COMMENT
Jason T Hesse
Go deeper with GlobalData
It is often the case that a
company’s profitability will vary over the year. After all, many
factors contribute to profit and return, so it is usual to see some
upward or downward movement.
However, fourth quarter results at Siemens
Financial Services (SFS), were particularly out of the ordinary for
a lessor which, over the last few years, had repeatedly reported
strong, stable results.
Not only did SFS see profit fall by a third,
but perhaps more importantly, return on equity (ROE) was down by
over 10 percentage points, to 11.3 percent, well below its 20
percent to 23 percent target range.
Because it is backed by the Siemens
conglomerate, ROE is one of the most important key performance
indicators for SFS. Historically, the German lessor – whose results
also include its equity and project finance divisions – has managed
exceptional ROE, even peaking at an eye-watering 46.8 percent in
the second quarter of 2008.
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By GlobalDataStill, a spokesperson for the lessor pointed
out that although recording a lower ROE result in the fourth
quarter, SFS’s overall return for the whole of 2009 was 25.9
percent. Yes, still above target, but well below 2007’s and 2008’s
average ROE of 30+ percent.
“Of course, there can be financial variations
here and there during the year, but in the end, the SFS return on
equity has been stable for several years now,” the spokesperson
said. “We continue to believe that 20 percent to 23 percent ROE
pre-tax is a good target range in 2010, too.”
The fall in pre-tax profit, which declined 31
percent from €49 million last year to €34 million in the fourth
quarter of 2009 was, according to Siemens, “primarily due to an
increase in loss reserves in part related to a commercial finance
portfolio in Europe to be liquidated”.
Indeed, last February the decision was taken
to cease all new business activities – barring major vendor
relationships – at SFS’s Italian subsidiaries, Siemens Finanzaria
SpA and Siemens Renting SpA.
At the time, well-placed sources suggested
that if large amounts of investment were needed by the Italian arm
to reach ROE targets, then it might have been cheaper for Siemens
to simply close it down.
“The decision formed part of a strategic
review undertaken by the Commercial Finance division of SFS
worldwide,” the spokesperson explained.
Regardless, even though, with an 11.3 percent
return, SFS remains a profitable division for Siemens, there is
little doubt that its masters will want to know how and when the
€11.7 billion financing cash-cow will return to target.
Keep your eyes peeled to how SFS will perform
in 2010 – I know I certainly will be.
