Leasing is strongly established in the Scandinavian countries and,
in some sectors, moving towards service-inclusive deals in
conjunction with vendors. Lessors based in the Nordic region are
also in the forefront of moves into the Baltic states. Andy
Thompson reports.
Compared with the major European countries such as the UK,
Germany and France, with populations ranging from 45 to 70 million
each, the Scandinavian and Baltic countries are not large –
combined, their population totals 31.2 million. Yet the Nordic
countries make up for their lack of size with levels of per capita
income among the highest in the world and the scale of regional
leasing market activities reflects the high level of general
economic development.
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The Baltic states have been taking great strides since emerging
from the Soviet economic system 17 years ago. There, too, leasing
plays a major part in equipping local industry and commerce. In
common with the rest of Europe, the Nordic and Baltic regions face
a slowdown in current conditions. The European Commission’s latest
economic forecasts showed that economic growth through to the end
of next year will slow down.
This prediction might well, however, fall short of the mark.
Last month, it was reported that Sweden, like the UK, in terms of
its quarterly trend of gross domestic product from April to June
this year,
has stood still. The mood among Scandinavian lessors remains
reasonably bullish, however.
Peter Rich, Nordics managing director for leasing at De Lage
Landen (DLL), says: “While this region cannot escape the impact of
the general economic slowdown at the European or global level, the
trend of demand for new leasing business here has so far held up
very well.
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By GlobalData“As a company we saw strong growth of Scandinavian leasing
business during the first half of 2008.”
Ben Lindberg, first vice-president of Nordea Finance, adds that
“the growth rate of leasing is slowing down in line with overall
economic conditions, but it varies among the national markets. For
example, the business is still growing at a good rate in
Norway”.
Nordic recession
The Nordic region has not seen an economic recession since the
1990-92 period. In that respect its experience matches that of the
UK, but when it comes to the impact of economic pressures on the
financial sector, including the parent banks of major lessors,
there have been significant differences.
Last time around the Scandinavian banks bore the brunt of the
economic troubles. Some of the largest banks in all of the Nordic
countries collapsed in the early 1990s, and the subsequent
consolidations resulted in part from state rescues and subsequent
re-privatisations of major distressed banks.
In the present credit crunch, however, Scandinavian banks appear
comparatively robust.
Alun Richards, partner at the leasing consultancy The Alta
Group, remarks: “The parent banks of some significant players in
European leasing markets, such as RBS, SocGen and some German
banks, have taken big losses on mortgage-backed securities or other
financial market derivative products.
“The Scandinavian banks seem to have avoided this. Even after
the credit crunch they will still probably dominate most of the
regional leasing market, although they are not particularly good at
packaging a competitive finance product in a service-inclusive
deal.”
The potential market for leasing in the Nordic region seems
unlikely to grow anything like as fast in the immediate future as
it has in recent years. The table below also shows forecasts for
the investment in equipment – or, where this is unavailable, total
fixed investment including construction – in each country.
These suggest that Denmark faces a real contraction in equipment
demand next year, while the other countries may see continuing
growth but at a much slower rate.
Penetration rates
There is, of course, always potential for leasing to take a
higher share of total investment. From the available indications,
there would seem to be some variation among the Nordic countries in
the proportion of total equipment currently sold on lease.
In Sweden the “leasing penetration” rate may be as high as 20
percent, and in Norway somewhere in the 15-20 percent range – but
in Denmark and Finland it is understood to be nearer 10
percent.
“Leasing penetration is an inexact science, but all the
indications suggest that the share of leasing in the total market
for capital equipment finance is probably growing across the
Scandinavian region,” explains Richards.
“It seems to be presently highest in Sweden where it is nearly
at the UK level.”
International players
As in some other parts of Europe, a large proportion of all
leasing business in Scandinavia is arranged at the point of sale.
The major pan-European vendor leasing specialists, such as GE, SG
Equipment Finance, DLL, Siemens Financial Services and Key
Equipment Finance, each have a presence in all of the Scandinavian
markets with varying degrees of size, alongside the more distinctly
regional players.
“Our general Nordic business model of ‘partners in finance’ is
mainly arranged through dealers because of the geographic
conditions in the region, but we naturally also service the DLL
global vendor programmes with manufacturers,” says DLL’s Rich.
Captive Finance Group, which was launched as an independent
Nordic leasing company offering a ‘white label’ facility for
undisclosed agency arrangements with unconnected equipment vendors,
has recently been acquired by Fortis Lease. It has thus now become
part of a vendor leasing group on a more continental scale.
Captives and local players
Pure captives are, of course, also significant players in
Scandinavia. Many of these are global in their operations, but they
include some locally based manufacturers such as Scania
Finance.
The relative scale of the locally-based players is broadly
indicated by the Leaseurope corporate rankings (see table:
Breakdown of outstanding leasing book values in Sweden at 30 June
2008). The size of the Hansa group’s Baltic operations
appears, perhaps, to be overstated in the Leaseurope survey by
comparison with the Nordic players, though the latter may have
reported more consistently among themselves.
Lindberg comments: “Local banks have an important role in some
individual countries, but Nordea is the only leasing company in the
region with a strong presence in all four Scandinavian countries as
well as the Baltics.”
Richards notes that it is, in fact, the local players that
dominate part of the market: “Standalone asset finance products are
very much dominated by the regional bank-owned lessors.
“Yet there are significant niche opportunities for other players
in areas such as vendor leasing programmes, undisclosed block
discounting facilities with vendors and specialist IT finance
products.”
Finance products
The bulk of Scandinavian leasing business consists of
full-payout finance leases, though residual value risk is taken by
lessors in some sectors.
“We write operating lease business on trucks and trailers,” says
Richards. He points out that “point-of-sale leasing products are
increasingly becoming service-inclusive across the Scandinavian
market”.
He adds: “In some of the IT and office equipment sectors,
finance is almost viewed as a peripheral part of the equipment
dealer’s servicing package.”
The lease, of course, remains an essential part of the picture,
even though the lessor does not necessarily have a high profile
with the equipment user.
Big-ticket leasing
Middle- to big-ticket leasing business has, to date, formed a
relatively small part of the Scandinavian market. However, this
could be starting to change with an innovative programme for the
leasing of wind turbines launched within the past year by Wasa
Kredit in partnership with Dynawind, which supplies, erects and
services turbines.
Wasa offers funding packages up to SKR80 million (€8.5 million)
for individual turbines or smaller wind parks. Specialist
investors, including private individuals, can take a 20 percent
equity interest in the project, while the lessor retains title to
the assets as in a conventional lease.
The Swedish authorities are aiming for a huge increase in wind
power generation, with the total number of stations targeted to
rise from the present 800 to between 3,000 and 6,000 by 2020.
“Wind power is a new area of finance for us. This market is
growing rapidly and we look forward to helping to ensure a
consistent strong growth in Swedish wind power,” says Jesper
Holmberg, area manager for large equipment finance at Wasa.
Routes to market
The marketing methods for leasing in Scandinavia – with pure
brokerage, for example, playing only a small part – to some extent
reflect the sophisticated approach to technology among the customer
base.
“Scandinavian countries are ahead of the world in the general
development of IT and Finland is the most advanced of all,” says
Richards.
“On-line banking and financial services transactions became
normal in Sweden and Finland long before the UK got there, and the
same process is now happening with mobile connectivity. All lessors
in Scandinavia have moved to online offerings of leasing
services.
“This is different from the position in Germany, for example,
where some substantial players still do not close deals
online.”
Regulations and the Euro Zone
It is still appropriate to regard Scandinavia as four national
leasing markets rather than one.
There remain some significant regulatory differences (see:
Laws and regulations, below), though few great cultural
barriers. Denmark, Sweden and Norway – though not Finland – share
very similar languages.
Of all the Nordic and Baltic countries, only Finland has so far
joined the euro zone. The other Scandinavian countries have
nevertheless managed to maintain a degree of economic convergence
with the zone, though rather less so in the case of Norway. Its
distinct position as a huge energy exporter and the consequent
fiscal benefits means the country can keep its distance.
Exchange rate relationships may be seen as a general indicator –
and arguably a cause – of the extent of economic convergence.
The Danish currency has remained very stable against the Euro
over the past five years, with only a 0.8 percent variation either
side of its average Euro parity.
The comparative currency fluctuation range for Sweden was just
more than 2 percent and for Norway 2.5 percent; though all have
been much closer to stability against the Euro compared with the UK
over the past year.
In terms of market entry, Denmark is generally regarded as the
easiest to enter. However, although there are many small local
lessors there, it is not the most competitive market on price, nor
the most well developed in service-inclusive products.
Sweden is the most highly competitive market at present.
Finland, meanwhile, is hard to penetrate given, according to
Richards, “that a single established player has such a large market
share”. He adds that Norway is “probably the least open to new
players”.
Despite the economic slowdown having a sizeable impact on
Scandinavia and forcing the EC to reconsider its own very recent
forecasts for the region, there is not much evidence that leasing
is particularly feeling the pressure.
While the scale of the slowdown Scandinavia is suffering is
comparable to that being borne by the UK’s economy, the Nordics has
not seen a flurry of lessor closures and portfolio sales as there
has been in Britain’s far larger asset finance industry.
This suggests that there is still plenty of business to go
around, and that additional investment by local and international
players in some Nordic countries might be a good step to take
despite wider market conditions.
Weathering the economic storm
The Baltic states have been characterised by very strong growth
in equipment sales in recent years. The outlook for the coming 18
months is not so good, though the prospects for Latvia are perhaps
not quite as bad as they appear in the table. The forecast slump in
the country in total fixed investment likely reflects a poor
outlook for construction because separate projection for equipment
is not available.
Leasing is certainly now well established in the Baltics, with
Estonia claiming one of the highest leasing penetration rates in
the world – well in excess of 20 percent of all fixed investment in
equipment.
The Estonian Leasing Association estimates that in this small
country new leasing business in 2007 reached €1.5 billion. Annual
leasing growth in euro terms was 15 percent across the market, with
general plant and machinery growing by 9 percent and commercial
vehicles by 23 percent.
Estonia is also something of a corporate tax haven, though of a
rather unusual kind. Companies pay no tax on retained profit, but
only on distributions to shareholders at the rate of 24 percent of
the tax-inclusive dividend.
Consequently, there is no such thing as fiscal depreciation,
except for unincorporated businesses; and the tax system is a
completely neutral influence where leasing is concerned.
The other Baltic states have more conventional tax systems, but
Latvia allows especially favourable tax depreciation for equipment.
Annual write-off rates on the reducing balance basis range from 15
percent for oil and gas extraction equipment to 70 percent for
computers.
Lessors based in Scandinavia and elsewhere in Western Europe
have developed significant operations in the Baltics. Swedbank has
big market shares in all three countries through its local Hansa
Leasing subsidiaries. Nordea, SEB and Nordania are also active in
all three of the Baltic states, as is UniCredit Leasing. DnB NOR
has a presence in Lithuania.
Some independent local banking groups, such as Medicinos, Parex
and SNORO, compete with the outsiders in Lithuania. In Latvia and
Estonia, the Scandinavian-based leasing groups are collectively
more dominant.
Leasing in the Baltic states is becoming increasingly bundled
with equipment servicing.
Laws and regulations
Except for Norway, all the Scandinavian and Baltic countries
belong to the EU; Norway adheres to the European Economic Area,
which commits it to following most EU commercial regulations. Some
regulatory aspects of equipment leasing, being harmonised on a
European level, are consequently the same for all these countries.
This is true of most aspects of VAT and of lease accounting for
listed company lessees and lessors.
Elsewhere, there are some variations, especially in the lessee
accounting rules for unlisted companies. In Finland all leases
remain off-balance-sheet for the lessee. Denmark is at the other
end of the scale, with a capitalisation rule for finance leases on
a very similar basis to IAS 17. The other countries are in
intermediate positions. In Sweden unlisted companies can keep
leases off-balance sheet except in consolidated accounts. Norway
applies IAS 17 but with an opt-out for small companies, according
to the EU company law definition of size.
The corporate tax systems vary, but all are generally favourable
to leasing. Timo Torkel, KPMG’s senior tax partner for Finland,
says “there are no general restrictions on the lessors’ entitlement
to fiscal depreciation.” The same is true of the other Nordic
countries. A proposal was made by the Swedish tax authorities in
2002 to adopt similar rules to the ‘long-funding lease’
restrictions that became effective in the UK in 2006. However, this
seems unlikely ever to be adopted.
The tax write-off rates for equipment vary from one country to
another, but all are more favourable than those now applying in the
UK. Denmark and Finland have 25 percent annual write-offs on the
“reducing balance” basis, as the UK had for most assets until this
year.
Sweden offers a choice of 30 percent on the reducing balance or
20 percent straight line (ie, full write-off in five years). Norway
has a range of rates for different equipment types, from 4 to 30
percent, all on the reducing balance basis.
Insolvency laws are variable, but generally favourable to the
security of leased assets in all these countries. A change in
Swedish law within the past two years has reduced the security
value of bank creditors’ ‘pledges’, which are broadly equivalent to
floating charges in English law. From the banks’ standpoint, this
increased the attraction of offering leases rather than unsecured
loans.
Through the EU Banking Directive all these countries have to
apply the Basel II capital adequacy rules to those lessors within
their scope. The actual scope is much the same as in the UK, though
with some variation as to precisely where the line is drawn. In
Sweden, Finland and Norway all financial sector lessors are
regulated in this sense, while captives are exempt provided that
they do not fund themselves with retail deposits. In Denmark, as in
the UK, any lessor not tapping the retail deposit market is exempt
from capital regulation.
Recent mergers and acquisitions
• Handelsbank was one of few large Swedish commercial banks to
come through the 1990-92 banking crisis without needing government
support. Through a combination of organic growth and the
acquisition of Bergen Bank in 1999, it has gained a large presence
in Norway. Similar developments have made Handelsbank the fifth
largest bank in Denmark. A significant acquisition in 1995 also
made it the fourth largest in Finland.
• Nordbank in Sweden was refloated on the stock market in 1995
after a collapse and state rescue in 1992. In 1995, it merged with
Merita Bank of Finland and the two banks were reorganised into
Nordic Baltic Holdings in 1997. In 2000 Unibank in Denmark and
Christiana Bank in Norway joined the group, the name of which was
changed to Nordea.
• The merger of two Norwegian banks Den Norske and Gjensidige
NOR in 2003
created the largest Norwegian bank DnB NOR.
• Danske Bank in Denmark has expanded into Sweden and Norway and
its leasing division trades as Nordania in all of those countries.
In 2007, Sampo of Finland was acquired by Nordania.
Major players
Sweden
• Handelsbank
• Swedbank
• Nordea
• SEB
• Wasa Kredit
• Barcken Finans
Norway
• DnB NOR (about 50 percent)
• Nordea
• Sparebank 1 Finans
• Santander Consumer Bank
Denmark
• Nordania Leasing
• Jyske Finans
• Nordea
• Handelsbank
• AL Finans
Finland
• Nordea (estimated at above 50 percent)
• Pohjola Bank (formerly called OKO)
• Santander Finland
