Despite
the continuing spectre of a lacklustre economy, the UK leasing
industry is surprisingly confident. Leasing Life
investigates whether British asset finance can enjoy a second
golden age.
Go deeper with GlobalData
It is often posited by British lessors that the levels of
penetration into capital expenditure seen during the ‘golden age’
of the 1970s and 1980s can never be recovered while tax conditions
remain as they are.
Nevertheless, a new strain of
optimism is building in the market among those who feel that some
of the old ground can be regained, given a new attitude towards
marketing and a willingness to learn from the development of the
leasing proposition during the recession.
One of these believers is Alex
Baldock, managing director of Lombard, the UK’s largest asset
finance provider. He has a lot to say, but just a few minutes to
say it – when Leasing Life catches up with him, he is
about to leave his office for a meeting with a client.
Although
he manages a multi-billion annual lend at the RBS-owned giant, he
tries to make time each day to meet personally with one of his
customers.
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By GlobalDataThis belief in visibility isn’t
limited to customer meetings; just this month he is due to take to
the stage alongside Labour leader Ed Miliband and Business
Secretary Vince Cable at the EEF National Manufacturing
Conference.
It’s not just a one-man crusade
either; Baldock has mobilised all the resources available to
Lombard in order to make as much noise as possible about asset
finance.
Lombard’s marketing budget
increased significantly in 2011, and its name began appearing
everywhere: in trade press ads across a plethora of vertical
markets, in sponsorship hoardings at major events, and in
partnerships launched with industrial trade bodies.
It has promised to lend £5bn
(€5.9bn) to UK businesses in 2012, and has emphasised its
commitment to small firms, which Baldock calls the “backbone” of UK
industry.
“We are banging the drum for asset
finance, indeed for capex funding, as loudly as we can,” says
Baldock, banging his mug on his desk to bring home the point.
“Although I want Lombard to lead
the charge, we are trying to raise the profile of the whole
industry – as the largest provider in this sector this will
obviously benefit us proportionally, but the aim is to promote
asset finance across the board.”
The end goal for Lombard is a
nationwide move from the current level of penetration into UK
capital expenditure (agreed by the majority of the market to be
around 20-25%) back towards the ‘high tide’ mark of around 40%
achieved during the late 1980s.
But can anyone expect the industry
to do this without the overwhelming tax benefits which one former
employee of Lloyds in the 1980s admits “often did our job for us”
back in the good old days?
Return to
splendour
Richard Carter, head of HSBC
Equipment Finance in the UK, believes there is potential to see
these levels return in the coming years simply because asset
finance works.
“With capital ratios being a real
driver for financial services businesses, providing historical loss
trends have been low, asset finance is good for risk-weighted
assets and as part of structuring facilities for a client,” Carter
tells Leasing Life.
Carter also expects, over the
course of the next two years, an increase in housing demand to
increase asset finance requirements in the construction segment,
which will form a more significant percentage of the market.
On the other hand, Chris Stamper,
director and chief executive of ING Lease, believes the current
climate does not leave room for asset finance to return to the
leading position it once held within the UK, and certainly not
without the tax advantages of yesteryear.
“The tax structure and advantages
of leasing are significantly different to the 1980s, so I doubt
that we will see a percentage of this size again,” Stamper
says.
Although asset finance penetration
in the UK is currently the highest in Europe, Stamper does not see
it breaking through 35% in the foreseeable future.
Stamper’s concerns over the
economic climate are shared with Alex Brown, head of asset finance
at Barclays Corporate, who, while believing the industry can regain
previous highs of penetration rate, suggests there are some
macroeconomic headwinds to be overcome.
“The answer has to be ‘yes’, the
industry can recover those levels,” he says. “The question of when
it can do it, however, is the apposite one and that’s a much harder
question to answer.”
Brown sees nothing automatically
preventing a return to higher market share of equipment capex, such
as inhibitive regulation, but suggests confidence in the euro, and
sterling’s appreciation against the euro and depreciation against
the dollar,
will continue to impact the UK leasing industry.
Nonetheless, Brown is confident
Barclays, and the wider industry, will see moderate growth in
2012.
“We are definitely dealing with
macro situations which make it difficult to say what will happen
but my feeling is you will see moderate growth in asset finance
usage,” he says.
“Whether that can be double-digit
again [as in 2011] depends on these macro issues and resolution
around the euro, but I do see growth.”
Barclays has already seen a
year-on-year increase in asset finance business in January, Brown
adds.
HSBC’s Carter is also confident of
gradual but steady progress in 2012.
“[I expect it will] maintain a slow
increase, by 1-2%,” he says.
ING Lease’s Stamper, meanwhile, is
more circumspect in his predictions for the year, echoing Brown’s
worries about the European economy.
“The future is still clouded by
financial uncertainty globally,” he says. “It is really difficult
to say how the leasing and asset finance market will perform during
2012. I don’t think we will see much movement on last year as we
are experiencing similar economic conditions.”
Stamper agreed, nonetheless, that
the economic climate of recent years has been supportive to the
industry in the UK and across Europe and has had a part to play in
the increase in penetration.
“With businesses being more nervous
about their banks’ propensity to renew facilities, they inevitably
look for different sources of funding,” he says.
In tough times, adds Stamper, asset
finance and leasing are an obvious choice and have provided a
valuable alternative to more traditional forms of finance.
“Businesses are still looking for
alternative ways of financing capital equipment, so funders are in
a good position,” Stamper adds.
“However, there still needs to be a
substantial focus on costs and bad debt to ensure that businesses
remain strong.”
To an extent, Brown agrees. He says
that although no one is looking for asset finance so much as
looking for whatever will work best for their business, it is a
funding option which will always be beneficial to UK businesses. As
business owners become aware of the benefits, asset finance can
grow.
“Clients are looking for certainty
when they’ve got a borrowing requirement and service and price
undoubtedly come into it,” Brown says.
“At Barclays we are channelling our
efforts into where we think asset finance specifically can offer an
additional benefit and I think that is through asset knowledge. I
find, if you take the time to sit down and explain in detail what
they’re looking at and demonstrate that knowledge, clients then
come to you with an asset finance solution [in mind].”
Brown’s suggestion hints at how he
believes the UK asset finance industry can increase its market
share and return to historic penetration rate highs.
For him, it is all about
communication with businesses.
“I genuinely believe the answer is
speaking to the clients,” he says. “It is a simple answer but very
often simplicity is the best solution.”
Brown says, in the early 2000s,
nearly every financial institution was guilty of identifying a
product and then trying to push it on clients. Whereas now,
discussing what the client is looking for and what the client needs
is how Barclays’ asset finance origination operates.
“That is how Barclays is looking to
increase penetration in each of its markets; be in front of the
client as much as possible listening to what they need,” says
Brown.
Open dialogue
HSBC’s Carter agrees the onus to
promote leasing and communicate its benefits lies squarely on the
shoulders of the lessors themselves.
“For the lessors to remain open,
[they must] be consistent about the benefits of asset finance, and
ensure they maintain an open dialogue as part of a relationship,”
he says.
“It is about how capital efficient
this form of lending is, [in order] to ensure the lending is well
backed, and therefore subject to low loss given defaults.”
Brown thinks good communication
practise filters through the industry to the activities of the UK
asset finance trade body, the Finance & Leasing Association
(FLA).
“We are listening to what the
clients are saying and the FLA is listening to what its members are
saying and acting from there,” he says.
The FLA is listening to the
industry, but it is also talking about the industry to politicians
and business leaders, according to Julian Rose, the body’s head of
asset finance.
“Our job is to lobby for the
fairest and best possible business environment in which
leasing companies in the UK can operate,” Rose says. “We are
probably lobbying on 20 different things at any one time.”
Like Brown and Carter, however,
Rose agrees that the most important issue is to increase knowledge
of asset finance.
“The greatest need now is to grow
awareness of the different places small businesses can go to obtain
asset finance – whether that’s direct from lenders, through brokers
or from equipment suppliers,” he says.
Awareness, particularly of the role
asset finance can play in funding SMEs, has grown significantly
over the past few years among politicians and business leaders,
says Rose, and adds that the FLA will continue to liaise with
industry to promote leasing.
“We need Britain’s 4.5m small
businesses to think about using asset finance and to be aware about
where they should go if they want to obtain it,” he says.
Chris Stamper praised the work of
the FLA and broker trade body the National Association of
Commercial Finance Brokers (NACFB) for their efforts in boosting
awareness of asset finance as an alternative form of borrowing.
“Both the FLA and the NACFB are
working hard to raise the profile of the industry. Funders are
continually improving their links with the business community
through these organisations and beyond,” Stamper says.
Adam Tyler, chief executive of the
NACFB, says raising the profile of leasing is about educating
business owners.
“What we are trying to do is to
educate UK SMEs to understand how different kinds of finance work –
‘This is asset finance and it helps you to buy equipment,’” Tyler
says.
“That education programme is going
to help asset finance grow.”
From the broker perspective, what
is stifling growth is the lack of funders currently in the market,
Tyler adds.
“Brokers have not seen an increase
in market share – it is still a real struggle out there,” he
says.
Tyler is in no doubt the UK’s
broker model, which is not replicated in similar-sized
markets, has helped Britain to the leasing penetration rated it
currently enjoys.
NACFB members introduced £1.1bn in
asset finance in 2011, which when measured against the FLA £20.8bn
total, accounts for 5.3% of the UK new business total.
“You have got a broker in pretty
much every small town advising customers on assets finance,” says
Tyler.
For ING Lease, according to
Stamper, maintaining the UK’s high penetration level if and when
mainstream credit becomes more readily available again is a
critical issue.
“This is always a very difficult
question and one that keeps us focused as a business,” he says.
“There is a proven cycle of
businesses using asset finance when bank lending is constrained,
then when economic situations improve, reverting back to their
banks – possibly because even with the increased culture of finding
the best deal, people find it easier to work with one person for
all their financial requirements.”
Although they may be aware of the
benefits of asset finance, businesses’ funders must continue to
work with them during more buoyant economic periods, in order to
encourage them to take up the option of asset finance, adds
Stamper.
Increased
awareness
Tyler also believes the industry
needs to capitalise on the increased awareness and market share
asset finance has enjoyed while the economy has stuttered.
“There is an opportunity for asset
finance to gain ground on traditional bank lending,” he says.
The FLA’s Rose disagrees and says
success in asset finance is not all down to curtailed traditional
lending.
“We have seen a strong recovery in
asset finance over the last year. I think it would be wrong to say
that is due to tightened credit rules for conventional banks,” Rose
adds.
“I think in many cases businesses
are recognising the underlying benefits of asset finance and are
starting to use it again.”
FLA figures for 2011 show UK
leasing grew in 2011 with a 10% increase in sub-£20m deals,
although overall business increased just 1% on 2010 levels.
FLA members wrote £19.5bn in asset
finance below £20m, with the biggest growth coming from commercial
vehicle finance which grew 22% to £4.4bn compared to 2010.
Other asset classes also
experienced growth, with business equipment finance up by 15%,
plant and machinery finance by 12%, IT equipment finance by 8%, and
car finance by 4%.
Total FLA finance, including deals
above he £20m level, was £20.8bn, a 1% increase on the figure for
2010 and representing around a quarter of all fixed-capital
investment (excluding real property and own-
account software) in the UK last year.
Referring to the FLA data for 2011,
Rose says penetration rates are recovering well and says chatter
coming through from the industry is positive for the year
ahead.
“We are seeing cautious optimism
from our members and an expectation the trends of the last year or
so will continue,” he says.
Stamper and Carter agree that in
the coming 12 months, the industry will face tough challenges.
“Getting the returns on risk-weighted assets and returns on equity
right – ie, at or above shareholder expectations [will be
difficult],” Carter says.
“The costs of capital and funding
for some entities are getting significantly higher,” he adds.
And although the economic woes of
recent years have presented opportunities for the leasing industry,
at the same time they continue to cause problems for it.
“The challenges of the economic
environment and the very probable recession will obviously be at
the forefront of our concerns over the next 12 months,” Stamper
says.
“This, coupled with the lack of
available capital and relatively low demand, will mean that 2012
will continue to be a testing time for the asset finance
marketplace.”
Despite steady growth last year and
a generally confident outlook from the industry, Rose echoes
Stamper and cautions against too optimistic an outlook.
“The other factor to bear in mind is our new business reflects
the overall economy and we don’t know how that is going to
perform,” Rose says.
See also –
In their words: the state of UK asset
finance
See also – UK asset finance survey 2012
