Even factors described as a potential brake on the thriving Czech economy are working in favour of the country’s leasing industry, as labour shortages prompt investment in equipment to enhance productivity. Paul Golden reports.
Recent data from the IMF and the Czech Leasing and Finance Association (CLFA) makes for encouraging reading for the domestic leasing industry.
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GDP rose by 4.4% last year on the back of strong domestic demand, while the unemployment rate fell to a record low of 2.3% in April 2018.
The IMF forecasts that the economy will grow by 3.7% this year, while cautioning that longer-term growth will depend on the potential for productivity to compensate for the decline in the labour supply.
The 42 providers of financial and operative leasing, enterprise and consumer credit, and factoring that make up the membership of the CLFA generated new business worth CZK163.28bn ($7.17bn) in 2017, an increase of 5.4% on the total for the previous 12 months.
The growth trend that has been uninterrupted since the end of the last recession in 2013 continued through the first half of this year, when these firms recorded new business worth CZK93.46bn, a year-onyear increase of 5.5%.
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By GlobalData“If we look merely at the financing of company investments, CZK112.62bn went on this area with a year-on-year growth of 5.1%,” explains CLFA general secretary Jaroslav Krutilek, adding that growth in corporate leasing was more modest for the first six months of this year at 1.6%.
He notes that consumer finance has undergone fundamental reform this year, with all providers of consumer credit having to apply for a licence from the central Czech National Bank in line with the new law on consumer credit.
“Fifteen of the CLFA’s member companies applied for such a licence, and all were successful out of a total of 85 licensed companies,” continues Krutilek.
“Our analysis shows, however, that our members account for 80% of the total licensed market, which is further evidence that we hold a significant position not merely in corporate financing, but also in consumer finance.”
The IMF notes that, in terms of expenditure, private consumption was strong in 2017, supported by real wage growth of 4% and employment growth of 1.6%.
Private domestic capital formation picked up in the second half of last year, and the household savings rate remains stable at around 11% of GDP. Operating leasing has tripled in value in the Czech Republic since 2012, a trend the general secretary of the CLFA attributes to growing demand for financial products with added value.
“It is being used, first and foremost, for financing new cars,” he says. “According to current data, more than half [53.5%] of companies are using operating leasing
during the external financing of new cars; the equivalent figure for consumers is 32%.”
CLFA members provided CZK47.7bn for road vehicles in the first half of this year, 4.4% more than in the same period last year. Funding of new passenger cars increased by 2.3% in terms of value, while the number of cars financed this way rose by 6.9%.
After passenger and commercial vehicles, machinery and equipment – especially agricultural or forestry machinery and metalworking or other machine tools – is the next-largest category.
Krutilek acknowledges that the performance of the Czech economy is the critical factor that has led to increased demand for leasing. “The economy has displayed extremely solid growth in recent years, and this has been reflected in our member companies’ results,” he says.
“It is also important for there to be a prevailing optimistic outlook of future development in the corporate and consumer sectors. We have record-low unemployment in the Czech Republic, accompanied by relatively pronounced growth in wages.
“This development is forcing companies to think about how to make up for a shortage of labour by means of investment in new equipment, and is also stimulating consumer demand, which are all pluses for our business.”
While recognising that the CLFA’s membership base has long been dominated by subsidiaries of large supranational banking houses and industrial concerns, Krutilek adds that his association also represents significant local leasing companies, some of which have been active since the very beginnings of the Czech leasing market in the first half of the 1990s.
Asked whether the Czech government is supporting growth in the industry, he suggests that it is not the role of the state to be actively supporting leasing business.
“On the other hand, we can say that representatives of the government listen to the arguments we put forward during the preparations for changes to the legislation that affects our member companies, and proceed extremely objectively during consideration of individual topics,” says Krutilek.
“Thanks to this, we have managed to push through a number of specific proposals to the benefit of leasing and credit companies and their customers.”
ECONOMIC OVERVIEW
The IMF observes that near-term domestic growth momentum is strong and that consumer and business confidence is high, consistent with strong demand for durable goods and production equipment.
Employment gains are assumed to slow considerably, but wage growth is expected to remain strong, supporting private consumption. Investment is expected to accelerate this year as firms attempt to compensate for labour shortages.
If the Czech economy continues to strengthen in line with the forecasts of the IMF, the CLFA anticipates the single-digit percentage growth trend in the market to continue. “As ours is an open economy, developments in the eurozone – and in Germany in particular – are fundamental,” says Krutilek.
“Unless we see great turbulence on the international scene, we can continue to be optimistic.”
Petr Neuvirth is director of the strategy and products team at ČSOB Leasing. He says the leasing sector in the Czech Republic is a developed market comparable to those in Western European countries.
“On one hand, there is a growing demand for financing of acquisition and use of movables among entrepreneurs and consumers,” he says.
“However, on the other hand, given the current policy of the Czech National Bank, there is also a gradual increase of interest rates.”
The IMF has noted that the Czech National Bank favours continued gradual normalisation of interest rates, seeking to avoid undue appreciation of the exchange rate.
The central bank has forecast that there will be a series of rate increases in 2019, and the IMF observes that the Czech National Bank would prefer to tighten monetary conditions via the interestrate channel rather than the exchange rate.
It has also warned that an increase in financial turbulence could see increased longer-term interest rates and exchange-rate volatility.
“In general, the main challenge regarding providers of financing is a gradual trend of interest rate increases in connection with the Czech National Bank policy, while the expectations of clients are in the opposite direction as they have become accustomed to low interest rates in previous years,” says Neuvirth.
He suggests that demand for leasing is driven by customers realising that they will receive responsive financing – including insurance and related services – with the use of assets under attractive conditions.
“Frequently, the attractiveness of this type of finance is increased by participation from suppliers of the objects of financing, for example funding from various grant programmes,” he continues.
“The offer of leasing companies is simply richer.” On the question of whether the Czech government should be actively supporting the growth of the lease finance industry, Neuvirth notes that since leasing companies finance entrepreneurs’ investments in movables and their modernisation, and that they use these assets to produce or provide better-quality services, leasing companies effectively increase the competitiveness of Czech entrepreneurs.
“The Czech government supports investments, so the intentions and efforts of both the government and the leasing companies are balanced,” he suggests.
Reinhold Knödl, CEO of SG Equipment Finance Czech Republic, observes that the Czech economy has been experiencing growth since 2013, with increasing nonbank financing volumes.
“Growth of GDP, industrial output, investments, retail sales, inflation and the low unemployment rate give the macroeconomic framework to the leasing market,” he says. “On the other hand, we see that the potential is limited by the lack of skilled labour. The unemployment rate in the Czech Republic is below 3%, and is the lowest among the EU countries.”
STEADY PRESSURE
Knödl suggests the leasing market reached its peak in 2015 and since then has been stagnating. “Concentration and competitiveness are typical features of the Czech leasing market,” he adds.
“The number of active leasing service providers is gradually decreasing, so the market concentration deepens every year. “A highly competitive environment generates benefits for customers, but for providers it means steady pressure on margin and strong competition – not only on corporate but also for SME activities. At the same time, it requires creativity and brings new opportunities in inventing new value-added services and products.”
Leasing companies with bank networks play a key role in the market, but captive leasing and specialised companies remain important players, according to Knödl, who goes on to outline a number of key challenges facing the industry. “First of all, we face strong price pressure,” he notes.
“There are a number of strong bank groups in the Czech Republic and local banks have a large deposit surplus. Many clients use their own financial resources after good years to cover their needs and investments.”
The second area where the lease industry has been challenged is tax and legislative changes.
Although the new IFRS 16 accounting standard impacts only multinational companies, these companies also use leasing products for their investments.
“In co-operation with vendors, we want to offer them pay-per-use financial products that will allow them to continue benefiting from an off-balance sheet solution,” adds Knödl. An amendment to the VAT Act is also under preparation, which will change VAT payments in the case of financial leases.
“The topic of VAT is more important and urgent for us than IFRS 16,” Knödl continues.
“Changes in the assessment of so-called ‘lease with an option’ will undoubtedly lead to a significant shift in the perception of the lease with full amortisation. However, the precise statutory regulation is not yet known.”
He says that, based on statistics from the CLFA in relation to business investment financing, his company increased production by more than twice the rate of the overall lease sector during the first six months of this year, registering a 4% year-on-year increase in the amount of financed investments.
“Leasing of movable investments [machinery and transport equipment] within the top 15 companies fell in the first half of this year by 5% according to purchase prices,” he adds.
“Non-bank business loans within the top 15 companies grew in the first half of 2018 by 8.8% year-on-year.”
Knödl says the transport equipment market remains flat, while in 2017 – after several years of continuous growth – there was a fall in the registration of new trucks by around 10%, and buses by more than 20%.
“As SGEF has provided almost the same volume of financing, our market share slightly increased,” he says. “The high-tech market also fell by 20%, while other segments such as machinery, equipment and agricultural equipment remain flat.”
DEMAND DRIVERS
As for the factors driving demand for leasing, in addition to the general advantages such as maintaining liquidity, off-balance-sheet accounting and flexible payment schedules, Knödl says the main attraction for customers in the Czech Republic is the need for regular renewal or expansion of production technologies or truck fleets, as well as the requirement to keep pace with technological progress and meet legislative requirements.
He suggests that the current top four operators in the Czech market – SGEF, KBC, UniCredit and Raiffeisen – account for around 60% of the total lease volume, and that their combined share of the market is continuing to rise.
“Our expectations for growth over the next 12 months are for the market to either be stagnant or slightly increase, despite upcoming tax and legislative changes,” he concludes.
