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Leasing: diversity, growth and change
Written by: Petr Vykoukal (www.penize.cz)
Photo: Petr Poliak
Although there have long been predictions
of saturation on the Czech leasing market, that is still far from
the case. While the market grew only slightly last year, the first
quarter of this year indicates that 2002's limited growth has not
yet become the rule.
LAST YEAR'S stunted growth also brought an unexpected result -
the Czech leasing market is the ninth largest in Europe. Although
this ranking, which means that our leasing market is larger than
Portugal's, Greece's, and Denmark's, sounds good, one has to acknowledge
that it is partially due to the strong Czech crown. However, the
true cause lies elsewhere. "Through most of the post-revolution
years small and medium-sized entrepreneurs have been complaining
that the banks were unwilling to extend loans to them, so they
had to seek out different financing methods," says Vratislav
Válek, the chairman of the board of the Czech Republic Association
of Leasing Companies, adding that "It is often leasing that
plays the role of banks in small to medium-sized firms. Because
the leasing company owns the subject of the lease, such transactions
are more secure than they would be for a bank." Leasing's
low risk is also borne out by the fact that out of the total CZK
400 billion financed since leasing's appearance in the Czech Republic,
Válek says that the number of problem leases is on the order of
tenths of a percent.
Enormous increases in the volume of transactions of 10% and more
per year, to which we became accustomed at the end of the nineties,
have not been repeated in the last few years. Last year's growth
in the leasing of movables was approximately 1%, and Válek points
out that after accounting for inflation one could say that the
market is stagnating. Another symptom of the change could be that
the number of leasing contracts is declining, while the financed
sums involved are rising slightly. However, last year's slow-down,
which affected primarily the largest companies on the market, also
had its own specific causes, not all of which will recur this year.
Vladimír Hábr, deputy executive director for sales at ČSOB Leasing,
the market's largest player, attributes this to the floods and
stagnation on the automotive market (which plays a great role in
leasing). This year's start shows somewhat better results. According
to Válek, there was mild year-on-year growth in sales in the first
quarter, but some firms are reporting significantly better year-on-year
results. Hábr comments that the sales volume for ČSOB Leasing reached
CZK 3.39 billion in the first quarter, an increase of 15% over
last year. If other companies can manage this throughout the year,
the era of rapid growth could return.
Cars account for half
A look at the structure of leased items indicates a specific Czech
trend - passenger cars account for half. In much of the world
this figure is usually 40% or less. Another large item (28%)
is attributed to trucks and utility vehicles. There is a question
as to how many of them are ordinary passenger cars modified to
fall under the utility vehicle category, thus allowing the buyer
to recover the VAT. The last significant commodities are machinery
and equipment (17%). Other items, such as computers, boats, and
airplanes, lag far behind, in single digits. The fact that leasing
has asserted itself as a method for personal car purchases plays
a large role in the increased volume of auto financing. While
around the world purchases of new (or used) cars by individuals
are usually financed by bank loans, in this country leasing predominates
this type of transaction. The reason is (as is the case with
financing machinery or vehicles for small firms) that leasing
companies are exposed to less risk than banks. Last year Czechs
used leasing to buy 30,000 new and 34,000 used cars, with 12%
of all movables leasing deals attributed to used cars alone.
As opposed to stagnating sales of new cars, the used-car segment
recorded significant volume growth - 35% year-on-year, to CZK
11.8 billion. However, more detailed analyses show stagnation
in this segment as well, as the number of contracts closed last
year is nearly the same as in 2001, so the only contributor to
the growth was the greater value of the financed used cars.
Gaps in the market still exist
The overall leasing market is stabilized to a certain degree, so it could seem
that there isn't any room for growth, but some segments have yet to peak.
Compared with neighboring countries, real estate leasing transactions (see
sidebar on page 42) still have an insufficient, one-third share, although
last year such deals increased by 40%. Operational leasing in this country
also lags behind the rest of the world, last year accounting for 4.25% of
all deals, while in Europe they account for tens of percent, and in the US
they even make up over half. With this type of financing the subject of the
lease is not transferred to the lessee, which has many advantages - it does
not increase the amount of assets or debits on the balance sheet (as per
international accounting standards financial leasing is included on the balance
sheet). Also, thanks to greater flexibility and many accompanying services
that increase efficiency, outsourcing is a more appropriate label than financing.
For now the leading leased commodity in this country is cars (see sidebar
on page 39), which account for the lion's share of the market, but firms'
growing interest in this service brings operational leasing to other areas
as well. Last year ČSOB Leasing recorded year-on-year volume growth of 111%
in operational leasing. "The largest volumes were in the area of computer
technology, with transport technology dominating full-service leasing," says
Hábr. "With EU accession one can expect increased interest in operational
leasing of machinery and equipment."
The last areas with sufficient room for growth are installment sales and consumer
loans. Installment sales were developed by leasing companies mainly in order
to be able to offer financing to subjects using state subsidies or grants (municipalities,
etc.). For many infrastructure projects (e.g., water treatment plants and others),
municipalities can apply to the state for subsidies, but the condition is that
the receiver must own the acquired item. But with leasing the receiver becomes
the owner only at the end of the lease, so he cannot receive a subsidy. Installment
sales provide the ideal solution to this situation. Last year such sales grew
by nearly 25%, to CZK 2.313 billion. ČSOB Leasing is the leader in this segment
(nearly 29%), closely followed by CAC (over 27%).
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Jiří Pathy
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More life on credit
Last year consumer loans (provided by non-banking subjects) again strengthened
their position, confirming Czechs' liking for living on credit. The total
of CZK 15.05 billion last year represented year-on-year growth of 6%. The
number of transactions approached one million contracts, but more are possible.
Jiří Pathy, the general director of GE Capital Multiservis, the largest firm
in the field, comments: "I don't expect any decrease in demand for consumer
loans in the near future, because not all of the types of products that are
usual in developed economies have been brought to the market yet, and this
type of financing is yet to cover all commodities." Three companies
account for 90% of the non-banking consumer loan market - GE Capital Multiservis,
Cetelem, and Homecredit, which are battling fiercely for customers. Vendors
of goods, mainly electronics financed through consumer loans, are significant
competitors. According to Pathy, the product a consumer chooses is heavily
influenced by "merchants, promotional materials in stores, and customers'
previous experiences with consumer loan companies." So the companies
are fighting for clients not only among themselves, but with vendors as well.
The Association of Leasing Companies currently has 92 members accounting for
99.5% of all leasing transactions. However, two years ago there were 50% more
such companies (and in the association). Their departures can be attributed
to several factors - insufficient financing (see sidebar on page 40) as well
as the rapidly rising concentration of all business in the top 10 or 20, which
makes any competitive effort more difficult. Válek says that many of the over
90 current association members aren't closing any deals any more, so there
are significantly fewer firms active on today's market. In neighboring Austria
(with about as many acres and citizens as the Czech Republic), about 30 leasing
firms are currently active, and Válek estimates that the Czech market will
look much the same in ten years, with 30-40 such companies.
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Operational competition
thickens
In the field of operational car leasing, which
was ruled two years ago by LeasePlan along with Business
Lease, the competition is becoming more striking. ŠkoFIN,
the market's number two leasing company, brought back the
idea of a specialized subsidiary, ŠkoLEAS, which specializes
in operational leasing. ALD Automotive, a part of the Société
Générale group, is becoming far more active, and currently
ARVAL, of the BNP Paribas group, one of the leading operational
leasing players in western Europe, is getting ready to enter
the Czech market.
"
We welcome market competition, because the new foreign players
will help speed up the Czech operational leasing market," says
Philip Aarsman, the managing director of the Czech branch
of Business Lease. "We spend a large part of our time
and efforts explaining the advantages of operational leasing
to Czech firms," he explains. Nevertheless, a lot has
changed in recent years. According to Radek Liška, the general
manager of ŠkoLEAS, the changes that are underway are one
of the reasons his firm entered the market last year. "In
the past many firms saw cars as investments, and wanted to
own them, while today they are beginning to see the advantages
in the option of delegating all of their car fleet cares
to specialized firms," he observes. This shift will
receive greater stimulus following the Czech Republic's accession
to the EU, where operational leasing is used much more often,
because it allows for savings, letting the firm focus all
of its concentration on its core activity, and leaving the
rest to the experts.
Although when you look at its share (4.25%) of the total
leasing deals in the Czech Republic, operational leasing
doesn't look very attractive, one should note that two years
ago it held a share of only 3.5%, which means its year-on-year
market share growth is 10%. Jaromír Hájek, the managing director
of LeasePlan's Czech branch, bears testimony about the extensive
use of operational leasing in other countries: "In England
and the Netherlands one half of all company cars are arranged
through operational leasing, while in this country only a
small percentage are." The entire operative car leasing
market in the Czech Republic currently manages only about
19,000 vehicles, half of which are under LeasePlan. Like
Aarsman, Hájek isn't afraid of competition either, seeing
his firm's seven years of experience and strong market position
as significant advantages.
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Czech market unfriendly
to small players
According to the chairman of the Association of Leasing
Companies, the European leasing market is divided into thirds:
banks, captives (subsidiaries of manufacturers of leased
items, e.g., automakers, computer manufacturers, etc), and
small leasing companies. The field is divided quite differently
in this country - captives and banks share about 90% of the
market, with a mere 10% left over for small leasing companies.
The Czech market's concentration is borne out by the fact
that the three top firms (ČSOB Leasing, CAC, and ŠkoFIN)
control 45% of the leasing market together. The top ten control
75% of the market, and they are all either banks (or subsidiaries
of other financial institutions - insurers) or captives.
The reason behind this division doesn't lie in a lack of
client interest in smaller firms' services, but rather in
that it is very difficult for such firms to get financing.
In other countries there are three ways companies can get
money in order to offer leasing - bank loans, forfaiting
operations, and offering bonds on the capital market. However,
the only one of these options that got much use in the past
- forfaiting - ended with the collapse of IPB, the sole provider
of this service, which was based on the purchase of outstanding
leasing debts. The impact of IPB's collapse on the leasing
market can be seen in the cessation of leasing activities
by 15 association members immediately following the bank's
failure, as no other bank in the country was interested in
providing such service, probably due to concerns about supporting
the competition of their own subsidiaries.
True, Milan Straka, chairman of the board of independent
leasing company Tekona, claims that he gets financing through
bank loans, but he is still encumbered by the banks' problematic
business policies, as they refuse to extend credit to small
and mid-sized leasing companies, not because of increased
risk, but because they want to shove them out of an interesting,
stabilized market in order to acquire more room for their
subsidiaries. Straka says that small companies bring their
clients a truly, not merely proclaimed, individual approach
based on evaluations of the abilities of specific entrepreneurs
to successfully realize their plans rather than on sector
statistics. Chairman of the board of the Czech Republic Association
of Leasing Companies, Vratislav Válek, lists other reasons
for there still being space for small companies on the market:
they are more regional, so they have good knowledge of local
conditions, they have personal ties with local companies,
and they can provide specialized services that large firms
either can't provide or aren't interested in. Better financing
opportunities would thus bring further increases in leasing
transactions as well as financing options of local entrepreneurs
in whom banks currently have no interest.
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Big deals account for most
of the market
Last year real estate leasing accounted for less than 10%
of all leasing deals, year-on-year growth of over 50%. However,
recent years' results are marked by strong fluctuations,
because many transactions take over a year, so a lot depends
on the moment when they are finally closed. Vratislav Válek,
the chairman of the Association of Leasing Companies, claims
that this was the decisive factor in last year's results: "at
the beginning of December we expected real estate leasing
to be on the same level it was two years ago, but then during
December two big deals were closed, with an entirely different
result." Real estate leasing still lags behind neighboring
countries; while in this country it accounts for about 9%
of all leasing transactions, in Austria and Germany the figure
is around 30% and 25%, respectively, according to Alois Lanneger,
director of Raiffeisen Leasing Real Estate. In Italy, where
acquiring real estate via leasing is associated with tax
advantages, it represents an even greater percentage of the
volume.
Commercial spaces - mainly hypermarkets and shopping centers
- dominated, with a 58% share of all deals closed last year.
Industrial buildings - production, storage, and logistical
- held the second largest share at one third. Other types
of transactions held negligible shares. Besides these segments,
the leasing of office buildings is gathering momentum, last
year accounting for 28% of all transactions in Europe, yet
in this country it was only 1.9%. Top-flight office buildings
suitable for leasing are being built only in Prague, and
many of these newly built (or reconstructed) buildings are
empty - there aren't many leasing options. Alois Lanneger
says that a lot of these options are financed by real estate
funds, depriving financing via leasing of the opportunity.
Services for municipalities are another real estate leasing
area that need development. Transactions financed by leasing
are not recorded in municipalities' records as debits, making
it possible to finance infrastructure construction that could
not be financed according to the Maastricht criteria, due
to increased indebtedness. Lanneger says that in neighboring
Austria this type of transaction is very common, thanks to
this factor. But the harbingers of this phenomenon have already
appeared in this country. The city of Most needed to install
new public lighting, so it found a contractor, Siemens, but
it was also necessary to ensure long-term financing, and
the best solution was leasing
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