Leasing Life’s second Business Confidence
survey shows lessors are, for the first time, now openly worried
about their futures. Judging by the survey results, only the most
adaptable and well-funded will survive. Peter Hunt and Chris Boobyer report on the precarious
position of many companies
Way back in the summer of 2007,
lessors predicted that the economic downturn that was then causing
panic in the capital markets would never hit the asset finance
industry. A year later they remained as optimistic, although a
business confidence survey of leasing professionals run by Leasing
Life (LL) and lease consultancy Invigors in September 2008
concluded that continuing to think in this way showed that they
were burying their heads in the sand.
Go deeper with GlobalData
Last month a similar survey was concluded by
the same authors – and finally, it appears, lessors have caught up
with reality.
The key findings of the LL-Invigors survey –
which looks at business confidence over the next six months – of
leasing professionals, including independent, bank and bank-owned
lessors, brokers and captives, from across 11 European countries,
make for grim reading.
They predict a continued fall in business
volumes, limited availability of capital, a squeeze on profits due
to increases in bad debt, cost reductions to deepen and become more
widespread, and continued staff cuts.
In short, the earlier optimism shown in the
previous survey appears to have quickly evaporated in the heat of
the global financial crisis and resultant recession.
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By GlobalDataBusiness volumes
In the previous survey, over half
the respondents expected new business volumes to increase over the
following six months. Last month this proportion fell to 45
percent. In line with this, the proportion of respondents
anticipating a decrease in business volumes increased from 29
percent in September to 42 percent in April.
Independent finance companies remain the most
optimistic group of respondents, with nearly three-quarters
expecting business volumes to rise. Banks and bank-owned lessors
are much more pessimistic with nearly 40 percent expecting volumes
to fall over the next six months and 29 percent forecasting falls
of over 20 percent.
Margins
On a brighter note, some 54 percent
predict margins will increase over the next six months compared to
48 percent in the September survey, while only 17 percent expect
them to narrow. Of those expecting margins to widen, 29 percent
predict an increase of more than 25 basis points, slightly higher
than the 22 percent in the earlier survey.
As with the previous survey, banks and
bank-owned lessors are most aggressive on margins with nearly half
expecting margins to increase by more than 25 bps. In contrast,
half of the captives surveyed expect margins to fall, mostly by up
to 25 bps, which perhaps reflect their experience of pressure on
manufacturing margins.
Bad debt
There is little ground for optimism
regarding bad debt. Three quarters of respondents expect bad debt
to worsen over the next six months. Of those expecting bad debt to
deteriorate, 26 percent thought it would increase by up to 25 basis
points across their portfolio, while 35 percent predicted an
increase of between 25 and 100 bps. Some 15 percent even
anticipated an increase of greater than 100 bps.
Independent finance companies anticipated a
worse than average situation regarding bad debt. Over 40 percent
expected an increase of between 25 and 100 bps, and 22 percent an
increase of between 100 and 200 bps. Banks and bank-owned lessors
appear to be in better shape with most expecting an increase of no
more than 25 bps over the next six months.
Profits
Worries about bad debt are clearly
feeding through to profit expectations. Although margins continue
to strengthen, 42 percent of respondents anticipate profits for
their business will fall over the next six months, while 40 percent
predict an increase. The remaining 18 percent expect no change.
Independent lessors are the most upbeat about
profits with two-thirds predicting these to increase over the next
six months. Banks and bank-owned lessors are more cautious with 40
percent expecting an increase in profits balanced by 35 percent
forecasting a decline. Brokers were the most pessimistic with 60
percent expecting further falls in profits over the short term.
Capital availability
Compared to the September survey
there is some evidence that limitations on the availability of
capital are easing slightly. Just over a quarter of respondents
expect capital availability to improve in the most recent survey
compared to 11 percent in the September one. However, the majority
of these predict an increase in capital availability of no more
than 10 percent. Overall, 30 percent anticipate capital
availability will decrease, which is slightly less than the 37
percent in the previous survey, although it seems that a higher
number of these than before expect larger reductions in excess of
10 percent.
Again, independent finance companies are the
most optimistic, with half predicting an increase in the
availability of capital and most of the remainder no change. Only
19 percent of banks and bank-owned lessors expect an increase while
30 percent predict capital availability will worsen. Brokers
clearly remain badly impacted by the squeeze on capital with 60
percent forecasting this will fall further and the remainder
anticipating no change.
Underwriting
Restrictive underwriting practices
look set to continue. Some 60 percent expect the level of
acceptances to decrease over the next six months, a similar
proportion to the 62 percent in September. Only 8 percent
anticipate the level of acceptances will increase.
Several respondents stated that they no longer
lent to certain sectors, though this varied between lessors. Some
mentioned that they no longer fund the real estate market, while
others now avoid retail, construction or IT. Two commented that
they no longer accept business from brokers.
Of those deals which are accepted, lessors are
imposing tighter conditions. Many respondents comment that they are
requiring larger deposits, more management information, and are
seeking greater security in the form of covenants and guarantees.
Some are writing shorter-term agreements than previously and others
have stopped certain forms of lending such as sale and
leaseback.
Credit turnaround
The survey shows that not only will
fewer deals be accepted, but those that are will take longer to
approve. Just under half of respondents in the April survey predict
that credit turnaround times will lengthen compared to just 39
percent in September. Only 6 percent expect them to shorten with
the remainder anticipating no change.
Bank-owned lessors and brokers are more likely
to expect conditions to tighten compared to independent finance
companies. Over 70 percent of banks and bank-owned lessors and 80
percent of brokers predict acceptances will decrease compared to 44
percent of independent finance companies. Similarly, nearly 60
percent of banks and bank-owned lessors and 80 percent of brokers
expect credit turnaround times to lengthen, against just one-third
of independent finance companies and captives.
Competition
As the credit crunch continues,
respondents expect less competition in their home markets. Some 79
percent anticipate that the number of competitors in their market
will decrease, a similar level to the 74 percent in the September
survey. This proportion was consistent across all types of
lessors.
As competitors drop out of the market, there
is little expectation that these will be replaced by new entrants.
Just under 80 percent of respondents think it unlikely that new
entrants will appear in their home market, again a similar level to
the 82 percent in the September survey. This is a worrying aspect
for competition, and given other downward pressure elsewhere in the
dynamic mix of lessor profits, there is unlikely to be any return
to price competition for the foreseeable future, which is, once
again, bad news for the struggling SME sector.
Mergers and acquisitions
While these trends are consistent
across both surveys, expectations of merger and acquisition
(M&A) activity have decreased markedly. Only 45 percent of
respondents expect the level of M&A activity to increase in
their home markets, compared to 71 percent in the September survey.
Some 49 percent anticipate no change, up from 23 percent
previously. Only 6 percent of participants in both surveys expect
M&A activity to increase. Therefore, not only are some
incumbents failing or exiting the asset finance market, there are
also no immediate signs expected consolidation plays among the
survivors.
With competitors exiting the market and new
entrants failing to appear, it is not unsurprising that most
respondents expect their companies’ positions to strengthen
relative to their competitors. Two-thirds expect to be in a
stronger competitive position over the next six months, compared to
60 percent in September. Only 6 percent expected their position to
weaken. Independent finance companies and captives were the most
positive in this respect, with over 80 percent anticipating that
their competitive position would strengthen. Banks and bank-owned
lessors together with brokers were slightly less bullish.
Those expecting their position to strengthen
cite their strong capital base, access to parent company funding,
ability to focus on specific markets and investment in areas such
as sales where competitors are cutting back. Some reiterated a
point made in the previous survey that action taken at the start of
the financial crisis has enabled them to weather the storm better
than their competitors and that they expected to emerge in better
shape. The few reasons given for a weakening position centred on
capital availability/liquidity and a reduced focus on specific
target markets by parent companies.
Volumes
In the September survey, just 40
percent expected growth in leasing volumes in their home market
over the next six months, while over half expected their own
business to grow at the expense of their competition. In last
month’s survey, a similar percentage – 42 percent – anticipate
growth in their home market, but now only 44 percent expect their
own business to increase.
It is interesting to note that relatively few
funders appear to admit to losing business given than several are
known to have reduced lending severely in certain sectors of the
market – and that some have withdrawn altogether.
Sales lead conversions
The anticipated reduction in
acceptance levels and longer credit turnaround times are reflected
in participants’ view of how the conversion rate of sales leads
would change in their business over the next six months.
Some 42 percent expect the lead conversation
rate to decrease, a 9 percent increase on the September figure.
Some 29 percent anticipate no change (a 9 percent fall since
September) while only 29 percent predict an increase (no change). A
quarter of respondents expect the decline to be no more than 10
percent while 13 percent anticipate a fall in conversion rate of
between 10 and 25 percent.
Channels
The survey highlights some changes
in how funders are changing their channel mix to improve the credit
risk on new business and enhance their margins.
Respondents were asked how the level of new
business originated through brokers and vendor finance programmes
is likely to change over the next six months. Of the 73 percent of
respondents who sourced business through brokers, over half expect
this to decline further in the coming months, while 30 percent
predict no change. Only a small minority anticipate an increase
through the broker channel. Banks and bank-owned lessors are much
more likely to reduce their business through brokers than
independent finance companies.
In contrast, out of the 94 percent of
respondents with vendor finance programmes, 55 percent expect the
level of business sourced through these to increase, though in most
cases only slightly. Just over a third anticipate a fall while the
remainder expect no change. Independent finance companies are more
likely than banks and bank-owned lessors to increase their business
through vendor finance programmes, perhaps reflecting their closer
alliances to that sector.
Expenditure
The survey reveals even greater
pressure on expenditure budgets, with many respondents not only
anticipating a reduction in expenditure, but also much deeper cuts
than forecast in September.
Operating and marketing expenditure appear to
be the worst affected, with 48 percent of respondents expecting
operating expenses to be cut in their organisation over the next
six months, compared to just 31 percent in September last year.
Some 38 percent foresee no change, while only 13 percent expect an
increase – half the level of the previous survey.
Marketing expenditure is expected to have a
similar fate, with 47 percent of survey participants stating that
marketing spend will decrease over the next six months, up by 10
percent from the previous survey.
Nearly double the percentage of respondents
believe that these reductions will be in excess of 10 percent,
compared to only 17 percent that anticipate reductions on this
scale last year.
Some 40 percent expect no change and 13
percent think that marketing expenditure in their organisations
will increase.
Training
Training appears to be less affected
by expenditure cuts, although more respondents anticipate training
expenditure to fall rather than increase. Some 60 percent of
respondents feel that there will either be no change in training
budgets (40 percent), or that there will be an increase (20
percent). Of the 40 percent who expect decreased training budgets
over the next six months (32 percent in September), 16 percent
believe that training spend will decrease by more than a quarter in
the short-term, which is nearly double the number in September who
expected reductions of this magnitude.
Lessors’ reliance on IT systems is being
impacted by investment reductions in front and back-office systems.
Some 38 percent expect cuts in this area, with 27 percent
predicting a decrease of up to 25 percent. Only a quarter of
respondents see expenditure increasing in the next six months, but
mostly by less than 10 percent.
There are few distinctive differences between
various types of lessor, though it appears that a slightly higher
percentage of independent finance companies expect to increase
expenditure in operations, marketing and training than banks and
bank-owned lessors. However the latter group were more likely to
increase investment in front and back-office systems.
Staff cuts
The forecast reductions in
expenditure and investment are matched by those expected in
headcount. In stark contrast to the previous survey, it appears
that the sales function is more likely to be affected this time.
Nearly a third of respondents expect sales staff numbers to be
reduced over the next six months, compared to less than a quarter
in September. However, there is perhaps greater balance in this
section in that most think headcount reductions will be no more
than 5 percent. A quarter of participants think that sales
headcount will increase in their organisation (down from 31 percent
in September), although the anticipated increase was less than 5
percent.
There was a marked difference between lessor
groups, with banks and bank-owned lessors more likely to cut sales
staff than other groups whereas a greater percentage of independent
finance companies expected to increase headcount in this area. Two
independents specifically commented that they are deliberately
investing in their sales force to take advantage of competitors
withdrawing from their market.
As might be expected given bad debt concerns
and lower technology investment, the outlook for non-sales staff
headcount appears to be more stable. There is no change between the
September and April surveys with half of respondents expecting this
resource to remain unchanged. A quarter this time – compared to a
third in September – predict that numbers will be reduced with the
focus for staff reduction on back office administration, marketing
and sales support. Only 17 percent expect non-sales staff to
increase with growth in areas such as recovery, collections, credit
control and risk management.
Generally, headcount reductions are most
likely among banks and bank-owned lessors, with respondents from
independent finance companies anticipating an increase. The
majority of brokers and captives included in the survey expect no
change in headcount in both sales and non-sales functions.
Given the outlook for new business volumes,
coupled with further cuts expected in expenditure, investment and
headcount, the short-term outlook for the asset finance industry in
Europe looks set to worsen. That said, 41 percent are more
optimistic about the prospects for their company compared to 37
percent seven months ago. In contrast, only a quarter this time
said they are more pessimistic about the future compared to a third
in September.
In the previous survey report it was concluded
that parts of the asset finance sector may well have been in denial
about the impact of the financial crisis.
In April that appears to have dissipated with
most respondents now highlighting the grim reality of reduced
capital availability on new business volumes and growing bad debt
on profit expectations.
However, it is evident that some lessors are
weathering the recession much better than others. Those which are
adaptable, well-funded and have acted quickly are best placed to
take advantage of the rapidly-changing business environment as less
nimble competitors are forced to simply retrench or withdraw.
The authors are partners at
Invigors.
