With the low-risk lending
models of co-operative banks having won praise during the financial
crisis, Fred Crawley examines what co-operative ownership means for
leasing subsidiaries in 2010.
Go deeper with GlobalData
As news breaks that Austrian
Raiffeisen Zentralbank Österreich is to merge with CEE network
Raiffeisen International – including its huge leasing arm – the
time seems ripe to ask what position Europe’s co-operative banks
have left their leasing subsidiaries in, after a recession that has
challenged even the most conservative of lending models.
The largest lessor owned by a
co-operative bank is De Lage Landen, the international vendor
finance giant owned by Dutch Rabobank Group, which comprises 152
independent local banks and their central bank, Rabobank
Nederland.
The group as a whole is one of the
world’s top 25 lenders in terms of Tier 1 capital, and one of the
rare few to have retained a AAA credit rating throughout the last
two years.
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By GlobalDataRabobank traces its origins back to
the agricultural credit unions of the Netherlands in the 19th
Century, and agriculture has held a consistent central role in its
lending strategy.
As DLL has concentrated its
business on key asset sectors over the last two years, Rabobank’s
agrarian focus has come to the fore – today, some 20% of DLL’s
portfolio is made up of contracts written by its food and
agriculture (F&A) business line, and the group is intent on
growing this proportion.
Additionally, building the F&A
portfolio is a major part of DLL’s strategy when entering new
markets, such as Brazil.
As well as supporting its parent’s
ambitions as an agricultural lender, DLL’s focus on leasing farming
equipment put it in a good position for recession: agrarian
customers are famously risk-averse, and default levels on F&A
business tend to stay flatter than those in other categories during
hard times.
Yet, while DLL has to some extent
narrowed the range of assets it concentrates on, it still writes
extensive business in its construction and industrial, office,
technology, health care and transportation lines – business that
neither conflicts with nor particularly pushes its parent bank’s
agenda.
Explaining this divergence, a DLL
spokesperson said: “After all, our business model has proven its
worth; we have been a stable and profitable entity within the
Rabobank Group for years on end, and stability is key for
Rabobank.”
That stability is borne out in
Rabobank’s financial performance – it is one of very few banks of
its size to have survived the economic crisis without state aid,
especially while maintaining profitability.
Self-sufficiency
key
A DLL statement said: “Key to the
cooperative ethos is self sufficiency, or the ability to take care
of oneself and its stakeholders”.
But Rabobank has not avoided bad
loans altogether – in its results for 2009, net profit fell 17%
year-on-year to reach €2.3bn. This was due largely to a near-€2bn
loan-loss provisions bill, which Rabobank says is double the
historical average for the business.
Nevertheless, profit is profit, and
Rabobank’s reputation for resilience has been cemented – something
that has made DLL an attractive finance partner in the vendor
finance sphere, where lenders such as CIT and GE Capital have been
forced to cut programmes in response to overstretched balance
sheets.
One major factor DLL has in common
with other co-op owned lessors is its commitment to ‘green’
lending, which it demonstrated in its establishment of a green
technology group. Starting this year, this group will use the
expertise of HSH Nordbank’s former solar energy finance team to
finance solar power projects.
Other co-op lessors have been
equally committed to the green ethics of their parents, even to the
point of quitting certain types of business altogether.
The asset finance arm of the UK’s
own Co-operative Bank, for example, has withdrawn almost entirely
from general equipment leasing, concentrating instead on financing
green technology such as wind power turbines in accordance with its
‘ethical lending’ slogan.
France’s Crédit Agricole is another
co-operative with a green bias, apparent in the participation of
its leasing business in several large-scale pholtovoltaic
projects.
Meanwhile, there are leasing
networks funded with co-operative money, but operating along their
own strategic agendas.
One such is Raiffeisen Leasing
International (RLI), the leasing arm of CEE banking network
Raiffeisen International (RI).
Some 70% of RI’s stock is held by
Raiffeisen Zentralbank Österreich (RZB), which acts as central bank
for eight regional banks, called Raiffeisenlandesbank. These in
turn are owned by some 550 local co-operative banks.
While a good quantity of RLI’s
capital comes from RZB’s co-operative base, in the words of RLI
managing director Dieter Scheidl, “the co-operative structure is
far enough away that it does not have a significant effect on the
leasing business”.
There is some cultural carry over
from the trends displayed by other co-operatives, however – RLI is
a keen funder of agricultural assets, and has participated in
several renewable energy projects.
Nevertheless, much of this is
simply expedient to RLI’s historic strategy of rapid expansion into
CEE markets, and the strategies it has had to adopt to hold its
ground in the face of global recession.
Agriculture
outperforms
Agricultural assets, for example,
performed exceptionally in terms of customer default and residual
value in the unforgiving economic climate of Ukraine in 2009.
However, RLI is about to become
much closer to its co-operative banking roots – it was announced on
23 March that RI will merge with parent RZB to create a combined
entity called Raiffeisen Bank International.
“A potential merger would
definitely allow the exploitation of certain synergies,” said
Scheidl, with reference to the better access to capital and equity
markets that a combined bank would enjoy.
“It could well mean a lot more
capital available to leasing.”
Despite facilitating an easier
growth in business volumes, Scheidl does not think a merger with
RZB will do much to change RLI’s lending strategy, which varies
intensely between each of its 17 markets of operation.
In terms of a general outlook,
however, RLI is “very optimistic” about 2010, predicting recovery
of some sort in almost all CEE markets, and a new business volume
exceeding 2009’s constricted total.
According to Scheidl, lending to
the construction sector will lead the way to portfolio growth in
2010, with refinancing for construction companies and equipment
finance for firms involved in infrastructure development being
major priorities.
He is also positive about the
performance of RLI’s motor finance operations, but feels a severe
challenge is still presented by the heavy transport sector, where
massive oversupply of assets across almost all CEE regions will see
a “continued downturn” throughout the year.
In RLI’s case, only time will tell
how much closer co-operative ownership will favour the leasing
operations of the combined bank. Certainly, the bulk of RLI’s
current leasing business is concentrated east of Austria, and this
momentum in the CEE would be wasted if the lessor’s lending focus
were realigned to support the business customers of RZB’s
co-operative owners.
In other co-operative banks,
however, leasing subsidiary business origination is tied very
closely to the customer base of the parent.
Italian Banca Agrileasing is owned
by Credito Cooperativo (BCC), a network of 440 local banks with a
huge focus on lending to small businesses.
BCC has tripled its lending and
increased staffing by 40% in the last 10 years, and while it only
occupies a 12.2% share of the overall Italian banking market, it
provides 22% of SME lending in Italy.
Agrileasing has ridden the crest of
this growth, sourcing more than 80% of business through local BCC
branches and building a formidable “grass roots” presence among
smaller businesses that have few other sources for equipment
finance.
Enrico Duranti, the head of Banca
Agrileasing, said that the intimacy of BCC’s relationship with
clients gave his company a big advantage in terms of risk
management:
“The strength of the BCC network is
in their knowledge of regional territory and of local businesses,
given the closeness of relationships that have developed with
customers over the years,” Duranti said.
Stable customer
relationships
“Compared with major banking
groups, which might have a higher turnover, BCC engages in stable
relationships with customers. This might seem a weakness, but is
actually a point of strength in terms of knowing one’s
customers.”
In some ways, the distribution
advantage offered to Banca Agrileasing by BCC’s structure is
comparable to that enjoyed by Deutsche Leasing (DL), the enormous
business owned through individual stakes held by more than 400 of
Germany’s local sparkassen, or savings banks.
Although the sparkassen
are not a co-operative group in the strictest sense, the way they
share ownership of DL and use the lessor to support their customer
base is reminiscent of Agrileasing or DLL.
While DL does a huge quantity of
business outside Germany, its expertise is in the leasing of plant
and machinery, a skill picked up through its history as a provider
of plant finance to the thousands of small business customers of
the sparkassen.
In a period that has been dominated
by conservative risk strategies, the distributed ownership
structure and consequent steering strategies of the co-operative
banking model has been a boon for leasing subsidiaries across
Europe.
Whether this culture will drive them to new heights during the
more risk-friendly climate of economic recovery, however, remains
to be seen.
Raiffeisen International :
results
CEE banking network Raiffeisen
International Bank-Holding (RI) has announced it will merge with
parent Raiffeisen Zentralbank Österreich (RZB), in a move that will
bolster access to capital for RI’s 17-country leasing
business.
The
announcement was made at the same time as RI, including subsidiary
Raiffeisen Leasing International (RLI), revealed a massive
inter-annual rise in loan-loss provisions, up nearly €1bn over the
year to reach a total of €1.74bn.
As a result,
RI posted a pre-tax profit of €368m for 2009, some 74.3% down on
the previous year’s figure. Having pursued an acquisitive growth
strategy to reach a market capitalisation of €15bn by the onset of
the financial crisis, it will be eager to resume growth with
greater aid from RZB’s capital resources.
RI CEO
Herbert Stepic, who is due to retain leadership of the combined
bank, said: “One of the key arguments for this merger lies in the
improved access to capital and money markets that the merged bank
would enjoy in comparison to Raiffeisen International’s current
status.
“This step
would also contribute to Raiffeisen International’s risk
diversification and would make it possible to further optimise risk
management for the group in the future.”
Nevertheless,
fears that merging RI with the slower-growing corporate banking
business of RZB might dilute the former’s strategic focus on
lightning growth in the East has seen RI’s share price plunge since
the merger was announced.
The new bank, named Raiffeisen Bank
International, will have a similar structure to RZB, which
currently owns 70% of RI. RI’s stock market listing will be
inherited by the combined group.
