30th Annual World Leasing Convention – May 29 & 30, 2012 – St. Petersburg, Russia – A Summary of the Proceedings

By Sudhir P. Amembal

It was once again a privilege and an honor to have served as the chairman of this annual convention – the most prestigious annual global event in our industry.  This particular year, it was an extraordinary honor as it was my 20^th consecutive year of chairmanship.

Since 1982 , the convention – hosted by Euromoney Seminars, has been held in some of the most beautiful cities in the world including  Amsterdam, Budapest, Dubai, Hong Kong, Istanbul, London,  Madrid, Paris, Prague, Rome, San Francisco, Singapore, Sydney, Tokyo, Warsaw, Washington DC; and, of course St. Petersburg.

This year the convention was attended by leasing professionals from over 25 countries; and, as always it attempted and succeeded in achieving the delegates’ dual objectives of keeping abreast of significant issues as well as networking.

Prior to introducing our first speaker, I presented a “Global Overview”.  The salient points were:

• 2011 witnessed a robust global recovery.  As expected, emerging markets such as China and Russia experienced substantial growth compared to the previous year – China surging by 69% (becoming the second largest leasing economy in the world, after the U.S.A.), and Russia by 110%!

• Statistics in our “industry” are unfortunately neither readily available, nor are they too reliable.  As far as availability, only two entities in the world present global statistics –White Clarke Group and my firm, Amembal & Associates.  While Clarke presents an annual report which is published in Euromoney’s World Leasing Yearbook; Amembal & Associates conducts frequent global studies.  The data gathered by both entities is clouded by many factors including that some countries (such as the U.S.A.) do not segregate leasing from total equipment finance, some countries include hire-purchase as a part of their leasing volumes – some do not, and some countries include real estate leasing – some do not.  Sadly, leasing in this context, has been relegated from an industry to a product.

• Amembal & Associates’ most recent statistics centered around global benchmarking.  Data collected showed that ROA in emerging markets averaged 2.5%, almost double than what it is in mature markets; margins in emerging markets, once quite generous, are approaching close to margins in mature markets; and, operating leases still only represent about 5% of total emerging markets volume compared to about 33% in mature markets.

• Trends presented included:
  • Continued decoupling
  • Fewer players
  • Regional and global expansion
  • Shrinking margins
  • Basel III caution
  • A movement to operating leases
  • Fiscal imbalance repercussions
  • Tax and regulatory uncertainties

• In conclusion leasing will remain viable and resilient notwithstanding global volatility and uncertainty; and, notwithstanding accounting, tax and regulatory changes – as viability and resilience has been proven over the past several decades.

Submitted below is a brief synopsis of presentations that followed: brief, as I was more preoccupied listening to the speakers as versus taking copious notes!  The format, below, shows the topic, followed by speaker details, followed by the synopsis.

 

PREFACE TO SYNOPSIS:

The synopsis is presented only as an overview.  It does not, by any means, attempt to substitute the time and effort put forth in splendid embellishments; it simply could not!

 

A.    RECENT ECONOMIC DEVELOPMENT AND OUTLOOK FOR RUSSIA

Sergey Ulatov, Resident Macroeconomist, The World Bank (Russia)

2011 demonstrated steady recovery; however, the rebound since the global financial crisis has been relatively slow.  The share of fixed capital investments financed by debt (loans and leases) dropped from 20% in 2009 to 13% in 2011 demonstrating caution.

The main challenges in the context of structural policies are:

• Closing the infrastructure gap (Russia is ranked 100 out of 142 for quality of general infrastructure).  The government has limited resources due to its recent military and social commitments; and the private sector is reluctant to invest.
• Human capital development (Russia is ranked 82 out of 142 countries according to the quality of educational system).  Russia suffers from very low life expectancy.
• Reducing state share in the economy.  Currently the state dominates the energy, transport and communication sectors).  In the context of leasing, the majority of volume takes place between state owned lessors and state owned enterprises (lessees).

 

B.     THE LEASING MARKET IN RUSSIA

Kirill Tsarev, President, United Leasing Association of Russia (Russia)

Annual volume has surged from $11.6 billion in 2009 to $43.3 billion in 2011 with the overwhelming portion of such being rolling stock (over 50% in 2011).  Close to 60% of volume is in the hands of state owned institutions.

Challenges for the industry include:

• Divergent arbitration practices
• Complex repossession procedures
• Shallow secondary market for repossessed assets
• Possible repeal of accelerated depreciation

Trends include:

• Further margin compression
• Fewer lessors
• More operating Leases

 

C.     IMPLICATIONS OF BASEL III ON LEASE FUNDING

Patrick Beselaere, Global Head, ING Leasing (Netherlands)

Constraints can be summarized into four categories:

• Risk based capital requirement (Core Tier 1 Ratio) – more stringent definition of capital and increasing risk weights for certain asset classes
• Non risk based capital requirement (Leverage Ratio) -  capping balance sheet size and off balance sheet items as a simple equally weighted multiple of capital
• Liquidity (Liquidity Coverage Ratio) – availability of sufficient buffers in the form of liquidity assets to cover potential deposit outflow
• Funding (Net Stable Funding Ratio) – availability of sufficient long-term funding

Impact on bank lessors include:

• Funding for longer term lending (including leasing) to be more expensive
• Leasing relative to lending will remain unchanged

Impact on independents include:

• Depends on regulatory regime in country – if independents are regulated then Basel III applies and creates a level playing field; if not regulated, then indirectly impacted as bank funding will be more expensive given the need to maintain more liquidity and the overall increase in capital requirements
• Greater reliance on alternative funding

 

D.    INCREASING SME ACCESS TO FINANCE

Raphael Parambi, CEO, National Company for Projects & Management (Oman)

Salient points presented below:

• There is no consistently accepted definition of SME.  Varies from country to country
• They constitute a very large percentage of the economy in both mature and emerging markets
• Financing them presents an attractive opportunity as they are typically the early movers in any recovery, the margins/spreads are generous and risk is distributed
• Risks are daunting.  They include the fact that SMEs are vulnerable to the economy, to their customers (payment delays), to fraud and to solvency (under capitalized).  Assessing and monitoring risk is difficult too.  Also, the small ticket transactions come with a high cost
• The probability of risk can be mitigated via assessment (credit scoring, bankers references, sectorial specialization, etc), covenants, guarantees and pro active monitoring.  A close relationship helps as well.
• The impact of risk can be mitigated via collateral, margin, advance rentals, credit insurance and aggressive recovery
• Automated risk prediction and automated risk mitigation must be used

 

E.     LEASE ACCOUNTING UPDATE: STATUS AND IMPACT

Moderator:         Sudhir Amembal, CEO, Amembal & Associates (U.S.A.)

Panelists:             Vincent Rupied, Strategic Marketing Director, Arval (France)

Ian Richmond, Manager, HSBC (U.K.)

As presented by the moderator:

Status:

• Exposure draft issued August 2010. 786 comment letters received
• Revised exposure draft expected second half of 2012
• Final standard date to be determined
• Effective date to be determined

Gist:

• Right of use model will be used by lessees with the balance sheet showing both the right of use asset and the corresponding liability.  Asset will be depreciated, liability will be amortized.
• Four methods (!) under consideration for depreciation and amortization.
• At an informal meeting in May, IASB and FASB have narrowed down from four to two methods – front loaded and straight line.  IASB likely to vote in June and decide whether to allow companies to use only one method or both; if both, one method for certain asset classes, the other method for certain other asset classes.  Uncertainty continues!
• For lessors, except for short-term leases and leases of investment property, the balance sheet will show the “right to receive lease payments” and the “residual asset”.  The income statement will show interest income on both the assets.

As discussed by the panelists:

Impact:

• Leaseurope and ELFA and other national associations must be given due credit for the elimination of much of the complexity from the exposure draft
• With respect to fleet leasing, off balance sheet financing is not a high priority
• Impact will of course be financial (ratios and net income) and economic (more scrutiny of leases)
• Financial covenants will need to be re-written

 

F.     OUTLOOK FOR LEASING IN THE YEARS AHEAD

Adam Warner, President, Key Equipment Finance (U.S.A.)

Jukka Salonen, CEO, Nordea Finance (Finland)

Note: Adam is Vice Chairman of ELFA and Jukka is Chairman of Leaseurope

 

As presented by Adam Warner:

ELFA Overview

• 550 members
• $628 billion equipment finance sector

Industry Update

• Steady growth in volume
• Credit approvals have increased from 69% in March 2010 to 78% in March 2012

Outlook

• Labor market strengthening
• Consumer confidence rebounding
• Credit conditions easing

Factors Affecting U.S. Recovery

• Election uncertainty
• Concern about Eurozone
• Flagging Chinese demand
• Sluggish housing market
• Cost of compliance

Conclusion

• Cautious optimism
• Sensible regulation
• Sustainable growth

 

As presented by Jukka Salonen:

European Overview

• Sustained recovery
• Weakening profitability with higher cost to income ratio (53%) and increasing cost of risk (1%)

Looking Ahead

• Basel III will dry up market
• Growth will require new business models
• Varied models for varied players

 

Player		Key Requirement
Bank product unit		Cost efficiency
Bank multi asset specialist		Outstanding profitability
Global captive		Value for manufacturer’s sales
Independent niche player		Specialization

 

G.    ANALYZING FUNDING SOURCES FOR CAPTIVE LESSORS

Alan Leesmith, Director, IAA Advisory (U.K.)

Why Captives Cannot Rely on Banks for Funding:

• European banking crisis
• Regulatory issues (Basel III)
• Rating agency downgrades
• Reassessment of key strategy and markets

New Sources of Funds for Captives

• Banks will continue to lend to parent companies
• Securitization is returning
• Sovereign funds
• Pension funds
• Insurance companies
• Private equity

Something to remember – No leasing transaction would ever take place unless a manufacturer sells a piece of equipment!

 

H.    EXPERIENCES IN REGIONAL VENDOR LEASING PROGRAMS

John Evans, Executive V.P. & Managing Director, Key Equipment Finance International (U.K.)

Why Vendor Leasing Programs?

• Regular source of good quality leads with decent margins
• Leverage vendor sales force
• Long term relationships

Why Not

• High ovehead
• Tied to success of vendor

Prerequisites for Success

• Total focus for all functions
• Co-mapped/aligned organizations
• Process expertise
• Program and relationship management
• Truly shared measures of success

 

I.      TRENDS IN FLEET LEASING

Vincent Rupied, Strategic Marketing Director, Arval (France)

European Glimpse:

• Cars and commercial vehicles represent 56% of total
• Fleet leasing portfoloio contains 14 million units

Main Drivers (for companies with more than 100 employees; list stack ranked)

• Fixed monthly cost
• Budget control
• Inclusion of service
• Reduction in administration cost
• Off balance sheet financing
• Avoidance of risk on resale

Who is More Prone to Lease:

• Less than 100 employees – stack ranked mode of acquisition
  • Cash
  • Loans
  • Finance leases
  • Operating leases

• More than 100 employees – stack ranked mode of acquisition
  • Operating leases
  • Cash
  • Finance leases
  • Debt

Challenges Faced:

• Funding due to economy and Basel III
• New versus used car values
• Changes in lease accounting

 

J.      KEY LEASING DEVELOPMENT IN LATIN AMERICA

Luis Schmied, V.P. Business Development – Vendor Finance, CIT (Argentina)

Market Overview:

• Top three countries: Brazil (63%), Chile (10%), and Mexico (8%) account for over 80% of market

Brazil:

• 60% of assets are automobiles
• Market dominated by banks
• Recent tax changes have adversely affected leasing
• Market highly regulated

Chile:

• Market generally unregulated
• Dominated by banks

Mexico:

• Market is fragmented; banks do not dominate
• Opportunities mainly in industrial, infrastructure and IT equipment

 

K.     THE TWO FASTEST GROWING LEASING ECONOMIES – CHINA AND INDIA

Siming Li, CEO, Unitrust Finance & Leasing Corporation (China)

R. Venkatesan, Managing Director, OPC Asset Solutions Pvt. Limited (India)

 

As presented by Siming Li:

Current Status:

Type of Company		#		Market Share
Bank subsidiaries		20		60%
Local leasing companies		66		15%
Foreign leasing companies		220+		25%

Challenges

• Dual regulatory regime
• Varied VAT treatment in provinces
• No uniform asset filing system
• Difficulties in legal enforcement
• Limited sources of financing
• Lack of adequate talent

Opportunities

• Transportation/logistics, energy savings, environmental protection and public education
• SME, financing (small and micro)
• Operating leases

As presented by R. Venketesan:

Market Overview:

• Very low level of penetration (3%)
• Central bank license required for finance leasing activity
• Operating leases gathering momentum

Potential for Resurgence:

• High growth in service sector
• Banks restricted from engaging in leasing
• Ownership mindset change
• Higher level of technology products penetration
• Huge investments in infrastructure

Growth Drivers

• Credit rating systems
• GST introduction
• Corporate bond market
• OEM partnerships and alliances
• Increased lessee awareness
• Organized secondary markets in certain asset classes

 

L.     SUSTAINABLE ENERGY AND LEASING – AN IDEAL COMBINATION

Martin Dasek, Climate Solutions Financing Coordinator, EMENA, International Finance Corporation (Turkey)

Definition of Sustainable Energy Finance:

A capital investment resulting in improvement against baseline:

• Energy efficiency – decrease in energy consumption per unit or in total
• Clean/renewable energy – more access to energy with less impact on the environment
• Resource efficiency – increase in material yield, reduction in emission of waste and hazardous substances

Sustainable Energy Finance Opportunities:

• Wind energy
• Solar PV and thermal
• Waste and recycling
• Green building
• Energy efficiency
• Water and wastewater

Key Benefits for Leasing Companies:

• Expanded market share through new business line
• Improved risk profile of portfolio (energy cost savings as a part of cash flow)
• Positive social and environmental impacts

Lease Structure Variations:

• Traditional lease
• Lease with guaranteed savings
• Performance lease
• Fixed payment energy savings agreement

 

M.   WORKING AROUND REGULATORY BARRIERS – LEASING IN ITALY

Piero Biagi, General Manager, BCC Lease (Italy)

Overview of Italian Market:

• Mature market with regard to volumes and competition
• Very basic market with regard to products – mainly vanilla finance lease
• Complex regulatory system
• Volumes have plunged since 2006 high due to international factors (financial and economic crises), international regulations (implementation of IAS in 2006, Basel II and Basel III), and national regulations (tax law changes and regulatory tightening)

Regulatory Nuances:

• Bank of Italy licenses and supervises banks and financial companies
• Supervision is very extensive and companies are subject to frequent inspections
• Detailed statistics have to be submitted each quarter
• Anti usury law exists
• Regulated companies not permitted to take on residual value risk or perform services such as maintenance – thus, operating leases cannot be done by them
• Agents and brokers are also regulated

How to Survive and Succeed (A Case Study – BCC Lease):

• To begin with, BCC was a non regulated non financial company doing operating leases.  Challenges faced included funding, poor fiscal treatment, inability to do finance leases (a regulated activity) and inability to sell finance leases (due to agency rules)
• Today, BCC is a financial company specialized in three different ways – channel (dealers); equipment type (mostly high tech); and, transaction size (average 10,000 euros)

 

N.    GETTING THE MOST FROM ASSET LIFE CYCLE MANAGEMENT

Charles Garity, Director of Asset Management, CSI Latina Financial (U.S.A.)

Salient points:

• Growth and profits are achieved through innovation
• Costs for obsolescence and complacency can be very high
• Government regulations are increasing and evolving
• New technology will save TCO, increase control, and reduce risk
• Lessors that provide true end to end service will provide value
• Upgrades and replacements prior to lease termination are critical

 

O.    ADAPTING THE BUSINESS MODEL TO ADD VALUE

Andy Swadlow, CEO, Central & Eastern Europe, Siemens Financial Services (U.K.)

The Operational Challenge:

• Increase financial returns, though competition driving down margins
• Decrease costs and still be best in class
• Be socially and environmentally responsible

The Essential Problem (We are All Doing Very Similar Things):

• Same products
• Same markets
• Same backgrounds
• Same process
• Same outlook!

A Ten Digit Countdown to Adapting the Business Model:

• We give (finance) discounts for parent components
• We get customers to switch to our products
• We organize around finance, not the other way around
• We visit clients
• We let competition win some “captive” transactions (why waste scarce capital if someone else will do it for you?)
• We hire people with more than IQ
• We focus one step at a time – geography, product, and market
• We leverage local success at HQ
• We integrate HQ
• We have some fun along the way

I prepared the summary based on a request from two leasing associations that wanted to post it on their websites.  This makes perfect sense as it will provide a gist to those who could not be with us.  I will also send it to all the leasing associations in the world requesting them to consider posting it.

I am hoping the summary will incentivize those who could not attend the 30^th annual World Leasing Convention to indeed attend the 31^st annual World Leasing Convention.