When the financial crisis hit Italy, the country’s property-intensive leasing industry was burnt – and burnt badly. Lessors are now rejuvenating their offers, and it shows in the numbers. Lorenzo Migliorato finds out more.
It could be said that leasing only came of age in Italy less than a year ago. In August 2017, a law came into effect introducing a specific framework for lease financing, which for decades had been governed by civil code dispositions on hire agreements.
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To Massimo Macciocchi, commercial leader for leasing and rental at Genoa-based Banca IFIS, the law felt like a “blessing” on an industry that has seen some of the highest growth rates in the European region. “Italy’s bill of health is very clean when it comes to leasing,” Macciocchi says.
“Compared to the UK, Germany or France, Italy has seen much bigger growth. Its leasing market is the smallest in absolute terms, but in 2016-2017 it grew twice as much as France’s.” According to Leaseurope, some €22.7bn (£19.99bn) of new leasing business – on nonproperty assets – was written in the country over the course of 2017; that is a 16% growth on 2016.
As Macciocchi mentions, growth for France’s €46bn market was half that at 8.3% – and it was still one of the strongest across major European markets. Part of the leasing bonanza can be attributed to a wider economic revival across the eurozone. Once Italy’s industrial production picked up again, “enterprises needed to renew their equipment to keep going, because it had not been updated for eight or nine years,” says Macciocchi.
“The great recession’s impact lasted a long time here, and it still lingers. SMEs experienced difficulties in investing in machinery. They had, and still have, obsolete equipment.” But beyond a productivity rebound, policymakers also provided firms with some very good reasons to choose leasing over other forms of financing.
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By GlobalDataSince 2013, a government fund has been incentivising SME investment by subsidising interest repayment on asset finance contracts. The strong fiscal incentives saw leasing orders skyrocket, and the measure, initially due to expire in 2016, was extended until 2018.
Leasing also represents a bright spot in a national economy still burdened by the second-biggest non-performing loan (NPL) portfolio in the eurozone. A Moody’s analysis of leasing asset-backed securities in February 2018 found that fouryear delinquency rates, at 1.27%, were some five times lower than those for regular SME loans, and had fallen over 40% from the previous year.
Overall, capital markets have shown enthusiasm when it comes to Italian leases: according to Moody’s, issuance of lease ABS in the country jumped almost sevenfold between 2015 and 2016; from €1.8bn to €12.4bn.
It has not been all happy times, though. The symbiosis with the so-called real economy works both ways, and when the 2008 crash hit “leasing suffered significantly, due to its specific market niche,” says Stefano Schiavi, deputy general manager at BNP Paribas Leasing Solutions Italy.
“The SME sector it financed was among the worst casualties of the crisis. Bank-owned lessors, meanwhile, shared the customer base with their parent, so their leasing portfolios generated NPLs in proportion to the bank’s wider business.” It did not help that a large chunk of leasing business in Italy was backed by property assets.
“In the 2000s, we had a very favourable fiscal environment for enterprises, on top of government measures allowing for the leveraging of tax benefits beyond their normal duration,” says Gianluca De Candia, general director at Assilea, the Italian association of lessors.
“This led to a boom in real estate, pushing property leasing new business to €27bn.” As Schiavi puts it, the leasing market was “doped”: leasing, especially in the property segment, was used as a financial trading tool, rather than as an investment in real assets. He says the crisis “cleaned up those capital flows doping the market” and brought leasing back to “what it should be: financing assets for production”.
De Candia says the crisis forced the leasing market to realign itself away from property – which had brought some lessors on the brink – towards segments like vehicles and equipment. Italy’s property leasing market remains unusually big for most European markets: €3.8bn of new business in 2017, behind France’s €4.1bn but far ahead of Germany’s €1.2bn.
This time around, however, lessors are more cautious of betting on property for growth: new business in the segment actually shrank 2.6% from 2016. “The economic crisis undoubtedly led to a repositioning of players,” says De Candia.
“We are seeing a major resizing of [the] property [segment], though it still remains advantageous in fiscal terms.” If Italian bank-owned lessors suffered big impairments from the crisis, arm’s-length leasing units of foreign banks showed the most resilience.
“Our business model allowed us to go through the recession unscathed, keeping roots in our core business,” says Schiavi. “[BNP Paribas LS] has trivial levels of bad loans. It has an extremely healthy business, which forded the crisis carefully, but successfully.”
He explains a large share of bad loans in the Italian unit came from the property operations of Locafit, the leasing unit of Banca Nazionale del Lavoro (BNL), a bank the BNP Paribas group acquired in the early 2000s to grow its footprint in Italy.
The deterioration of the BNL/Locafit’s portfolio was inconvenient, but it was a small price to pay for a larger presence in a key market. “In terms of volume, for Leasing Solutions, France is the top country, and Italy is number two,” says Thierry Bonetto, general manager at Leasing Solutions Italy.
“Italy is a very important market for LS, and the Italian division has an important place within the global business.” Bonetto’s words are testament to financiers’ appetite for Italy’s leasing market, despite the narrative of financial risk that surrounds the economy.
It is two foreign lessors, Société Générale Equipment Finance and BNP Paribas Leasing Solutions, that dominate the country’s market – €2.1bn and €1.9bn of business respectively written in 2017, compared to Unicredit Leasing’s €1.4bn. And while Italian companies lead in financial leases, with a combined 58% market share, German and Dutch lessors account for a staggering 65% of the operating lease market.
“From what I hear, there are a number of foreign players that would like to enter the country,” says Assilea’s De Candia. “I am talking about both banks and international funds that keep a close eye on the Italian market, with the aim of building a presence of their own. “The data around vehicles and equipment did not go unnoticed. I expect forays by more lessors in Italy.
Many players have expressed interest to enter the market, regardless of the political situation.” It is not just foreign entities that are attracted to the market. In the ‘repositioning’ that followed the crisis, Italian lessors have been refining the identity of their leasing offer to better compete with their rivals from North.
Assilea found that some 76% of member companies want to introduce new elements to their leasing offer in 2018, with 44% of those surveyed focused on reducing underwriting times.
A significant number of lessors also intend to grow the added services component, potentially reducing the gap with foreign competitors in the operational leasing space. The problem with the operational-financial gap so far has been one of specialisation, says Banca IFIS’s Macciocchi.
“Italy does not have many companies specialising in leasing. Banks have been in the space for a while, generating big volumes thanks to their business capacity, but they never operated as leasing specialists. “I think operational leasing is the class that will grow exponentially within the next five years.
As a product, it is much more coherent with a production investment strategy. Financial leasing has a different impact on productivity.” Some Italian players that had previously
steered clear of leasing are now seeing an investment opportunity in it.
Banca IFIS entered the leasing market a year ago, acquiring GE Capital’s Italian unit for €160m in the wake of General Electric’s retreat from financial services in Europe. The €2bn-plus debt saddling the unit did not deter its buyers.
“Leasing was a match [for Banca IFIS’s business], both in terms of customer profile and cross-unit synergies,” says Macciocchi. In a way, the transaction was the mirror image of BNP Paribas Leasing Solution’s incorporation of BNL’s Locafit: in Banca IFIS’s case, a local bank bought a piece of a troubled financial services conglomerate to tap into a booming market.
“What changed is a simple but major element,” says Macciocchi, who was commercial leader for leasing at GE Capital before the acquisition. “The previous parent was a multinational conglomerate with little faith in the Italian market. Banca IFIS is an Italian bank, in touch with Italy’s real economy.”
This created a shift in vision from constantly monitoring whether the country is going to default, to taking a look inwards, with the knowledge that we can support the economy.” Within one year of the acquisition, business volumes had grown 35%. “In the end, the acquisition by Banca IFIS turned out to be of great advantage: we [the former GE Capital business] gained in agility, speed, nimbleness.”
We also improved our technology,” notes Macciocchi. He adds that the leasing portfolio “has become, one of the best I have seen in 20 years”. He attributes this to the new postacquisition strategy, but also to strong momentum in the wider industry. “Italy’s leasing market has improved noticeably,” he says. “We are seeing the lowest NPL ratios in 15 years.”
For Macciocchi, the Italian market is not saturated just yet, despite the inflow of new entrants and the expansion of established ones. “When the [leasing] product becomes intelligible to SME and corporate customers, a contagion mechanism will kick in: [banks] will understand leasing’s perks, and they will join in on its business model. This will not bring about cannibalisation of market share, but rather growth, especially in equipment financing.”
For Italian lessors, the main takeaway from the crisis was that tailoring one’s offer – targeting specific segments – was the way forward to compete in a growing market. That meant leasing units could not only be pipeline originators for their parent bank anymore.
“The effects of the crisis were felt less by specialised firms that either focused on just one asset class, or relied on a well-established origination channel,” says De Candia. “Having diversity of [products] did not necessarily result in a competitive edge. On the contrary, the players that specialised are now showing the best results – even if it meant dropping, say, a leasing offer to devote to hire products. “The specialisation strategy will be the trend going forward.
It is the opposite of 10 years ago, when you had lessors doing as much property leasing as equipment leasing – which was a unique case in the European landscape.” Whereas the closeness of Italian leasing to the real economy proved a lethal embrace during the crisis, the two now seem to be locked in a virtuous cycle, at least as long as the country’s economy is on a recovery route.
Leasing’s good fortune bodes well for all sectors of the economy, says Candia, noting how, historically, an uptake in leasing demand has always been a prelude to economic recovery.
He makes the example of construction machinery leasing, whose growth preceded higher business in property leasing in 2018. “Leasing has always acted as a litmus test for the wider economy,” he says.
A narrative of financial uncertainty may surround Italy in mainstream analyst discourse, but the leasing sector is looking at more good times, for now. “Market trends have exceeded forecasts,” says De Candia. “We expected 2018 to come to a close with a 7% growth in business – but we hit 10% in April already.”
