Leasing: diversity, growth and change
Written by: Petr Vykoukal (www.penize.cz)
Photo: Petr Poliak
Although there have long been predictions of saturation on the Czech leasing market, that is still far from the case. While the market grew only slightly last year, the first quarter of this year indicates that 2002’s limited growth has not yet become the rule.
LAST YEAR’S stunted growth also brought an unexpected result – the Czech leasing market is the ninth largest in Europe. Although this ranking, which means that our leasing market is larger than Portugal’s, Greece’s, and Denmark’s, sounds good, one has to acknowledge that it is partially due to the strong Czech crown. However, the true cause lies elsewhere. “Through most of the post-revolution years small and medium-sized entrepreneurs have been complaining that the banks were unwilling to extend loans to them, so they had to seek out different financing methods,” says Vratislav Válek, the chairman of the board of the Czech Republic Association of Leasing Companies, adding that “It is often leasing that plays the role of banks in small to medium-sized firms. Because the leasing company owns the subject of the lease, such transactions are more secure than they would be for a bank.” Leasing’s low risk is also borne out by the fact that out of the total CZK 400 billion financed since leasing’s appearance in the Czech Republic, Válek says that the number of problem leases is on the order of tenths of a percent.
Enormous increases in the volume of transactions of 10% and more per year, to which we became accustomed at the end of the nineties, have not been repeated in the last few years. Last year’s growth in the leasing of movables was approximately 1%, and Válek points out that after accounting for inflation one could say that the market is stagnating. Another symptom of the change could be that the number of leasing contracts is declining, while the financed sums involved are rising slightly. However, last year’s slow-down, which affected primarily the largest companies on the market, also had its own specific causes, not all of which will recur this year. Vladimír Hábr, deputy executive director for sales at ČSOB Leasing, the market’s largest player, attributes this to the floods and stagnation on the automotive market (which plays a great role in leasing). This year’s start shows somewhat better results. According to Válek, there was mild year-on-year growth in sales in the first quarter, but some firms are reporting significantly better year-on-year results. Hábr comments that the sales volume for ČSOB Leasing reached CZK 3.39 billion in the first quarter, an increase of 15% over last year. If other companies can manage this throughout the year, the era of rapid growth could return.
Cars account for half
A look at the structure of leased items indicates a specific Czech trend – passenger cars account for half. In much of the world this figure is usually 40% or less. Another large item (28%) is attributed to trucks and utility vehicles. There is a question as to how many of them are ordinary passenger cars modified to fall under the utility vehicle category, thus allowing the buyer to recover the VAT. The last significant commodities are machinery and equipment (17%). Other items, such as computers, boats, and airplanes, lag far behind, in single digits. The fact that leasing has asserted itself as a method for personal car purchases plays a large role in the increased volume of auto financing. While around the world purchases of new (or used) cars by individuals are usually financed by bank loans, in this country leasing predominates this type of transaction. The reason is (as is the case with financing machinery or vehicles for small firms) that leasing companies are exposed to less risk than banks. Last year Czechs used leasing to buy 30,000 new and 34,000 used cars, with 12% of all movables leasing deals attributed to used cars alone. As opposed to stagnating sales of new cars, the used-car segment recorded significant volume growth – 35% year-on-year, to CZK 11.8 billion. However, more detailed analyses show stagnation in this segment as well, as the number of contracts closed last year is nearly the same as in 2001, so the only contributor to the growth was the greater value of the financed used cars.
Gaps in the market still exist
The overall leasing market is stabilized to a certain degree, so it could seem that there isn’t any room for growth, but some segments have yet to peak. Compared with neighboring countries, real estate leasing transactions (see sidebar on page 42) still have an insufficient, one-third share, although last year such deals increased by 40%. Operational leasing in this country also lags behind the rest of the world, last year accounting for 4.25% of all deals, while in Europe they account for tens of percent, and in the US they even make up over half. With this type of financing the subject of the lease is not transferred to the lessee, which has many advantages – it does not increase the amount of assets or debits on the balance sheet (as per international accounting standards financial leasing is included on the balance sheet). Also, thanks to greater flexibility and many accompanying services that increase efficiency, outsourcing is a more appropriate label than financing. For now the leading leased commodity in this country is cars (see sidebar on page 39), which account for the lion’s share of the market, but firms’ growing interest in this service brings operational leasing to other areas as well. Last year ČSOB Leasing recorded year-on-year volume growth of 111% in operational leasing. “The largest volumes were in the area of computer technology, with transport technology dominating full-service leasing,” says Hábr. “With EU accession one can expect increased interest in operational leasing of machinery and equipment.”
The last areas with sufficient room for growth are installment sales and consumer loans. Installment sales were developed by leasing companies mainly in order to be able to offer financing to subjects using state subsidies or grants (municipalities, etc.). For many infrastructure projects (e.g., water treatment plants and others), municipalities can apply to the state for subsidies, but the condition is that the receiver must own the acquired item. But with leasing the receiver becomes the owner only at the end of the lease, so he cannot receive a subsidy. Installment sales provide the ideal solution to this situation. Last year such sales grew by nearly 25%, to CZK 2.313 billion. ČSOB Leasing is the leader in this segment (nearly 29%), closely followed by CAC (over 27%).
More life on credit
Last year consumer loans (provided by non-banking subjects) again strengthened their position, confirming Czechs’ liking for living on credit. The total of CZK 15.05 billion last year represented year-on-year growth of 6%. The number of transactions approached one million contracts, but more are possible. Jiří Pathy, the general director of GE Capital Multiservis, the largest firm in the field, comments: “I don’t expect any decrease in demand for consumer loans in the near future, because not all of the types of products that are usual in developed economies have been brought to the market yet, and this type of financing is yet to cover all commodities.” Three companies account for 90% of the non-banking consumer loan market – GE Capital Multiservis, Cetelem, and Homecredit, which are battling fiercely for customers. Vendors of goods, mainly electronics financed through consumer loans, are significant competitors. According to Pathy, the product a consumer chooses is heavily influenced by “merchants, promotional materials in stores, and customers’ previous experiences with consumer loan companies.” So the companies are fighting for clients not only among themselves, but with vendors as well.
The Association of Leasing Companies currently has 92 members accounting for 99.5% of all leasing transactions. However, two years ago there were 50% more such companies (and in the association). Their departures can be attributed to several factors – insufficient financing (see sidebar on page 40) as well as the rapidly rising concentration of all business in the top 10 or 20, which makes any competitive effort more difficult. Válek says that many of the over 90 current association members aren’t closing any deals any more, so there are significantly fewer firms active on today’s market. In neighboring Austria (with about as many acres and citizens as the Czech Republic), about 30 leasing firms are currently active, and Válek estimates that the Czech market will look much the same in ten years, with 30-40 such companies.
|Operational competition thickens
In the field of operational car leasing, which was ruled two years ago by LeasePlan along with Business Lease, the competition is becoming more striking. ŠkoFIN, the market’s number two leasing company, brought back the idea of a specialized subsidiary, ŠkoLEAS, which specializes in operational leasing. ALD Automotive, a part of the Société Générale group, is becoming far more active, and currently ARVAL, of the BNP Paribas group, one of the leading operational leasing players in western Europe, is getting ready to enter the Czech market.
|Czech market unfriendly to small players
According to the chairman of the Association of Leasing Companies, the European leasing market is divided into thirds: banks, captives (subsidiaries of manufacturers of leased items, e.g., automakers, computer manufacturers, etc), and small leasing companies. The field is divided quite differently in this country – captives and banks share about 90% of the market, with a mere 10% left over for small leasing companies. The Czech market’s concentration is borne out by the fact that the three top firms (ČSOB Leasing, CAC, and ŠkoFIN) control 45% of the leasing market together. The top ten control 75% of the market, and they are all either banks (or subsidiaries of other financial institutions – insurers) or captives. The reason behind this division doesn’t lie in a lack of client interest in smaller firms’ services, but rather in that it is very difficult for such firms to get financing. In other countries there are three ways companies can get money in order to offer leasing – bank loans, forfaiting operations, and offering bonds on the capital market. However, the only one of these options that got much use in the past – forfaiting – ended with the collapse of IPB, the sole provider of this service, which was based on the purchase of outstanding leasing debts. The impact of IPB’s collapse on the leasing market can be seen in the cessation of leasing activities by 15 association members immediately following the bank’s failure, as no other bank in the country was interested in providing such service, probably due to concerns about supporting the competition of their own subsidiaries.
|Big deals account for most of the market
Last year real estate leasing accounted for less than 10% of all leasing deals, year-on-year growth of over 50%. However, recent years’ results are marked by strong fluctuations, because many transactions take over a year, so a lot depends on the moment when they are finally closed. Vratislav Válek, the chairman of the Association of Leasing Companies, claims that this was the decisive factor in last year’s results: “at the beginning of December we expected real estate leasing to be on the same level it was two years ago, but then during December two big deals were closed, with an entirely different result.” Real estate leasing still lags behind neighboring countries; while in this country it accounts for about 9% of all leasing transactions, in Austria and Germany the figure is around 30% and 25%, respectively, according to Alois Lanneger, director of Raiffeisen Leasing Real Estate. In Italy, where acquiring real estate via leasing is associated with tax advantages, it represents an even greater percentage of the volume.