An economic upturn across the Baltic states last year provided welcome additional impetus to a lease market that was already performing well across most parts of Estonia, Latvia and Lithuania. Paul Golden reports.
The IMF recently reported that the Estonian economy is gathering steam after several years of subdued growth, with GDP more than doubling to 4.9% in 2017.
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ESTONIA
The lease portfolio controlled by the members of the Estonian Leasing Association was worth just under €2.7bn (£2.4bn) at the end of June 2018, an increase of 9.8% on the same period in 2017.
New sales rose by 5.6% to €663m, driven by a 14% increase in agricultural machinery leasing and even stronger demand for leasing of medical equipment, which was up 140% compared to the first six months of last year.
Heli Silluta, member of the board at Swedbank Leasing, observes that the quality of the association’s members’ credit portfolio remains good, with the volume of leasing payments overdue by more than 60 days in the portfolio only slightly increasing to 1.1%.
The car leasing market was significantly influenced by the new taxation system for business vehicles that came into force in early 2018, he explains, adding: “This tax change has also supported the growth of private car leasing, which is up by around one-third on the same period last year. Corporate car leasing increased by 13.5% in the first six months of the year.”
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By GlobalDataSilluta notes that demand for financing industrial equipment has been affected by labour costs and shortages in Estonia. “Together with the need for increasing productivity, this should also raise the need for enterprises to invest more productive capital,” he adds.
In the first half of 2018 the largest investors in machinery and equipment were manufacturing, agricultural and forestry enterprises.
Taavi Tomson, head of sales at SEB Leasing – one of the dominant players in the Estonian leasing market, along with Swedbank and new banking group Luminor – notes that the agricultural sector has been influenced by a range of factors over the last few years.
“These factors include Russian sanctions – after which the domestic meat sector was hit with disease that led to a significant decrease in the number of pigs in farms – and poor weather, which has impacted crop yields,” he says.
“This is not to say that the agricultural sector is weak, just that the last few years have not been favourable.” Asked to outline the factors driving demand for leasing among consumers, Tomson refers to strong growth in both wages and deposits.
“In the case of private individuals, we are seeing more new clients using leasing for the first time,” he adds.
LATVIA
Latvia’s economy rebounded in 2017, supported by rising wages, recovering private investment and accelerated absorption of EU funds.
The portfolios of the members of the Latvian Lessor Association, which account for around 95% of the market, were worth almost €1.6bn last year, with new business to the value of €791m recorded during 2017.
“Our members are providing products concentrated on financial leases and operating leases for movable assets such as cars, trucks, equipment and machine tools,” explains the association’s chair, Jevgenijs Belezjaks.
“Real estate leasing is not practiced due to legal and tax disadvantages compared with traditional bank mortgages.”
The remainder of the Latvian leasing market – less than 10% – is represented by a number of relatively small leasing and financing companies, which are mainly active in used car and household goods leasing, and for which financial leasing is not their core activity.
Belezjaks notes that the leasing portfolio grew by 15.9% last year, of which just over three-quarters, or €1.2bn, was financial leasing and a further €321m was operating leasing.
The remainder of new business, €43m, was loans issued by Latvian lessor association
members for movable asset purchases. “New business volumes were up by 13% compared to 2016,” he says.
“The most significant increase was observed in the equipment sector, which expanded by almost one-third or 31%, followed by the commercial transport sector, which grew by 22%. However, there was also positive movement in the passenger car sector, which was up 5%.”
The market is undoubtedly showing signs of recovery, and this positive trend has accelerated over the last 12 months on the back of an increase in new passenger car sales, a revival in commercial transportation following the dramatic decrease of 2014 – when commercial transport leasing volumes fell by a third – and the recovery of the industrial leasing sector, which had suffered from projects being put on hold during 20152016, mainly due to a break in EU structural fund availability and geopolitical tensions.
The first three months of this year saw a 7% increase in new business volumes, although the commercial transport sector is down slightly, explains Belezjaks.
At the same time, the passenger car and equipment sectors both showed positive contributions in the first quarter of 2018, growing by 11.5% and 15.7% respectively, he adds.
“Our expectation for the market over the remainder of this year is for growth of 5-10%, strongly influenced by the commercial and industrial equipment sectors.”
Peteris Plaudis, chair of the management board at Citadele Leasing and Factoring, identifies three main challenges facing lease firms in Latvia: competition, regulatory requirements and innovation.
“A decline in the population over the last few years has led to more risk-taking from leasing companies in a variety of ways, such as lower down-payment requirements and longer tenures, with increased pressure on margins,” he explains, adding that leasing companies – especially those providing finance to private customers – are becoming increasingly regulated and require more staff to cover these requirements.
“Clients are becoming more demanding and more IT-oriented,” adds Plaudis. “During the next few years, most leasing companies will invest in technical solutions to become more attractive and accessible to their customers, both private and business. We are paying particular attention to digitising our services and are working on several solutions for making our leasing services more convenient.”
He refers to the growing influence of fullservice leasing companies and car rental firms on the passenger car leasing market, noting that the latter accounted for around 40% of the lease business in the passenger car segment last year.
“According to new sales data, the commercial transport [trucks and trailers] segment seems to be rather strong, although it is dominated by one large company, Kreiss, which in 2017 had approximately 1,700 truck or trailer units on its balance sheet,” says Paulis, who adds that demand from private customers is being driven by increased confidence and an improved macroeconomic picture.
“Latvia has reached one of its lowest unemployment levels since 2007, and the average salary is continuing to grow,” he says. “Demand from business customers is driven by market growth and the stability of the economic situation in the country, and there is organic growth in the market in addition to ‘one-off’, large transactions such as large state procurements.”
Paulis believes the lease market will record an increase in new sales of between 10% and 15% in 2018, mainly down to increased passenger car sales and an increase in the proportion of these vehicles that are leased rather than bought using personal funds. “Over the last 12 months the proportion of leased cars has risen to approximately 60% of total sales, whereas a year ago it was around 50%,” he concludes.
LITHUANIA
The Lithuanian economy picked up steam in 2017 following two years of sluggish growth, with GDP expanding by 3.9%, mainly due to an acceleration of investment.
The largest economy in the Baltic region, its lease market was worth €2.45bn last year – an increase of approximately 14% on the previous 12-month period – on the back of €1.76bn of new finance business.
Laimonas Belickas, chair of the Leasing Committee of the Association of Lithuanian Banks, is confident that the double-digit growth experienced over the last few years can be sustained – at least in the short term.
The main drivers of this growth are commercial transport and passenger car leasing. Lithuania has a relatively large commercial transport fleet compared to its neighbours, and some of the largest pan-European transport companies are headquartered in Lithuania.
The agriculture sector is significant and active – Lithuania is the fifth-largest wheat exporter in Europe – and other sectors exerting a positive influence on leasing include chemicals, furniture production and wood processing.
“The main challenges facing lease firms in Lithuania relate to global competition, the ability to innovate and invest and their ambition to became regional or pan-European leaders,” says Belickas.
“The availability of labour is a hot topic, especially for transportation companies.” Looking at the market players, he says it is clear that the major part of the market is still dominated by Scandinavian banks.
However, this is a decreasing trend as a result of structural changes in the Lithuanian banking market, such as the merger of DNB and Nordea in the Baltics, the growth of EBRDowned Siauliu bank and the rapid expansion of other non-Scandinavian leasing companies.
Asked whether the Lithuanian government actively supports the growth of the lease finance industry, Belickas observes that the market is highly competitive and effective, and that government bodies are focused on increasing finance accessibility for SMEs and developing tools such as portfolio guarantees for leasing companies and guarantees for innovative companies.
Kaupo Luhaäär, head of Luminor leasing for the Baltic countries, says the market is dominated by a small number of local bankowned leasing companies, and that there are no brokers and few captives on the heavy vehicle side of the market. “All three markets are quite similar in terms of dynamics, with strong growth in the SME segment and private sector car leasing,” he explains.
“In all three countries there is no single asset or industry segment driving growth – growth is evident across all segments.” According to Luhaäär, the popularity of leasing for financing investment is very high in the Baltic states.
“Leasing gained popularity in the 1990s as a collateral-driven way of financing, and it is still the easiest and fastest way for SMEs to acquire financing for their investments. Baltic leasing markets are at the top of the global leasing-GDP penetration ratio.”
Vendors are a growing channel for leasing distribution, as is the captive model offered by local leasing companies as a white-label solution for manufacturers, he continues.
“Vendor distribution accounts for approximately half of all new business.”
The leasing market in the Baltics is growing because of the positive economic situation in Europe, and companies are not only making renewals but increasing capacity; that is the view of Matias Huhtala, head of Baltic banking at OP Corporate Bank.
The positive economic outlook and strong GDP growth is driving demand, supported by EU subsidies, he says. “In Latvia, the agricultural and car leasing sectors have shown a pattern of growth over the last two to three years. Construction is rebounding this year, and there is also evidence of steady growth in other sectors.”
In Lithuania, truck companies are expanding their fleets, although Luhaäär agrees that the agricultural sector is suffering a second year of difficult weather conditions, which has led to payment difficulties. “However, passenger car sales have been strong and we are seeing real investments in more or less all industry sectors,” he adds.
In Estonia, the passenger car segment is growing in line with an increase in disposable income and the performance of the wider economy. “The construction sector is also very active, although it poses higher risk over the coming years as a result of the current boom,” concludes Luhaäär.
“The forestry sector is performing well in 2018, as the price of wood is much higher than it was last year. We are expecting some challenges for the agricultural sector over the next 12 months though, with a poor grain harvest forecast.”
