Leasing companies in the Czech Republic are hoping that the country’s relative success in suppressing the spread of Covid -19 will enable the sector to bounce back in the latter part of this year. Paul Golden reports.
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Since the Velvet Revolution in 1989 and its split from Slovakia in 1993, the Czech Republic has become a democratic nation with a highly developed economy, with membership of both NATO and the EU.
It has a large expat community of around half a million and a handful of internationally-recognised companies: Skoda, Budweiser Budvar, Pilsner Urquell and Bata.
The country is ranked 23rd in world leasing according to the White Clarke Global Leasing Report 2020. Citing figures for 2018, White Clarke Group reported that total new leasing business in the republic was $5.36bn (£4.23bn), which is a 1.92% decline on the previous year.
Compare this to the Czech Republic’s neighbours: Slovakia, which ranked 31st ($2.79bn and a 7.49% decline) and Poland, which ranked 10th ($22.2bn, up 21.8%). (White Clarke sources its figures from Leaseurope, the European Federation of Leasing Company Associations).
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By GlobalDataData from the Czech Leasing and Financial Association (CLFA) for the first quarter of 2020 reveals that its member companies provided CZK 24.08bn (£805m) of lease and loan finance during that period, a year-on-year decrease of 16.6%.
Financing of business investments showed a decline of more than one-fifth in the first three months of the year with just under 22% of these investments made through operating leases. The total value of receivables assigned within factoring increased by 10% and the number of funds provided to clients through factoring rose by 5.4%.
Total receivables of CLFA members from ongoing leasing and loan contracts reached CZK 255.43bn at the end of the first quarter of this year, which represented a decrease of 4.2% compared to the last three months of 2019. The largest percentage decrease was observed in the category of financing of machinery and equipment as companies suspended investments.
The market for new passenger cars fell by 15.8% in the first quarter of the year according to the number of newly registered vehicles. CLFA member companies provided CZK 6.96 billion to finance new passenger cars during this period.
While lease firms have managed to continue to provide services during the period of lockdown, Jaroslav Krutilek, general secretary of the CLFA explains that the announcement of a moratorium on loan repayments has had a considerable impact.
The moratorium applies to the repayment of loans and mortgages and is binding on all banks and non-bank companies. Debtors – both individuals and companies – may suspend repayment for three or six months and repayments are deferred after the debtor notifies its creditor of this intention and declares that this step is being taken due to the negative economic impact of the coronavirus pandemic. These reasons do not have to be proven.
In the event of suspension of repayment, consumers and sole traders will make instalment and interest payments later. Companies pay interest continuously even in the period of the deferral of the payment of the principal.
When the option of the deferral of payments is used, interest is maintained at the contractual amount but in the case of consumers it can reach the maximum statutory amount of interest on late payment at the level of the repo rate increased by eight percentage points.
Challenges
“This has posed a great challenge for our members’ IT departments, who have had to adapt their internal systems in an extremely short time period,” says Krutilek. “The entire process was eventually handled without major complications and according to the available information, more than a quarter of a million entities have already requested a deferral of payments.”
While 2020 has been particularly turbulent, he acknowledges that last year was also a challenging period for the industry, especially for providers of car finance. Although the number of newly registered vehicles began to grow again in the final four months of 2019, sales were down 3.7% compared to 2018.
“We therefore consider it a success that in spite of the above factors our member companies achieved an overall increase in business in 2019, providing clients with CZK 153.96bn through leasing, loans and factoring – 3.7% more than in 2018,” says Krutilek.
Financing of business investments amounted to CZK 104.26bn last year. The value of receivables assigned within factoring reached CZK 160.95bn and funds provided to clients through factoring totalled CZK 21.75bn.
The overall increase in business in 2019 was driven mainly by the favourable development of financing of machinery and equipment. CLFA member companies provided CZK 30.25bn to companies and entrepreneurs for the above sector, an increase of 8.3% and a significant improvement on 2018 when machinery and equipment financing stagnated.
The Czech lease market continues to maintain a relatively unusual profile whereby leasing companies provide loans on a large scale – in fact, leasing companies provide more than half of the total volume of investment financing in the form of loans. This is an asset-based funding product in principle, but from the technical perspective the product has a form of a loan.
Aside from coronavirus, Tomáš Veverka, vice-chairman of the board of sAutoleasing refers to tougher regulation of the consumer segment as a significant development over the last 18 months with the change of VAT principles regarding financial and operational leases making these products less attractive from this year onwards for both customers and leasing companies.
Jiří Liner, Grenke branch manager Czech Republic says his firm reacted to the restrictive measures imposed by the Czech government in early March by ‘returning to its roots’ and funding mainly IT equipment and small tickets.
“The amendment to the VAT treatment of leasing has been significant,” he says.
“However, thanks to this legal regulation we managed to increase classic lease activity and thus implement a trend that is common in other developed markets. In a country where the sense of property is high and traditionally seen as a sign of status, we have to take every opportunity to promote leasing.”
Liner describes cooperation with partners and vendors (and specifically agreeing on the maximum buy-back price of equipment from classic lease) as a significant market support. “The higher the redemption price we have guaranteed by the partner, the lower the lease payment we can offer the customer,” he adds.
New contracts
Martin Brix, managing director of LeasePlan Czech Republic says it is encouraging that the total number of active full service contracts during Q1 2020 increased by 3.5% compared to the same period in 2019. Any decrease in the number of new contracts has been compensated by fewer contracts being terminated.
He explains that the company has made use of the quarantine period to develop and complete important projects. “Especially during the first two or three weeks, when it seemed like the country had ground to a halt, we used that time to fine-tune services. We also put a strong focus on the improvement of communication with our clients.”
Reinhold Knödl, managing director and chief executive at SG Equipment Finance Czech Republic, observes that some sectors of the lease market are more pro-cyclical than others.
“Transport equipment reacts the fastest to changes in market conditions, resulting in a drop of 28% in the first quarter of the year,” he says. “Likewise, recovery in this segment usually comes promptly. Due to the suspension of tourism, financing of buses has stopped completely and here we expect that the market recovery will take longer.”
By comparison, investment in agriculture is at a similar level to previous years – thanks in part to subsidy programmes – while changes in corporate business models and home office expansion have led to growth in IT expenditure.
Knödl says his firm has developed a number of products and innovations based on the experiences of its sister companies abroad and its parent bank as well as investing in digitisation.
Raiffeisen Leasing’s business in the Czech Republic has slowed down significantly explains MD & CEO, Alois Lanegger. “Outcomes from the first quarter were quite good, but we are expecting a sharper decline in Q2 and Q3 before the volume of investment financing starts increasing gradually again in the final quarter of the year.”
He notes that before the state of emergency, the market showed a sustainable annual growth. Costs of risk were at a historic low and the economy was doing well, showing growth for more than five years in a row.
“The last year was one of our most successful in the Czech market,” adds Lanegger.
“We outperformed in all the important areas. In real estate financing, we reached 51% of the market share and we also achieved significant market share in the financing of movables. We saw a significant increase in activity in the SME sector, not only in terms of car purchase but also equipment and technology financing. There was clear potential for growth and innovation within this sector.”
Raiffeisen Leasing has been co-ordinating with Raiffeisenbank to identify situations that may be more suited to the leasing financial structure with respect to the type of asset and collateral value. Raiffeisen supports leasing solutions across the whole group because it has turned out to be more effective in case of defaults than standard financing provided by the bank, says Lanegger.
“We offer a wide range of support services (such as subsidy and grant advice) which help our clients decide if they should apply for any subsidy either from national or European funds,” he adds. “We also help them through the application process.”
Raiffeisen Leasing cooperates with the Czech-Moravian Guarantee & Development Bank (ČMZRB), a state-owned institution intended to support domestic entrepreneurs. It also provides investment financing guaranteed by the European Investment Fund (EIF).
While recognising that the Czech Republic is one of the countries least affected by the coronavirus pandemic in Europe, Krutilek also observes that his members do not yet know exactly how much the protection measures have affected the economy.
“Some sectors (tourism, hospitality) have essentially stopped and their return to pre-coronavirus levels will not be easy,” he says. “In addition, the Czech Republic is a very open economy dependent on developments in other countries, mainly in Germany but also in other western countries. It is not yet clear to what extent the crisis will change the supplier-customer relationship with our important business partner.”
Economic slowdown
At this point, he concludes that many of the problems caused by coronavirus are yet to come. “Developments in the automotive market will be crucial. Already, some of our member companies are noticing the tendency of companies to delay the replacement of vehicle fleets and extend the existing leasing cycles for operating leases.
Therefore, the realistic assessment is that the second quarter of the year will be even more challenging for our members than the first quarter has been.”
Veverka notes that some negative effects of the economic slowdown and corresponding customer delinquencies could become more visible at the end of this year and at the beginning of 2021. Liner also accepts that the return to the new normal will be slow and cautious.
“We believe there will still be enough leasing requests, but a large percentage will require increased guarantees to secure contracts,” he says. “We think the market will continue to move forward as the need for technology and new services grows, albeit perhaps not at the same pace as in previous years.”
Brix notes that some customers are postponing their orders of new vehicles, opting for the extension of current contracts instead.
“We consider this a very savvy approach – cars on the road today have very high technical standards and customers are still well served by such vehicles,” he says.
“There are also some companies that are booming and in need of many more vehicles than previously. A typical example would be the delivery segment where companies need a car immediately, and the solution we found is to offer slightly-used vehicles for leasing.”
“In 2019, our target market grew by 6% and even at the beginning of 2020 we believed in modest growth,” says Knödl. “It is obvious that coronavirus will result in a decline.
How severe it will be at the end of this year depends not only on the speed of economic recovery, but also on the production capacities of vehicle and technology manufacturers.”
Lanegger recognises that there will be a limited appetite for investment in the Czech Republic over the remainder of the year.
“Next year we could see some improvement – in the first half of 2021 there could be increased need for movable assets and not only SMEs but also larger companies will renew their investments in machinery or fleet,” he says.
“If there are no harmful backlashes linked to Covid-19, we could see a significant increase of demand in the second half of 2021. However, caution is required.”
Czech Republic: Key data at a glance
IMF revised real GDP growth projections (due to Covid-19)
2020 -6.5%
2021 7.5%
Source: IMF World Economic Outlook: The Great Lockdown, published April 2020
GDP per capita
$42,165 Source: OECD, 2019
Covid-19 government fiscal measures
The government announced a rescue package of CZK 257bn, including paying up to 80% of employee wages for businesses that have had to close during the pandemic, and paying 50% of commercial rents, while mandating a 30% reduction in rent.
Source: IMF, Policy Responses to Covid-19, 29 May
COVID-19 emergency response
The Czech Republic was one of the first in Europe to impose strict lockdown measures, but is now gradually reopening the country, including its international borders.
