirely focused on one market sector, such as vehicles, may have been affected.”

The situation was even starker in India, which Nidhi Bothra, executive vice president of Vinod Kothari Consultants, says largely escaped the

turmoil, reporting that: “The leasing market had been dormant in India since 1996. It was only post the crisis that the market seemingly picked up, so the Indian leasing market had little correlation to the global financial crisis.”

George Lagos, senior general manager of Canon Finance Australia, argues that the situation for some lessors in that country was similar, as the mining boom and consequent requirement for


ASIA PACIFIC


In general, the mature leasing markets in North America and Europe weremuch more affected by the global financial crisis than leasing operations inemerging markets, at least at first. While asset backed finance was anintrinsic part of the US and European economies, it played a much smallerrole in the Asia Pacific region.

Paul Errington, CEO of Hong Kong-based Connaught Finance Investmentssays: “As the leasing market in Asia is still developing, with market awarenesson the increase and lessors attempting to be proactive, the global financialcrisis had little impact on the overall growth of equipment leasing. Thoselessors that were entirely focused on one market sector, such as vehicles, mayhave been affected.”

The situation was even starker in India, which Nidhi Bothra, executive vicepresident of Vinod Kothari Consultants, says largely escaped the turmoil,reporting that: “The leasing market had been dormant in India since 1996. Itwas only post the crisis that the market seemingly picked up, so the Indianleasing market had little correlation to the global financial crisis.”

George Lagos, senior general manager of Canon Finance Australia, argues thatthe situation for some lessors in that country was similar, as the mining boomand consequent requirement for investment in industrial equipment maskedthe effects of the general downturn. However, Australian Equipment LeasingAssociation director John Bills says that new equipment finance business inAustralia, which had stood at A$46bn in 2007, declined to A$37bn in 2009and 2010. While some ground was regained by 2012, at A$44bn figures forthat year are still below pre-global financial crisis levels, while receivableshave remained around A$94bn over this period. A number of entities exitedthe Australian equipment finance market, and there have been few newentrants.

© A

sset

Fin

ance

Int

erna

tion

al, A

ll r

ight

s re

serv

ed.

21

Paul Errington, CEO, Connaught Finance Investments


29 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

investment in industrial equipment masked the effects of the general downturn. However, Australian Equipment Leasing Association (AELA) director John Bills says that new equipment finance business in Australia, which had stood at A$46bn in 2007, declined to A$37bn in 2009 and 2010.

General Equipment Finance Quarterly New Business Volumes

Source: AELA

Since then, as AELA’s latest figures indicate, it has been a slowly upwards trajectory. New business volumes exhibited consistent improvement in the three years to 2012, when the annual volume reached $39.4 billion, but fell back in 2013 to $37 billion. The association reports a general improvement in general equipment finance business in 2014, to $37.7 billion, gathering in strength over the year, with fleet leasing a further $4.2billion, taking the total to $41.9 billion. Total receivables at the end of 2014 were $92.4 billion.

However, it warns that new business levels are likely to remain subdued over the coming period, consistent with the prospects for overall business credit growth.

While the Australian leasing market has started on the road to recovery, but the path going forward has not been straightforward. Hugh Lander is chief executive officer of BOQ Finance, Bank of Queensland, and AELA chairman. “Certainly anecdotally the industry has recovered to pre-great recession levels, but it’s still a bit of a rocky ride,” he said.

Mar Qtr Jun Qtr Sept Qtr Dec Qtr

2010 2011 2012 2013 2014

$ Billion

12

10

8

6

4

2

0


30 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Volume end December 2014

Source: AELA

Receivables end December 2014

Source: AELA

Rise of leasing in China

Of course the big success story in the region is the rapid development of the leasing industry in China, a country which has seen accelerated rates of growth in recent years. The Report on Development of China Financial Leasing Industry 2012 points out that the number of registered financial leasing companies of different types doubled during that year alone, to total well over 500 entities. The research suggests that at the end of 2012 the market totalled RMB 185bn, an increase of 36% compared with the RMB 135.8bn recorded the previous year. The value of financial leasing contracts nationwide increased by two thirds, up from RMB 930bn at the end of the preceding year to about RMB 1.55 trillion.

According to the statistics of Financial Leasing Committee (FLC) of China Bank Association, by the end of 2013, total leasing investment by non-bank financial institutions reached RMB 442.26 bn. Of this, RMB 72.10 bn was conducted via finance leasing, accounting for about 16%. On top of this, domestic pilot lessors and foreign invested lessors also saw leasing investment reach RMB 386.35 bn in 2013, bringing the total leasing investment of the Chinese leasing industry to around RMB 828.61 bn in 2013.

General Equipment Fleet

$41.9bn

$37.7bn

$4.2bn

General Equipment Fleet

$92.4bn

$83.1bn

$9.3bn


31 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.


In mid 2013, Bills identified low credit growth due to weak demand in the overall economy after a downturn in the mining industry as the main challenge to the equipment finance market in Australia.

“Equipment financiers are operating in a low-growth environment, with anaemic balance sheet growth. The main drivers in the past year have been cars/light commercials and other transport equipment; previously growth had been driven by the mining/earth moving/construction sectors,” Bills pointed out.

Australia’s interest rates have been at historically low levels and the result has been a “twisted economy”, with a significant uplift in activity in the residential property market and in property prices, but much less appetite for investment in the wider economy. There are also signs that the Australian recovery may be shortlived, with business confidence starting to soften, a weak labour market and less manufacturing activity.

“There are positive side effects from the growth in residential and commercial construction as we are seeing equipment purchases in those areas, juxtaposed against what is happening in manufacturing and mining services where there is certainly a corresponding depressed effect,” Lander said.

Lander reports that those states which have benefited from the mining boom, including Western Australia and Queensland, are starting to see improvements in demand for asset finance whereas Victoria, historically the centre for manufacturing, has suffered from the high Australian dollar.

In other countries in the region, where leasing is only beginning to become a widely recognised approach, the challenges are very different, as Errington outlines: “As with any emerging market for equipment leasing the checks and balances are being created as we go along, which opens opportunities for corruption as well as poor due diligence on borrowers, leading to higher rates of default. Experience and skill sets are hard to come by, especially if lessors want to employ local teams in each country.”

Errington goes on to state that a further challenge in the Asia Pacific region is “a lack of vision and research and development on behalf of traditional lessors” which means that the growth, and therefore acceptance, of the concept of equipment leasing is proceeding more slowly than it might otherwise.

“Basic research into how equipment leasing has developed and grown in Europe, America and Australia shows a clear path as to where the market will go and how profitable this can become. Why therefore are banks and finance companies such as Macquarie and CIT pulling out of many Asian countries? And why do the local banks not take this opportunity to step up to the mark and drive the business in a proactive manner?” Errington argued.

In India, Bothra identifies regulatory and policy issues as the main challenges, coupled with a slow-down in the economy which means the financing demands for the equipment and automotive leasing markets has also suffered. While the penetration rate for the leasing industry has looked up in the last couple of years, it looks likely to stall in the medium term.


32 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.


Lander characterised the state of leasing in Australia at the start of 2014 as a ‘re-financing market’, saying reductions in capital expenditure in the country had a direct impact on leasing and asset financing. He highlighted a significant amount of under utilisation of existing plant and equipment which needs to be absorbed before companies become more aggressive about adding new equipment to their inventory. “Residuals are flat, if not contracting, across the leasing industry. New business volumes are down and there is certainly a lot of competition amongst the major banks, foreign registered banks and other players to endeavour to maintain receivables balances which is putting pressure on margins across the board,” Lander reported.

Some key players, such as Societe Generale, left the Australian market in 2010 and Lander says there are no signs currently of new entrants coming in. GE’s announcement in early 2015 that it intended to divest itself of most of its financial services activities and is looking to offload its GE Capital portfolio is likely to spark further consolidation in the sector.

GE Capital dominates the small business equipment leasing sector, with research analysts suggesting it has relationships with a quarter of all equipment lease business customers with turnover up to $5 million and a fifth of business lease customers with turnover of $5 million to $20 million. GE is currently looking for buyers for between $7 billion and $8 billion of business in Australia including equipment and vehicle leasing, commercial lending, acquisition finance and inventory loans.

Bothra says the data suggests leasing in India grew by 10% in both 2013 and 2014 as the concept becomes more widely understood and accepted, with asset classes such as medical equipment, IT, cars and solar equipment proving to offer the best future prospects.

“Generally the acceptance of leasing as a mode of finance has happened. New asset classes have emerged where leasing as a finance mode are being tried. In India, the motives continue to be off-balance sheet for lessee and tax shelters for lessors by looking at assets with high depreciation rates. These motives continue to drive the equipment and automotive leasing markets here,” Bothra said.

However, preliminary data for the most recent report from Vinod Kothari Consultants, suggest new business volumes declined by 21.75% in 2013 – 2014, compared to a decline of 6.42% in 2012 – 2013. The split between operating leases (48% of new business) and financial leases (52%) remained unchanged, with medical equipment, solar equipment and car and vehicle leasing continuing to represent the most common asset classes.

Errington estimates that the overall growth rate in the Asia Pacific region, leaving out China which has shown some spectacular increases in recent years, could be between 10% and 18%. Logistics, manufacturing and sustainable energy are the key industry sectors, along with IT, and small and medium sized businesses are likely to perform better than large corporates, with growth rates here heading towards 20% rather than a top rate of 10%.

“Growth in the manufacturing equipment sector is driven by general growth within industry, while the rise in sustainable energy leasing is


33 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

driven by high demand in Japan, China and Sri Lanka. As regards the rise in logistics, transportation is the backbone of economic growth and therefore movement of products is essential,” Errington said.

China is the second largest equipment leasing country in the world ($63bn) with a very low GDP penetration. While the economy has been growing at around 7%, equipment leasing has emerged as a proven method for company expansion and increased productivity.

Yang Haitian, leasing association chairman of the China Chamber of International Commerce, says China is well on its way to overtaking the US as the world’s largest finance leasing market.

“China’s financial leasing market is expected to grow at a pace of 50% annually, and the nation’s total finance leasing market will exceed 5 trillion yuan in the four years to 2017,” Haitian said.

According to consultancy ResearchInChina (RIC), as of the end of 2013, there were about 1,026 financial leasing companies across the nation, growing at a rate of 83.2% year-on-year.

Its latest report suggests total turnover reached approximately RMB2.35 trillion by end of March 2014, an increase of RMB250 billion from RMB2.1 trillion at the end of December 2013. The number of companies active in the market totaled 1,137, up from 1,026 at the end of 2013. Foreign leasing operations dominate and now number 990, an increase of around 110. At the end of the third quarter of 2014, the value of assets held by China’s leasing companies rose 45% to 1.22 trillion yuan) from the end of the first quarter of 2013, according to data from the banking regulator.

In the finance leasing sector, the highest penetration rate is in construction machinery industry, at nearly 16%. In 2013, financial leasing turnover from engineering machinery exceeded RMB100 billion. The next most significant market is the aviation industry, where leasing penetration stands at around 10%, followed by the medical device sector and automotive finance leasing.

All these areas have been the target of overseas leasing specialists, who are keen to expand their presence in China, but local financial services companies have also performed well. CDB Leasing, which has signed several large aircraft leasing deals, has also made inroads into the auto finance area. At the end of 2013, its leasing business transaction volume from commercial vehicles reached RMB10.3 billion and business revenues from leasing totalled approximately RMB 4.4 billion. The business handled over 30,000 vehicles for close to 9000 leaseholders.

However, 2014 saw an industrial slow down in China, as the economy paused to take breath after the years of rapid expansion. While this had an inevitable impact on demand for leasing and loans, new markets are also beginning to open up in the country.

China’s “millennial” push

After several years of economic expansion more affluent consumer class is emerging, with the result that auto leasing in China is set to grow substantially over the next five years according to a study from professional services firm PricewaterhouseCoopers (PwC).


34 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Its research found that while China continues to dominate as the world’s largest automotive market, auto financing is currently a niche activity as 76% percent of car buyers purchase vehicles outright for cash.

Only 21% of Chines consumers use credit to finance their new vehicle purchase, and leasing as an option is even more scarce. But PwC says that with the emergence of the millennial generation, which is more open to alternative financing methods, this landscape is changing.

The firm estimates that over the next five years, leasing could grow at an annual rate of 25%, potentially creating significant growth opportunities for OEMs’ captive finance arms.

The other developing trend is the increasing preference for bigger, premium vehicles. Luxury and SUV sales are up, which means higher average transactions, making financing a more reasonable option, according to PwC.

Additionally, the Chinese government is encouraging a broader lending environment by promoting awareness of financial leasing options and moving to relax the regulatory requirements to obtain auto financing licenses through the China Banking Regulatory Commission.

The findings are backed up by separate research from Deloitte China which indicates the automotive financing penetration rate of Chinese auto market will hit 50% and reach 180 billion Yuan in 2020.

However, local leasing specialists have already given warning that there needs to be better regulation of the sector, pointing out that auto financial leasing companies do not belong to the credit system of the central bank and cannot easily evaluate customer credit ratings.

Wang Yanling, CEO of Herald Leasing China, said: “Auto financial leasing is going too fast before the administration and regulation are established.”

In addition, increases in consumer spending power and improvements in transportation have boosted the market for aircraft leasing in China, which has traditionally been dominated by global players but is now increasingly seeing new local entrants.

Tadas Goberis, CEO of specialists AviaAM Leasing, said: “Moreover, these opportunities are being backed by the Chinese authorities. They have recently declared the support for the need to boost low-cost air travel segment. As a result, we might see a demand for extra aircraft which will facilitate the development of the upcoming low-cost projects. At the same time, there are obvious signs that China is willing to further push its major aircraft leasing companies to the international market.”

Aviation leasing flying high

Air travel demand in Asia is projected to expand 5.7% each year to 2017, the second fastest pace in the world, with routes within or connected to the mainland being the single largest driver, according to an International Air Transport Association study. Boeing has said Asia will push commercial aircraft sales to US$5.2 trillion over the next 20 years as China overtakes the US as the world’s largest aviation market.

Current Airbus forecasts indicate China is the world’s fastest-growing aviation market and is set to surpass the US as the busiest domestic air travel market within 10 years. Research from CIT recently suggested that


35 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

China’s airlines had under-ordered medium-haul jets in recent years, opening up opportunities for leasing firms to fill the gap.

Hong Kong-based China Aircraft Leasing Group Holdings (CALC) has signed a provisional deal with Airbus Group to buy 100 planes valued at about $10.2 billion, with delivery mainly scheduled between 2016 and 2022, as it bids to build a portfolio to serve China’s domestic routes.

CALC and Airbus have also entered into a purchase agreement for four A320 aircraft, for an aggregate price of $375.6 million. Delivery of the aircraft will be made within 12 months. The leasing company has entered into lease agreements with Chengdu Airlines for four A320s and Sichuan Airlines for two A320s. Both lease contracts are for a duration of 144 months.

Alex Huo, deputy general manager of Chinese leasing giant ICBC International Leasing Company said: ‘In China, every year the fleet in the whole Chinese market increases about 200 to 300 aircraft, so I would say in the next 20 years the Chinese market will need an additional 6000 aircraft.’

His estimate is endorsed by John M. Timpany, a Hong Kong-based tax partner at KPMG, who said: “China requires 5,000 aircraft in the next two decades. It’s clear there is a huge demand for financing which will attract new investors who are looking for better returns.”

CALC has also been looking outside China for growth, and in mid 2014 became the first plane lessor in the region to go public and the first to look overseas for deals. It signed an agreement with state-owned carrier Air India Ltd to lease five Airbus Group NV A320s starting in early 2015.

However, the company, which counts Air China, China Eastern Airlines and China Southern Airlines among its customers, has said it will continue to focus principally on China, where it has a 3.1% share of the business. According to its financial results for the year ended 31 December 2014, CALC’s revenue grew by 66.7% to HK$1,145 million compared with HK$686.9 million the previous year, which was due mainly to the growth in lease income and income from lease receivables realisation.

Profits were up 75% at HK$302.7 million compared with HK$172.5 million in 2013, despite the costs of the company’s one-off IPO listing expenses and share option expenses.

CALC says it is committed to expanding its fleet to meet the rising demand for air travel in China. Its fleet is projected to grow to 168 aircraft by 2022.

Dr. Mike Poon, CEO of CALC said, “Along with the growing aircraft leasing demand in China and Asia, CALC will grow rapidly with our successful experience in developing the aircraft leasing business as well as our accurate market positioning and business development blueprint. With a strong foothold in China and the ambition to expand globally, the group is confident to become the largest one-stop full value-chain aircraft solutions provider in the Asia-Pacific region.”

This claim is backed up by independent research. Clarence Leung, asset finance & leasing director, PwC Hong Kong, said: “Chinese airlines are projected to need 6,000 new planes over the next 20 years, worth about $780bn. A substantial proportion of those will be acquired through leases. Globally, about a third of aircraft are financed this way – up from less than 1% 40 years ago.”


36 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Thailand leasing losses

Not all countries in the region have mirrored China’s success. Despite predictions that new car sales are about to pick up, auto financing companies in Thailand face a tough year in 2015, with rising rates of non-performing auto loans and a three-fold increase in the number of repossessed vehicles over the past twelve months.

A recent poll of leasing firms revealed levels of non-performing auto loans are up by 20% to 30%, and were likely to hit 3% of total loans. Thailand has been through a period of political and economic upheaval which has placed a severe strain on many household budgets.

Tisco Bank reported it was seizing about 1,000 vehicles a month throughout 2014, compared with an average of 300–400 a month a year earlier. As banks start to sell repossessed cars, used car prices have fallen 20% to 30%, compounding losses for loan providers.

The auto industry, which accounts for about 11% of Thai economic output, has been grappling with slowing domestic sales since May 2013 when a government subsidy programme for first-time car buyers expired. In August 2014, for example, sales dropped 31% on the year before, while production declined 27%. By the end of the year, domestic sales of passenger cars and commercial vehicles in Thailand had fallen 33.7% to 881,832 units,

Auto financing specialist Kasikorn Leasing reported bad loans increased 20% in 2014, and said it rejected more than 10% of loan applications, double the prior year, due to concerns about the high debt burden of borrowers.

However, the company says it is predicting an upswing in the sales of new cars in the country over the next twelve months and is targeting a 17% increase in new loans, to 71.8 billion baht, but noted that 2015 is likely to prove ‘challenging.’

Kasikorn Leasing managing director Surat Leelataviwat said: “The used car market has seen prices tumbling, while buyers have abandoned their cars, and financial institutions are having to cope with piling repossessed vehicles, alongside having to manage multiplying bad debts.”

Leelataviwat said he expects sales to bottom out in the first half of 2015, when the leasing business will start to revive, with a greater focus on a prudent credit policy to avoid non-performing loans. The company is aiming for no more than a 1.5% non performing loans target and hopes to push profits over the 500 million baht level reached in 2014.

Rules and regulation

The Asia Pacific region has not felt the same impact from the increased regulation and proposed changes in accounting for leases which is ushering in significant change in the North American and European leasing industry. However, different countries in the region have certainly not proved immune to developments in legislation.

In Australia, Lander reports that the change in government in 2013 saw the repeal of the previous government’s plans to change the fringe benefits tax arrangements on car leasing which had been of


37 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

major concern. He cites a number of current issues, including ongoing there is pressure from consumer bodies and SME advocates to extend consumer-style regulations to cover SME lending. New privacy regulations introduced in March 2014 have added significantly to regulatory compliance requirements under anti-money laundering rules.

Of particular concern are changes to the Personal Property Securities Register (PPSR) regime used in both Australia and New Zealand which has altered the process by which title to an asset passes to an individual or company from the previous situation where this happens on payment to one where it occurs once notification is made to the register. There is a large sub-hire demand in Australia, particularly in mining services, where equipment is on hire to third parties and it has proved challenging to iron out the details of how registration works in this context.

A two year transition period between the old regime and the new approach ended in January 2014, and Lander says greater clarity over the rules is required in order to avoid expensive legal challenges in future.

Elsewhere tax legislation is proving to be much more of a challenge, with Bothra describing indirect taxes as a complex area in India for leasing entities, with both state and central government tax laws applicable and state-wide registration requirements.

“However, the tax laws have become more lease friendly than they were in the 1990s when they caused leasing to become unviable and inactive in India,” Bothra maintained.

China’s leasing market experienced a similar period of turmoil because of changes to the VAT regime which took place unexpectedly in August 2013, according to Selina Xu, assistant to Professor Yanping Shi at the University of International Business & Economics in Beijing.

In China, a dual system of indirect taxes has existed for many years with business tax applicable to the services industry and VAT applicable to the sale of goods. During that time, both business tax and VAT were applicable to financial leasing transactions, with VAT paid when the leased assets are purchased and the business tax paid by lessor when it receives the rentals from the lessee. Business tax rate of the licensed lessors is the same with banking industry, i.e. they shall pay the business tax by spreads and the rate is 5%. However, Xu says, this situation was completely changed by government reforms to replace the “business tax” with VAT for the entire services industry.

This process began on January 1, 2012 with a pilot programme in Shanghai for the modern services and transportation sectors and later similar pilot reform started in several other cities and provinces including Beijing, Tianjin, Jiangsu, Zhejiang and Guangdong. In August 2013, that pilot was extended to the whole country. The leasing industry was included as part of the pilot reform, so that leases became subject to VAT.

“However, a number of problems and challenges were revealed in the pilot reform in leasing industry. In fact, a big problem has appeared since August 2013 when the tax authorities required that the tax base of

Hugh Lander, CEO, BOQ Finance, Bank of Queensland


38 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

sale-and-lease-back transactions shall include the rent principal which was previously exempted.,” Xu said.

Sale-and-lease-back transactions account for nearly 60-70% market share in China, and for a while virtually came to a halt as the policy requires the VAT tax base of such transactions includes the rent principal which was previously exempt from either VAT or business tax.

Moreover, Xu says that in Shanghai lessors were asked to pay back taxes related to sale-and-lease-back transactions which occurred earlier in the pilot when VAT reform started in 2012.

“To date, China’s leasing associations and many lessors are still working for change of this new policy and the latest progress is that a change will hopefully be made soon by Ministry of Finance to grant leasing more favorable tax treatment in the ongoing VAT reform,” Xu said.

However, Xu cautions that the design of the VAT on financial leasing remains a difficult task, particularly given the complex regulatory regime of the industry, and designing a tax policy which truly reflects the financial structure and turnover of the industry, while at the same time also facilitating its further development is a major challenge. There were some signs of movement in this area in December 2013 with the release of new regulations (Circular 106) which alter the rules of leaseback services by allowing the financial leasing company to deduct the cost of the tangible movable asset.

In March 2014 the China Banking Regulatory Commission (CBRC) announced further reforms designed to reduce the regulatory restrictions on leasing. Financial leasing firms are no longer subject to the provision of having a main investor with a stake of 50% or more in their registered capital. Instead, financial leasing firms can be established as long as one of the founders holds at least 30% of the equity and is qualified to engage in financial leasing business, as either a commercial bank, manufacturing enterprise or overseas financial leasing company.

The new rules also expand the scope of leasing by extending the scope of the assignees of financial leasing assets, reducing the requirements for receiving deposits from non-bank shareholders, cancelling the “foreign exchange” restrictions of the overseas borrowings and allowing securities investment. Leasing companies are allowed access to a wider range of financing channels and to set up subsidiaries.

Liquidity in the leasing market remains good, largely because China’s banks were responding to other factors in the market, and specifically the need to meet new capital adequacy rules. .

Under BASEL III regulations, China’s biggest banks have to increase their capital as a percentage of their assets. To help free up the funds to do so, the banks have sought to cut provisions for some loans which has led them to increase their lending to companies leasing ships, tractors and building equipment in some of China’s most vulnerable sectors.

The provisioning for certain leasing companies owned by financial institutions is lower as they fall under the official category of safe borrowers. Provisioning for direct loans to heavily indebted corporate borrowers such as shipping companies and property developers is higher as the economy slows and default risks increase.


39 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

“Lending to a bank-owned leasing company with a guarantee from the parent means a lender only has to set aside capital for 25% of the loan, whereas for straight debt, it is 100%,” said Michael Hu, a financial services assurance partner at PwC China.

Export-Import Bank of China (EXIM), which along with China Development Bank and Industrial and Commercial Bank of China, is one of the main institutions active in this area, increasing its lending to leasing companies by 10 % in 2014.

In addition, Hong Kong is seeking to capitalise on the rapid growth of air travel in the region. It is considering adopting a new taxation regime which could see the territory become a major aircraft leasing hub, benefiting from $1.9 trillion of business over next 20 years, according to analysis from accountancy firm PwC.

The firm says potential tax changes outlined by CY Leung, the chief executive of the Hong Kong special administrative region of China in his annual policy address at the start of the 2015 are significant.

“To grasp this market opportunity and taking into account the recommendation of the Economic Development Commission, the government is studying the development of Hong Kong aerospace financing business so as to strengthen Hong Kong’s status as an international aviation and financial centre,” Leung said.

PwC says this move would have a significant impact on airlines globally, which have been dependent up till now on the main aircraft leasing hubs of the US, Ireland and Singapore.

“Financial services and logistics are two of the key industries in Hong Kong, so it is well placed to develop aviation leasing,” says Simon Cheng, capital markets and accounting advisory partner, PwC Hong Kong. “Building on its special status within China, it could become the dominant industry hub in Asia.”

PwC says the main obstacle for a Hong Kong-based company leasing out an aircraft is that it is taxed on gross rental income rather than profits. In Singapore and Ireland, for example, the lessor can not only claim for tax depreciation, but is also taxed at a more favourable rate.

Industry predictions suggest the Asia Pacific region is forecast to account for half the world’s air traffic growth over the next 20 years, with an annual growth rate of 6.3%. The lure of potentially high returns has attracted substantial investments in recent years from Hong Kong, China and the broader region.

Finance providers who are looking to expand operations globally will need to be aware of how swiftly local regulations can change the market, and will not simply be able to use a “plug and play” approach, as a deep understanding of local conditions and the particular demands of each country will be necessary.

An issue in India, for example, is that the tax authorities have been seen to mount repeated appeals on key issues, with the consequent changes in approach and uncertainty over future developments proving difficult for would-be investors. In September 2014, the Bombay High Court has handed down a judgement in a case involving leased equipment which says it is not necessary for a company to own plant and machinery outright in order to claim an income tax break.


40 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

The case involved a film producer who was claiming a deduction in respect of the profits from a film. The court looked at two issues: whether a film company qualified as an “industrial undertaking”, and whether the claimant could be said to own the plant and machinery, which was hired for the production.

This was the latest in a string of court decisions on the subject of leased equipment and industrial undertakings, and the court described the Indian tax authorities’ approach in revisiting the fundamentals as “entirely misconceived”.

Dismissing the appeal, the court stated: “We do not see how the Revenue can repeatedly bring matters before this court on the same issues in successive years when it has not been able to succeed in its earlier endeavour.

Late in 2014, the Reserve Bank of India (RBI) announced it has tightened the regulatory framework for non-banking finance companies (NBFCs), including asset finance and leasing companies. Like banks, they will be subject to 90-day overdue norms for identification of bad loans, will be required to make higher provisioning for non-standard assets and have to put in place ‘fit and proper criteria’ for directors.

In a statement, the RBI said: “The intent is to create a level playing field that does not unduly favour or disfavour any institution.” With the unveiling of the framework, the process of issuing Certificate of Registration (CoR), which is required for conducting NBFC business, will be re-started having been discontinued for the last six months.

Under the new rules, NBFCs will have to have larger minimum net owned funds (NOF) by the end of March 2017. In addition, the threshold for defining systemic significance for NBFCs has been revised to RS 500 crore of assets, double the original requirement of RS100 crore.

Leasing expert Vinod Kothari was critical of the RBI for not allowing de-registration of systematically unimportant NBFC s with less than Rs 500 crore of assets. “While there are no substantive regulation on such NBFCs, administrative controls on them will continue,” he pointed out.

Despite the red tape there are certainly plenty of opportunities amongst the emerging markets in Asia Pacific. Kothari’s colleague Bothra says: “The incentives for foreign leasing companies are that the Indian leasing market is huge and has great potential. The pitfalls are getting regulatory approvals and understanding the leasing market and customer demands in the country.”

However, Errington cautions that would-be entrants will need commitment and management. “To invest in Asia there must be a fundamental long term view on profitability and the region must be viewed as a whole and not just on a country by country basis. Foreign leasing companies will face the same issues as us all, and that is lack of local experience and skill sets to manage and to generate business,” he said.


41 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

SOUTH AMERICA


The equipment and auto finance industry in South America also fits the profile of an emerging market and, like the Asia Pacific region, experienced only a fraction of the turmoil that consumed the North American and European leasing markets during and immediately after the financial crisis.

Rafael Castillo-Triana, CEO of The Alta Group Latin American Region (LAR), makes the point that the impact varied from country to country. Mexico and Central America, for instance, suffered greater problems than some other countries because of their close connection with and economic dependence on the US.

Castillo-Triana said: “Other countries such as Brazil, Chile, Peru and Colombia were more resilient to the global crisis, in part because their financial systems were better controlled and organized, and in large part because the demand for leasing was fuelled by the economic boom of China purchasing commodities exported by these countries.”

Brazilian market cracks

However, there has been a substantial shift in leasing activity in the region since then, driven by what has happened in Brazil. Often viewed as the powerhouse of Latin America, and with strong expectations that its prime position as host to both the 2014 World Cup and 2016 Olympics would see the country forge ahead in terms of infrastructure development and economic activity, Brazil has become mired in difficulty.


SOUTH AMERICA


The equipment and auto finance industry in South America also fits the profileof an emerging market and, like the Asia Pacific region, experienced only afraction of the turmoil that consumed the North American and Europeanleasing markets during and after the financial crisis.

This matches Andrew’s assessment that: “Across Europe and the US, leasingindustry new business volumes plunged, particularly in those economieshardest it by the crisis such as Spain. In high growth economies, such asChina, demand for leasing continued but at a reduced level as the impact ofthe crisis on the global economy took hold.”

Rafael Castillo-Triana, CEO of The Alta Group Latin American Region, makesthe point that the impact varied from country to country. Mexico and CentralAmerica, for instance, suffered greater problems than some other countriesbecause of their close connection with and economic dependence on the US.

Castillo-Triana said: “Other countries such as Brazil, Chile, Peru and Colombiawere more resilient to the global crisis, in part because their financial systemswere better controlled and organized, and in large part because the demandfor leasing was fuelled by the economic boom of China purchasingcommodities exported by these countries.”

© A

sset

Fin

ance

Int

erna

tion

al, A

ll r

ight

s re

serv

ed.

27


42 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Economic growth in Brazil has slowed, largely because of the fall in demand for commodities from China. All the work carried out in preparation for the World Cup, particularly construction and infrastructure investment, and the acknowledged need to continue such development, should have produced an uplift in equipment financing and leasing. However, the leasing industry has suffered severely in recent years, with the main financial incentives to borrow coming from the state development bank (BNDES), which offers unbeatable low-rate finance to the state-owned banks through its FINAME subsidiary.

The government has promoted cheap finance via these banks for domestically produced equipment, thereby encouraging foreign manufacturers to locate bases in Brazil. However, this has not translated into a boost for the leasing industry. In 2013, the annual rate of contraction of the leasing market was 31.6%, which was only marginally better than the decline of 33.5% in 2012.


A stark indication of the problems is given in the Alta Group’s annual report ranking the 100 largest equipment leasing companies in Latin America, published in late 2014.

Its data suggests that in general terms, leasing portfolios in the region at the end of 2013 totalled an estimated $67.9 billion, representing a reduction of 1.03% compared with the end of 2012 ($68.2 billion).

However, if Brazil’s performance is stripped out of the figures, then the leasing industry grew an average of 16.25% between 2012 and 2013. Brazil’s reported portfolio value decreased more than 40%, which the Alta Group’s analysis suggests is down to a combination of real deterioration of the leasing industry and a great reduction in transparency due to the Brazilian Central Bank’s relaxation of reporting guidelines.

Leasing portfolio per country, shown in thousands of US dollars.

Country Sum of 2013Portfolio ($000)

Number ofcompanies

Sum of 2012 Portfolio ($000)

Change EstimatedVolume

Colombia $15,341,409.59 339 $14,581,866.91 5.21% $5,620,164.98

Chile $15,246,887.59 19 $12,090,575.89 26.11% $7,186,503.66

Brazil $12,438,601.62 55 $20,840,961.59 -40.32% $(1,455,372.77)

Mexico $10,269,470.38 84 $8,304,999.96 23.65% $4,732,803.74

Peru $8,094,368.28 17 $8,786,552.14 -7.88% $2,236,666.86

Argentina $4,237,402.70 47 $1,772,747.57 139.03% $3,055,570.99

Puerto Rico $1,539,665.00 32 $1,407,843.00 9.36% $601,103.00

Costa Rica $424,106.00 5 $364,001.00 16.51% $181,438.67

Venezuela $232,121.85 16 $329,324.71 -29.52% $12,572.04

Bolivia $69,034.03 3 $51,536.56 33.95% $34,676.32

Ecuador $56,597.88 10 $61,411.40 -7.84% $15,656.94

Grand Total $67,949,664.92 627 $68,591,820.74 -0.94% $22,221,784.42

Sources: central banks, published financial statements and company reports, compiled by The Alta Group Latin America Region


43 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

According to Castillo-Triana’s analysis, leasing in South America was originally focused on financial leases, a structure which has now become a commodity that competes with other forms of full pay-out equipment financing. This left lenders exposed to “commoditization, margin compression and consolidation” as the main challenges.

More recently, however, analysts have tracked a move towards the increasing participation

Of operating lessors and renting companies in the leasing market, suggesting that the industry is becoming more mature and adopting business models that are focusing much more on asset/equipment management.


“Brazil is no longer a significant player in the equipment leasing and financing industry in Latin America. Its industry leaders refused to innovate and adjust themselves to the challenges of the times, in spite of the fact that they still have one of the most favorable tax environments for leasing,” Castillo-Triana says. “Now, it is time to focus in the countries that are experiencing growth through innovation, financial penetration, and adjustment of value propositions to their customers. The key countries are Mexico, Chile, and Colombia.”

Castillo-Triana argues that the decline in Brazil is explained by what he calls “the virtual paralysis” of the banks’ business model for leasing, combined with the problems of an economy which has stalled. While the banks remain the dominant players, other lessors have sort to shore up their market position by acquiring the former auto financing captives of Fiat, Ford and others. However, they have not matched this with the development of new product offerings, and remain reliant on full payout leases, which have become commodities.

There is support for this view in the most recent statistics released by the Brazilian leasing association ABEL. These show that leasing as a percentage of the country’s GDP is continuing to decline, from 1.8% at the end of 2011 to 0.42% at the start of 2015. Over the same period, leasing revenues for its members have dropped from R$6.14 million to R$21.6 million.

In contrast, Castillo-Triana says: “Most of the growth in Mexico, Chile, and Colombia is due to the emergence of operating leases and renting. At the same time, the leasing industries in Argentina and Bolivia, while still not very active in operating leases, show outstanding growth and higher penetration in fixed capital formation of their respective economies.”

Looking ahead, the findings of the latest Alta LAR 100 report suggest that independent lessors, that is those companies that are neither controlled by a bank nor an equipment manufacturer, are starting to make headway in the region. While only eight independents ranked among the 100 largest lessors the previous year this has now risen to 15, suggesting the market is evolving beyond the control of the banking sector.

Total estimated new business in Latin America in 2013 was valued at US$22.2 billion, spread over a range of industry sectors.


44 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

“IT and telecommunication are gaining ground and will continue to increase their market penetration in equipment leasing markets. The automotive markets are keeping their leadership, but they are facing structural challenges that need to be addressed. One of them is the imbalance between the growing stock of motor vehicles and the inability of the transportation infrastructure to host them inexpensively,” Castillo-Triana said.

Some10 major car manufacturers have plants in Brazil, which is now the fourth largest new car market in the world behind China, the US and Japan, according to the first in a series of national fleet reports from the Global Fleet website.

The report makes the point that before the financial crisis broke in 2008, Brazil’s market was dominated by short-term rental, the so-called 12-months market, which owed its existence mainly to Brazil’s relatively high inflation. Following the arrival of well-known, Europe-based multinationals including LeasePlan, ALD Automotive and Arval there has been a move towards large Brazilian corporations adopting a longer-term leasing business model, although Brazilian business culture remains very attached to the idea of ownership.

In addition, the supply of second hand vehicles is now increasing fast with a consequent drop in residual values. Despite this, Arnault Leglaye, general manager of Arval Brazil says growth of around 20% a year is possible. The country’s leasing association, ABEL, says that currently around 34% of leasing activity by volume is in the auto sector, compared to 42% in equipment and machinery leasing.

Castillo-Triana reports that “mining and construction equipment markets still have good momentum, in particular in certain key countries such as Brazil, Mexico, Peru, Colombia, Chile and Argentina.” The green renewable sector is starting to create interest, although traditional energy projects still prevail in the region and alternative energy has not yet been shown to be a business where lessors are particularly eager to deploy much investment.

At the start of 2015 the Association of Leasing of Argentina (ALA) reported the fifth straight year of growth in the industry, with lending to individuals up 36.1% between December 2014 and the same month the previous year, while total funding granted to the public sector recorded an increase of 57.2% in the same period.

Nicholas Scioli, ALA president, said leasing “is a financial tool that further expanded in Argentina during the last ten years: while GDP grew by approximately 80% between 2003 and 2013, the leasing industry did 800%.” Scioli cited the example of Province Leasing, which was funding assets to the tune of $7 million in 2011 and estimates that this year it will close deals at about $70 million, representing an increase of 1000% in just four years.

“Thanks to a careful positioning and innovation in new products by the companies, lessors are now growing and new market segments for leasing are starting to appear, allowing for consolidation of this approach in this country,” Scioli said.

ALA says its data suggests leasing operations grew 25.9% in the last quarter of 2014 compared to the same period in 2014, while the overall leasing portfolio totalled $13,026 million.


45 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

New originations in Latin America region 2013

Source: The Alta Group Latin America Region


Castillo-Triana argues that the raft of regulations in the different countries throughout South America leads to a “Darwinian survival of the fittest”, where only those finance providers able to negotiate their way through the tax regimes are able to operate efficiently and to seize market share. However, the proposed changes to lease accounting laid out by the US and EU regulators have had little impact so far in the region.

“The EDs (Exposure Drafts) have been so confusing and esoteric in terms of economic reality that most of the lessors in Latin America are not taking it seriously. There is a certain impression that the ED might never become a reality and that creates a generalized agnosticism. On the other hand, a number of countries have been adopting the IFRS accounting standards as mandatory, which has led to a transition in the accounting standards. This is the current focus of attention,” Castillo-Triana maintains.

Where regulation is likely to have an impact is within individual countries, many of which have created an environment which makes leasing attractive, a move which has caught the attention of some of the large international players in the market.

The current boom in leasing in Argentina, for instance, is the result of a combination of strong leadership within the leasing industry coupled with a favourable tax environment. However, political change can result in sharp shocks – the Alta LAR 100 report has Chile pushing up to second place in terms of leasing growth, driven largely by the housing leasing market, but warns that recent shifts in economic policy including recently enacted tax reform mean that the Chilean leasing industry’s potential for future growth is likely to be constrained. Ecuador is another country where finance leases have now lost their tax advantages.

Colombia

Chile

Mexico

Peru

Argentina

Rest of LAR

$5,620,164.98

$7,186,503.66

$4,732,803.74

$2,236,666.86

$3,055,570.99

$845,446.97


46 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

“The legal and regulatory environment is generally very favourable to operate a leasing business in any Latin American country. Some countries offer tax incentives, and capital markets have been evolving to the point that funding is becoming available as well. The pitfalls have been due to the inability of foreign lessors to understand the different cultures prevailing in the countries of Latin America – they need to understand how to deal with country risk. Those who stay are harvesting their rewards,” Castillo-Triana said.

Castillo-Triana says merger and acquisition activity has expanded in recent years and is expected to continue to grow. This is partly because the equipment and auto finance market has a clear potential to generate high returns, given that local players have only scratched the surface.

“This has been attracting private equity funds and other institutional investors into the industry, with the expectations of a rewarding exit strategy. Multinational equipment and automotive vendors and foreign lessors, even those who a few years before decided to leave, have suddenly realised the importance of being in these market and they have become potential buyers. This has been happening for the past five years and is expected to become more intense in the coming years,” he said.

One interesting example in the Alta Group’s analysis is Mexican company Unifin which saw a 75% uplift in its leasing business in 2013/2014 and is on target to repeat the same level of growth the following year. Independent lessors are starting to challenge bank-affiliated lessors with innovative products.

The other notable trend is the switch from an industry dominated by US multinationals to one where “multilatinas” from the region, such as Itau, Bancolombia, and GrupoAval, are making strong headway. Some have suggested that multinationals may now start to look more closely at local partnerships.

As an experienced observer of the region, Castillo-Triana has always sounded a note of caution about this process, claiming that for large international financial institutions answerable to US or UK shareholders, South America remains a difficult market to master. “The impact of Latin America on these large financial institutions revenues or profitability is negligible. In the 40 or more years that the equipment and automotive leasing business has been operating, no single large international financial institution has remained in the business. They sometimes enter the markets, then exit and then enter again.”

However, current trends suggest this prediction may no longer hold true, as Canada’s Scotiabank has started to gain ground in the region. Most significantly, China, through the Bank of China and the Industrial and Commercial Bank of China, has entered into the group of multinationals active in the equipment leasing and financing industry here.


47 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

Conclusion

After a turbulent few years, the global equipment and automotive leasing market has got its head above water and is making headway. Many countries, in both the developed and the emerging leasing markets, are showing signs of growth and there is renewed expansion activity.

However, it is by no means all plain sailing, as analysis from CIT indicates: “In the near term, slower growth in global economies poses a challenge. The US economy is growing, albeit at a muted pace, and confidence levels for small- and medium-sized businesses need to increase in order for capital expenditure to increase. The equipment leasing and finance market needs to be more innovative and change to adapt to market needs such as the evolution of managed services, cloud products and supporting services.”

This year potential lease accounting changes could have a significant effect from a reporting and process perspective for both lessors and lessees, which could signal significant cost and business disruption implications across the board. While emerging markets may be exempt from this worry, the challenge there is to adapt to the evolution of the leasing markets, as rapid changes such as China’s new VAT policy illustrate.

But Andrew is one of many who remains convinced that the future is promising: “Demand for leasing of assets to support increasing productivity as the world continues to industrialize, to improve energy efficiency as energy prices continue to rise, providing high-quality healthcare to ageing populations and the equipment that helps create sustainable cities and infrastructure will all be important areas for leasing in the future.”

The belt-tightening which has characterized government and business attitudes to spending over the past few years is also starting to change the appeal and the offers within the asset finance industry. Early in 2014 research from Siemens’ Financial Services unit (SFS) identified a pattern of significant liquidity trapped in manufacturing industry due to outright purchase of equipment and machinery.

In the UK, the level of this “Locked Liquidity” is estimated to be £10 billion between 2014 and 2018, representing 0.12% of the nation’s Gross Domestic Product (GDP). In comparison, Locked Liquidity in manufacturing in the same time period totals £23 billion in France (0.30% of GDP) and £48.4 billion in Germany (0.44% of GDP). Considerable amounts of liquidity are also trapped in the manufacturing sector of emerging economies – £1,129.1 billion in China (2% of GDP), £137.3 billion in India (0.70% of GDP) and £22.9 billion in Turkey (0.53% of GDP).

SFS argues that asset finance is positioned as a way to release that trapped capital, allowing companies to spend on new product developments, sales initiatives and production increases in order to become more competitive.

However, there are undercurrents running through the global outlook which may mean that companies continue to favour sitting on their cash rather than making large capital purchases.

In the UK and the US, changes in the political climate are in the offing, with unknown implications for the tax, fiscal and regulatory regimes. The Eurozone has substantially repaired itself but the possibility of a Greek


48 © A

sset

Fin

ance

Int

erna

tion

al, a

ll r

ight

s re

serv

ed.

exit remains a real challenge, with its impact on the financial services markets yet to be tested. On top of this, there is the ever-present threat of terrorism across large areas of the world.

Against this background, resilience, speed, flexibility and sound internal systems are the watchwords for the future, as asset and auto finance continues to be an engine of growth around the world, not just in the most developed market for leasing, with innovative solutions to match ever-changing business needs.

whiteclarkegroup.com

Smart end-to-end Auto and Asset Finance So�ware

Social | Mobile | Agile | Robust | Tailored

Full lifecycle management

Retail, fleet and wholesale

Easy and flexible to deploy

Intuitive business rules engine

Powerful workflow capabilities

In-life case management

Document management

Web-based, self-service

and mobile access

Works across multiple countries

global asset and auto finance survey may 2015

Documents

finance technology

boq finance

asset finance sector

commercial finance business

cit corporate finance

white clarke group solutions

global ceo

group head