With good results over the past 18 months, Nordea Finance has its sights on more of the Nordic and Baltic markets. The firm’s chief executive Jukka Salonen talks to Grant Collinson about cutting costs and increasing income and why parent banks, as well as SMEs, need to understand the leasing industry is not just about products, but about solutions
Nordea Finance, the leasing subsidiary of the Stockholm-based Nordea Bank Group, had a good year in 2012 and growth has continued into 2013.
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The Leaseurope ranking survey of European leasing businesses for last year places Nordea Finance seventh in Europe by business volume, having increased new business from 5.04bn in 2011, when it was placed 11th, to 5.2bn with an 11% increase in contracts signed.
Jukka Salonen, chief executive of Nordea Finance, says steady growth has continued in the first six months of 2013.
"We’ve been doing well," he says. "Looking at the overall development at the beginning of this year – especially in asset finance – we are still increasing our portfolio. Income growth is over 9% compared to the previous year and we are increasing operating profit by 14%. We are also increasing our profitability."
Salonen says Nordea Finance has a portfolio of 17bn focused in the small- to medium-ticket asset finance markets, as well factoring and consumer credit lines. "We are a full-scale finance company in that sense so there is a larger product portfolio," he says.
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By GlobalDataSalonen believes Nordea Finance is "going against the trend" when compared to the generally low business volumes reported in the most recent Leaseurope Index, which puts the firm in a strong position.
Vendor strength
One reason Salonen gives for this success so far in 2013 is the strength of Nordea’s relationship with manufacturer customers.
"We have been extremely strong in equipment vendor and are also building ‘captive’ solutions for some of the biggest manufacturers in the Nordic and Baltic areas," he says.
Nordea Finance operates in four Nordic countries – Denmark, Norway, Sweden and Finland – and the three Baltic countries – Estonia, Latvia and Lithuania.
The company did operate in Poland but Nordea Bank Group sold its Polish operations, including Nordea Finance Polska, in June this year to PKO Bank Polski for 694m.
In a statement, Nordea Bank said the sale was part of the group’s strategy to concentrate on markets where it can deliver "significant scale benefits based on a leading market position".
The firm’s geographical coverage is an advantage, says Salonen, as he claims it is the only lessor which can offer "truly pan-regional" vendor partnership across these countries.
"The same is also true on the car finance side," Salonen says. "We are strong there, and again, it is this capability to build solutions for big car manufacturers and importers which has been a success factor."
Another reason Salonen offers for Nordea Finance’s business growth is its front line services.
He says the front-end system used by manufacturer and vendor partners are currently "efficient and good" but are fragmented because the company does not operate a common system across all its regions and divisions.
This fragmentation led Nordea Finance to sign an agreement with CHP Consulting in May to implement its Alfa Systems software across the Nordic business, a process which has already began with the firm’s Finnish portfolio.
Common model
The plan to implement a common front- and back-end system across its Nordic markets is part of a wider company strategy which Salonen calls "One Nordea Finance".
Similar to the company’s pan-regional vendor programmes, Salonen wants the company to have a common operating model across all seven markets.
Nordea Finance is already implementing a common system for its factoring business across all its markets, with completion in Sweden and Finland expected next year, although the leasing system is set only to be implemented in the Nordics for now due to the difference in business volumes in each region.
"The key issue here," he says, "is on top of this capability to operate in the whole area, we are able to increase our critical mass and economies of scale.
"We believe this is giving us, over time, a lot of process efficiencies and taking down our operating costs. This will also give us
a good base to develop our products and services in the future."
Building cost-saving efficiencies into the business is one reason why Salonen believes Nordea Finance can continue to grow its income and maintain profitability over 2013. However, it depends, he says, on how the Nordic economies perform.
"It all depends on what happens generally in the Nordic economies towards the end of the year," says Salonen.
"Growth is rather slow which is, of course, having an effect. If it goes really, really bad then it will obviously have
an impact too, but the estimate we have is positive."
The latest economic outlook report from Nordea Bank predicted an average GDP increase for the region of 1.2% in 2013, with
Sweden and especially Norway enjoying most of the growth while Finland and Denmark are predicted to remain fairly flat in 2013.
Salonen predicts much of Nordea Finance’s key indicator growth will come from higher income levels rather than portfolio growth, although he also believes the company can increase its market share in the region, leading to continued growth in the Nordics into 2014.
The story in the Baltic states is a little different, says Salonen.
"If we compare just the growth rates, the Baltics has been growing more, but we have to remember that they really went down
in 2009.
"The market hasn’t yet recovered from the crisis – and we are quite far away still – but it’s going in a positive direction," he says.
Salonen points to Latvia’s likely adoption of the euro on 1 January 2014, joining Estonia in the eurozone, as likely to boost business.
"It will take away some of the risk there and will help to stabilise the economy and also lower the interest rates, so Latvia has a good prospect in that sense," he says.
Lithuania, whose leasing association joined Leaseurope in February this year, joining its Estonian and Latvian counterparts, has also expressed a desire to join the eurozone.
Not leaving home
With positive outlooks for business growth in its markets, Nordea Finance has no ambition to expand geographically, says Salonen, but is happy to stay focussed on its parent bank’s home markets.
"We are at home as Nordea Bank in the northern part of Europe and Nordea Finance’s strategy is very much aligned with the group," he says.
That said, Nordea Finance’s aim is to have a "global competence" and Salonen says in this regard his firm is comparable with any bigger European or global lessor.
"This is very important," says Salonen, "otherwise we cannot serve these global manufacturers if they see us as country-league players."
Nordea Finance’s aim is to be at a level where it’s capable of going anywhere for sales-aid partnerships, even if it remains only in home territory for direct business.
This strategy of alignment with the parent bank’s ambitions and geographical footprint is not part of the capital and funding issue currently being faced by most bank-owned lessors, says Salonen.
"In general, I think all the banks and bank-owned finance companies have faced capital issues and funding issues – resources are scare compared to what they were," he says.
"But of course, there are differences between the banks – how stressed they have been with capital and funding.
"Nordea has been one of the least-stressed banks when it comes to capital and funding positions – we have both a strong funding position in the markets with low rates and we are strong capital-wise," he says.
"That, of course, helps our position."
Nonetheless, adds Salonen, capital and funding pressure has forced banks to look at how they use their capital and some have make tough decisions as a result – particularly ING which has closed several profitable leasing businesses in Europe.
"There are now quite a lot of different strategies for bank-owned finance companies – if ING is maybe at one end [of the spectrum] then we are probably at the other end," says Salonen.
He adds the recent investment in common systems is reflective of the Nordea parent group’s willingness to invest long term in Nordea Finance.
"We have a good understanding within the group of what the purpose of the finance business is and the value it brings. We are really able to add value to our customers, our manufacturer customers, and fulfil their needs, which is beneficial to the whole group because it strengthens our relationships with the big clients and differentiates us in the market," he says.
While a common strategic approach within the Nordea Bank Group and a mutual understanding between divisions is good, Salonen says it is not enough.
"We must also be profitable; that is the case for all leasing companies; all banks are looking at profitability and, of course, if the business is not profitable then the discussion about capital allocation is much harder."
"We have put in a lot of effort on the cost side to be profitable and our productivity has been increasing 8% every year for a long timethat has given us a good boost in terms of profitability," he says.
Salonen also sees a danger in leasing firms becoming integrated too far into a parent bank’s commercial lending suite and losing industry knowledge.
"We believe to be specialist in asset finance you need specialist people – this is not a banking product business, it’s a solution business and it requires a different operating model and different skills than normal corporate banking.
"I think many of those who are merging risk losing the specialists they need."
Beyond the problems faced by many bank-owned lessors, Salonen’s main concern for the whole European leasing industry is in growing the industry’s penetration rate.
Even although Nordea Finance is doing well, he says there is an issue for the industry when it comes to growing volume and income significantly, and Nordea Finance is no exception.
"I think generally we’re suffering as part of a trend in Europe of declining penetration rates compared to the strong years of 2007 and earlier. We are part of the industry so we feel that trend."
Nordea Finance, he says, works very hard on its existing relationships as well as developing new ones in order to generate volume growth and increase the company’s penetration of capital investment.
Balancing act
In a difficult economic climate, Salonen says many leasing firms are faced with a balancing act between investing in the future and keeping the wheels of daily business turning. Nordea, he says, is investing and aims to be an even stronger player in the market in five years’ time.
Salonen also wants the wider industry to invest in increasing awareness among European business of the benefits of leasing to help grow penetration rate.
"In the short term, we must increase understanding of this really important tool for helping European SMEs and mid-sized companies to grow.
"Leasing is one of the most important sources of finance for investments. It is going in the right direction but there is still work to be done," he says.
He also wants to increase understanding among regulators and policy-makers that leasing is by its nature a low-risk business compared to many other banking businesses.
"The regulation on the capital and liquidity side is hitting leasing business too much, whereas it should be seen as a safe way to finance growth in Europe," he says.
Increasing understanding is how Salonen thinks the leasing industry can grow penetration, but adds it’s equally important that banks, as well regulators and SMEs, understand the value of the product.
"It’s not just for regulators and policy-makers to understand the value of this business, but also for some of the big banks to understand that it is low-risk and a safe way to do lending."
In the longer term, Salonen says the development of more service solutions to add value beyond the finance is the best way for the industry to grow in the years to come.
"There is a need," he says, "for reinventing some of the areas of the business to create growth.
"If we succeed with these things, I believe it would be possible to increase leasing penetration."
