The leasing industry’s big hitters reflect on what made their radars in 2017, and offer some insights into what is to come in the new year
Gavin Wraith-Carter, Hitachi Capital
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The word I would use to describe the industry in 2017 is ‘resilient’.
We have seen SMEs being fairly pragmatic in their response to the uncertainty arising from Brexit: they continue to make investment decisions, even if not always with a long-term goal in mind. Most SMEs have just decided to get on with it.
Besides Brexit’s effects, the first month or two after the general election were the key moments of the year.
A close second is the interest rate rise – quite a powerful signal, which might cause SMEs to stop and assess the situation. It is not a big rise in itself, and the market had already priced it in, but it signals that the Bank of England is going to change its policies slightly. That will get SMEs feeling that they need to navigate uncharted waters.
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By GlobalDataMost businesses can remember the heavy days when interest rates were much higher, but I think they got out of the habit of actually paying banks high interest each month. As that shock comes in, it will change perspectives, and will get businesses reviewing what they should be doing.
In general, what most businesses are telling us is that they are concerned by the lack of certainty and lack of stability. Those are the two things I hope to see in the new year: knowing where we are going, and what outcomes are likely.
At the very least, businesses need to have the chance to plan and decide on a long-term strategy. At the moment, they are probing four or five different scenarios in their heads, and are not quite sure yet which one will play out.
Geraldine Kilkelly, FLA
The asset finance industry returned a strong performance in 2017 amid challenging economic conditions as businesses deal with the uncertainty about the outcome of the Brexit negotiations.
In the first nine months of 2017, the value of asset finance new business – primarily leasing and hire purchase – grew by 6% compared with the same period in 2016. New business for deals of up to £20m increased by 8% over the same period.
The plant and machinery finance and business equipment finance sectors recorded double-digit new business growth in the nine months to September, of 16% and 10% respectively.
Growth was broad-based in the plant and machinery finance sector. New business for forklift trucks grew by 44% compared with the nine months to September 2016; production and process equipment grew by 30%, while construction equipment grew by 23% and agricultural equipment grew by 19%.
Data revisions published by the Office for National Statistics in September 2017 suggest that the asset finance industry’s contribution to supporting business investment is even greater than previously thought.
FLA calculations show that the industry financed more than 35% of UK investment in machinery, equipment and purchased software in the 12 months to June 2017 – representing an eight-year high.
Ian Isaac, Lombard
This year has seen a remarkably buoyant asset finance market with year-on-year growth each month. Many in the industry were expecting a slowdown in activity following the election and the Brexit debate, but that is something we have not seen.
Asset finance growth has outstripped that of overall UK business investment. Businesses are now better educated about the benefits of asset finance on cash management – and are putting it to use.
Competition is rising with a number of new entrants, including private equity and challenger banks, and the broker market is also buoyant. However, competition has put pressure on pricing and we must ensure we price effectively and responsibly to deliver sustainable returns and reflect credit risk.
The media has focused on consumer lending, in particular around the volume of PCP deals in the motor market, and we are seeing increased regulatory focus on our sector. We need to put customer outcomes at the forefront, and challenge ourselves on transparency and fairness.
We are beginning to see the emergence of some digital solutions for asset finance customers. However, to date nobody has come into the market with a real standalone, dynamic digital approach. It is difficult to assess whether a purely digital approach would be attractive as customers are always likely to prefer to speak to someone directly for more significant asset purchases. It is inevitable that digital will play an important role in the future, but there will always be a place for asset finance sales specialists – unless, of course, our industry gets wholly disrupted.
Looking to 2018 and beyond, the challenge will be how our industry adapts to the changes in the asset markets we support. Knowledge-based assets such as software, databases and licences are becoming increasingly core and valuable for our customers and we need to be able to provide funding options.
In our traditional motor markets the focus is moving rapidly from diesel to electric cars, and the growth of businesses such as Uber even brings the whole ownership model into question. So while current business trends remain healthy, there is plenty to occupy our minds as we plan for the future.
John Rees, Société Générale
Europe’s asset finance market has been heading in a positive direction. We maintain a very low cost-of-risk environment in most European countries, and a very low interest-rate environment.
Leasing companies continue to do good volumes of business and to grow, and you see some fairly competitive prices.
As for the profitability of leasing companies themselves, I am not sure it has improved so much, except perhaps where companies are able to leverage European networks.
We have also seen a lot of product development going on: I think one of the themes of 2017 has been the move from asset ownership to asset usage. We are in what people are describing as the ‘usage paradigm’, a situation where lessees want to be able to use their machines, and are less worried about owning them.
We hear more about managed equipment services and pay-per-use leases. We have talked about it for a long time, but now we are actually doing it – we went from thinking about innovative products to delivering innovating products.
I think that trend will continue. Some countries are slower to adopt the new paradigm than others: The UK, US and Benelux have already adopted it; France and Spain are starting to, while in Germany the process is slower.
But overall, this is the theme for the past year and for 2018.
Patrick Beselaere, ING
Continued growth in the leasing industry over the last two years is confirmation that we provide extremely good lending products.
Companies are looking for funding: We offer it in a way that is convenient for – and appreciated by – SMEs and mid-caps. It is transparent, comes with regular invoicing, and does not ask for guarantees, unlike bank loans. The process is rapid, and the asset suppliers are comfortable with this funding model as well.
There are three main elements that are shaping changes in the industry. The first is regulation: we see capital regulations for all financial institutions getting tighter in the future. But as leasing is asset-based, the risk of lending is lower than traditional banking. Even if the risk rates rise, they will still be extremely low. This is one of the reasons why traditional banks are now keener to offer leasing as a product.
A second trend is the increasing digitisation of the industry, which will also affect customers’ journey. Leasing will increasingly be offered in a digitised way, from origination to the management of the contract.
The third trend is the circular economy. Leasing is no longer just about ownership, but about usage of assets. Once the first cycle of usage for an asset is over, the leasing industry is well positioned to liaise with other parties who are interested in remarketing.
Peter Hupfeld, Nordea Finance
In Nordea Finance, we see three defining megatrends affecting the asset finance industry in 2017 and in the coming years.
Firstly, the digitalisation of our industry is opening up highly attractive customer segments.
The increased use of automated processes and robotics to lower operational costs is allowing asset finance companies to approach new and attractive companies in the SME segment.
Secondly, upcoming legislation such as PSD2 is opening up the finance industry to new players, presenting opportunities to use big data to tailor customer offerings. We have more than 800 pilots signed up to our Nordea Open Banking interface.
Thirdly, customer behaviours are changing continuously. Taking car financing as an example, a new generation of consumers have a different preference and expectation – putting use and accessibility before ownership.
Successful asset finance companies will be the ones that understand technology and consumer trends – and convert that understanding into new and innovative customer propositions.
Bas van Asseldonk, DLL
We are operating in a very liquid financial market, and that has impacted financing rates, which are very competitive at the moment.
Risk costs, with the economy recovering, are extremely good, and the industry as a whole is seeing low levels of bad debt.
Compliance is an ever-growing burden, especially as regulators treat leasing the same as other banking products, and do not see the nuances and differences between the various financial products.
This puts a strain on our ability to innovate and create value for our customers as leasing is, in essence, different from other bank lending products.
It is becoming more challenging to find the right financial solutions for customers under the increasingly strict rules that the regulators are imposing on the leasing industry.
Another trend relates to the customer demand for more flexibility. If you look at the tech industry, everybody wants to move from owning IT infrastructure to using the cloud, because of the extreme flexibility it offers.
This, however, does not only apply to the tech industry. Across all the equipment categories that we trade in, the top-end customers are looking for complete managed service contracts, where they pay based on performance and usage. That is a tremendous selling challenge for leasing, especially if we need to balance this with complying with all the new rules for financial institutions.
What I would like to see is more nuances in the regulatory environment. My wish is that the regulators find a balance between safeguarding a sound banking environment and the changing needs of the customers. At the moment, the pendulum has swung too far out towards trying to regulate everything.
Secondly, I wish for the industry to learn from the credit crisis and not get in the same pitfalls that we did years ago. With high liquidity and very low risk costs, everybody is financing everything. We must continue to be careful of what we underwrite before we find ourselves in another crisis in five or six years.
Finally, I would like to see us focusing on our customers, because I think banks in general have been focused on fulfilling the demands of their shareholders and regulators.
