Derek Soper argues that
bank-owned lessors will need to fall in line with the strategy of
their parent banks.
Go deeper with GlobalData
Change is happening, but the signals coming out of the
leasing industry are mixed. At IAA-Advisory, we are experiencing a
considerable discrepancy between the messages coming from the
parent banks and their leasing subsidiaries.
On the one hand, most of the banks
across Europe appear to be addressing their central issues: capital
requirements; a need to increase profitability from the
distribution chain; rationalisation of internal services; and the
handling of an increased burden of regulation and supervision.
Many of the banks’ leasing
subsidiaries, however, are indicating that all is virtually back to
normal and there is no real change, so the name of the game is
redefining the business sectors, growth and profit. I guess we must
ask if these two views are compatible?
A phenomenon we have seen in recent
times is the steady march of corporate bankers into the top jobs in
the leasing and asset finance subsidiaries of the banks. It is
difficult to believe that this is just a coincidence and we see a
strong indication that the banks are taking hands-on control.
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By GlobalDataA senior director of one large
European bank commented recently: “Change to a more rigorous bank
control is taking place and we fully understand that, while the
leasing companies may not be fully aware of a bank’s plans, many
seem to be refusing to acknowledge the underlying movement.”
It is not yet fully clear what the
main drivers of the changes are: cost optimisation, capital and
liquidity issues, strategic orientations – or perhaps all
three?
Nonetheless, it is clear that many
banks have already decided that integration is the name of the
game. Leasing companies which have traditionally embraced the
international vendor business may be partly preserved. Banks need
to show that they are servicing the real economy and, in some
cases, the international servicing of vendors is the main
international business of the bank.
The balancing act of sustained
global corporate banking activity, versus a large domestic
presence, can in some instances be the rationale for maintaining a
leasing business across an international footprint. Whether this
should be a separate organisational structure is in doubt.
Examining the possible drivers
towards an integrated bank may lead to an understanding of what is
really taking place and the cause of the differing views emerging
from the market.
Cost
optimisation
It is not a surprise that banks are
questioning the cost of maintaining separate companies to deliver a
product which has lost much of its differentiation from other
banking products over the past ten years.
Complexity of structures delivered
by the corporate lending divisions of banks has been well beyond
the leasing products now on offer.
The more leasing companies
transform themselves into process-driven operations, the easier it
is for the bank to consider integrating the product range.
Costs such as human resources,
treasury, legal, collections, credit and, to a much smaller extent,
systems, are obvious areas of cost optimisation targets.
Capital and
liquidity
The introduction of Basel III
coupled with the determination of central banks and regulators to
increase public confidence in the safety of the banking system has
produced a keen edge to the consideration of product and
distribution choices of the banks.
Experience tells us that not all
choices will be made on profitability alone; comfort and
compatibility within banks always take a high priority.
Just what capital will be required
for a specific range of bank products continues to be under
debate.
The asset finance and leasing
businesses will be keeping close to any developments to make sure
due consideration is given to sustainable profitability and quality
portfolios – plus the understanding of equipment lifecycles and
afterlife disposal opportunities.
Leasing generally looks good when
comparisons are made with other bank products.
Strategic
orientation
Maximising the contribution from
the distribution network is a driver for many banks, particularly
those who are the major players in their domestic markets. The sale
of a range of products to what they see as their own customer base
is an important part of bank strategy.
Organisational structures which get
in the way are likely to get some tough treatment. Leasing
subsidiaries are no longer surprised by calls from their parents to
align with the banks’ strategies and to develop synergies.
It is really a question of where
this leads and the vision of the leasing practitioners as to what
the end game looks like – not necessarily just to themselves, but
also to the parent bank.
There is still a long way to go
before we see well-capitalised banking groups trading in a buoyant
market again, at least measured by the new standards and beyond.
Before then we will see some tears.
I hope this will not be among our leasing colleagues emulating
King Canute trying to stop the tide coming in.
