Year of consolidation sees record growth
Two years on from tough new rules, leasing companies have slashed the number of firms in the sector, and witnessed a rise in fortunes
The evolution of the leasing market continues to defy expectations. In 2006, the industry faced tough new regulations which many feared would lead to mass takeovers in the industry.
Leasing companies were forced to increase their share capital to a minimum of 200,000 Euro, to report their financial data to the central bank (BNR) and to enforce a rigid managerial structure.
But the bloodbath did not happen and instead the industry saw a massive number of companies vanish – as the quantity of firms registered as leasing companies dropped by 75 per cent.
In January 2006 there were over one thousand leasing companies, by August 2007 there were only 278.
“The smaller leasing companies could not comply with the strict rules, so just disappeared,” says secretary general at the Leasing and Non-Banking Financial Services Association (ALB), Adriana Ahciarliu. “They will see out their existing contracts, but are not allowed to develop any more.”
The new rules intended to make the Romanian leasing more transparent, secure and predictable. They also favoured larger companies.
“It is too bad that some small leasing companies had to disappear from the market,” adds Adrian Dodita, secretary general of the Association of Leasing Companies of Romania (ASLR). “But this is for the best because this market is run by a certain set of rules that lead to a healthy and secure evolution. This has attracted some important investments.”
In the last two years KBC Lease, a subsidiary of the Belgian finance giant KBC, acquired the largest independent leasing company on the Romanian market, Romstal Leasing, for 70 million Euro. Another example is the acquisitions of Motoractive Leasing by the US group General Electric (GE) Money.
Some voices complained that the total market would take a nose-dive because of this regulatory framework. But the reverse has happened.
Optimistic officials from ALB estimated for 2007 a growth of a maximum 32 per cent for the industry, but this forecast underestimated the Romanians’ appetite for buying in installments. For last year the leasing market registered a 51.3 per cent growth.
“Now we have a different approach, we have a more professional personnel and people began to understand better how the leasing market functions,” says Claudiu Stanescu, general director of BCR Leasing.
Not following Euro-trend
Last year was clearly dominated by financial leasing, also known as hire-purchase, which is buying a product in installments from a leasing company. This has a market share of 99 per cent, according to the ALB. The remaining one per cent of business is from operational leasing, which is hiring out a product without intending to make a final purchase. Romanians like to own what they pay for.
“Here customers are focused on possessing goods,” says Anina Iordache, general director of Immorent. “This is contrary to the trend abroad where people are satisfied knowing that they have the right to use those products.”
Kurt Leitner, CEO of Porsche Leasing, says that as long as the concentration of cars per person stays below the level registered in Western Europe, the car leasing market will also continue to grow – which he estimates will last for at least another ten years.
Operational leasing still remains a niche product. “Now it is only focusing on the management of car fleets for multinational companies,” says Septimiu Postelnicu, CEO of UniCredit Leasing. “In this area we are not following the European trend where operational leasing holds a very important position. Here the market is focused on the transfer of the ownership of assets.”
But some players have great faith in the future of operational leasing. Corporate clients need flexibility in the kind of products they can buy into. “The fleet [of vehicles] is often a significant cost-factor, which is viewed as time-consuming,” says Kurt Leitner. “We see the highest potential in the operational leasing and fleet management fields.”
The massive potential of Romanian operational leasing has been noticed by international players in long-term car hire such as Sixt New Kopel, ALD Automotive, Hertz Lease and DiRent.
“The potential of the market is unbelievably big, but is growing gradually,” says Dudy Perry, CEO of Sixt New Kopel. “I think that the numbers will grow considerably in the near future. Especially when, as happens in western Europe, insurance companies here will eventually have to replace the cars of insured customers, when they have accidents.”
In Romania, leasing is not yet seen as a useful tool that can help the financing of different investments, nor is it a choice of the public sector. “Unfortunately all the funds that come to Romania automatically become the monopoly of banks,” says Adriana Ahciarliu, ALB. “While the Ministry of Economy and Finance has become the sole financier of public institutions from the central administration, centralising all the expenses and we cannot close direct contracts with any of them.”
While vehicle leasing remains the most popular product, the most dynamic sectors in 2007 were in real estate and equipment. In 2007 compared to the year before, the real estate leasing market has seen an increase of 213 per cent, according to Kerem Sekizyarali, president of Credit Europe Leasing. “This now reaches a total value of 461 million Euro,” he adds. “Connected to the development of real estate, we also saw a rise of 67 per cent in equipment financing.”
With around 70 per cent of the market is in vehicle leasing, Sekizyarali believes a healthy leasing market should be divided into 50 per cent vehicles, 35 per cent equipment and 15 per cent in real estate. “This means that the Romanian leasing market still has a very good potential,” he adds.
Erste Bank’s Immorent is specialised specifically in the real estate leasing sector. General director Anina Iordache argues that the country will continue to see an accelerated growth in this area. “The market is now more stable and the residential sector has some more good years until the country covers the needs of the market, the industrial sector which rises with the same pace as the national economy and of course the commercial sector is growing too,” she says. “[Real estate leasing] can only rise and I estimate a minimum rise of 50 per cent for 2008.”
Equipments and trucks are other sectors in which leasing companies have great expectations. “For 2008 we estimate that the segment of equipments and trucks will reach up to 30 per cent of the total value of financed assets,” adds Felicia Relenschi, CEO of Motoractive Leasing.
The most popular period for leasing a product is over four to five years, with one third of customers choosing this length of time. Only 13 per cent of customers choose a period of over five years.
Although Romania is trying to reach European standards, there are still some major differences in the economy which reflect on how the leasing sector is organised.
“Real estate leasing is a very good product, but in Romania it is very risky because the property prices have boomed,” says Sekizyarali. “The figures accepted as the value of a land or a building are not real and everyone pays without checking what the real price should be.”
Meanwhile Postelnicu argues that the financing costs in Romania are higher than in other western countries and the regulations are stricter. This is partially due to the slow and stuffy bureaucracy, says Anca Petcu, general manager Piraeus Leasing. “But Romania is a country that is still developing and we do not have a mature economy,” she adds.
But the risks and the tough conditions may be paying off. “Maybe the financing costs are higher in Romania, but at the same time the profits of leasing companies are higher too,” argues Adrian Dodita.
Although the Romanian leasing market is quite young compared to countries such as Germany or Austria, Peter Demmer, general manager Volksbank Leasing, believes the country is catching up “very fast”.
The financing conditions differ from one country to another depending on the level of maturity of each market. “In the Czech Republic, Poland or Hungary, where the privatisation of the banking system began earlier than in Romania, the conditions for leasing are more developed,” argues Mihaela Mateescu, general director of Raiffeisen Leasing. “But in countries like Ukraine or Albania, where the leasing market is just setting up, the costs are higher then here.”
Fall-out from credit crunch
Concerning the evolution of 2008, leasing market players disagree. Some argue that the country is passing through a tough economic period because of the credit crunch and the financial crisis affecting the global banking industry.
The central bank has increased the key interest rate from seven per cent to 9.5 per cent in only six months, with indications that this could rise even further. International risk agencies, such as Moody’s, Fitch and Standard and Poor’s have downgraded the security of Romania as an investment target.
“2008 will be a year of consolidation and less enthusiastic expansion than 2007, particularly when there are the prospects that some clients will not to be able to pay their debts,” says Septimiu Postelnicu, Unicredit Leasing.
Where the leasing of machines may find some further potential are in the healthcare industry and green energy, argues Postelnicu. There is also potential for equipment for sectors dependent on Government financing, such as in infrastructure development, because these areas are not as reliant on foreign direct investment.
But non-essential investments may be affected. “Increased interest rates and a weaker leu do not encourage investments which can be either delayed or canceled,” says Leitner. “We hope that the Romanian central bank will rationally balance the measures taken in the cash and currency policies and will further ensure a consumer and investment friendly environment.”
But some are less negative about the effects of the international financial crisis on Romania. “At the moment the Romanian financial market is more stable than other international markets,” says Peter Demmer.
With up to three million Romanians living and working abroad, there is also an extra boost to the Romanian economy from money they send home.
“This is very good for the economy because more investments are possible with this money and this creates stimulation for the leasing market,” adds Demmer.
There are few direct effects of the credit crunch which have impacted the domestic leasing market. “The increase of the interest rates in leasing stem only from the rise of [benchmark European interest rate] Euribor because most leasing companies are financed by mother banks based abroad,” adds Anca Petcu, general manager of Piraeus Leasing.
Companies in the sector, at a local level, are not listed on the Bucharest Stock Exchange, which has suffered an unruly six months since the sub-prime crisis in the US.
“This means there should not be any direct effects of the international financial crisis on the Romanian leasing market,” says Adriana Ahciarliu, ALB. “Some indirect effects might appear because most of the players attract their finances from the mother-banks.”
The average expectation of leasing companies for 2008 is an increase of around 30 per cent in the market. This is a healthy prediction, but way below the 52 per cent for the previous year.
“The leasing market saw a very good growth in 2007 because of high need of technology and the desire to use leasing as an alternative to the bank loans,” says Adrian Dodita, ASLR.
“But in 2008 I do not think that we will see the same thing,” he adds. “If we take into consideration that the indebtedness threshold has increased, the rise of costs [for companies and clients] and the macroeconomic environment, the growth of the Romanian leasing market will slow down.”
Challenging the rulebook
Tough rules from the central bank aim to rein in the development of leasing companies, but are they fair?
Some leasing companies are dissatisfied with the central bank’s regulations which enforce tough rules on the larger companies in the sector.
At present, all leasing companies are registered in a General Register at the central bank, but players,which for three consecutive trimesters have an activity volume of more than 50 million RON [around 14.1 million Euro] and a level of exposure of 25 million RON [around 7.1 million Euro] are placed in a Special Register.
This does not take into consideration the product that the company is selling, whether it is leasing, factoring or credits. It is a classification based on the volume and not on the type of the business.
Once the leasing company enters into the Special Register, it has to abide by stricter regulations in connection to its funds and its volume of financing.
Therefore the larger the leasing company, the tougher the rules.
“Those who are in the General Register have more freedom to move into the market and this leads to unhealthy competition and forces the players to find ways to avoid entering the Special Register,” says Adriana Ahciarliu, ALB. “It is very confusing for our clients. They do not understand why, when they go to a big leasing company, they have to fill in a stuffy file and to comply with so many rules. But in a smaller leasing company, all they need to lease a car is an identification paper.”
The main role of the central bank is to monitor non-banking financial institutions to maintain a certain level financial stability in the economy.
“Those in the Special Register have at least 80 per cent of the total value of financed assets, so it is expected that the rules should be stricter and the BNR is more prudent especially now, with such aggressive growth,” says Angela Dimonu, division manager of the Regulation and Licensing Department, Financial Activities, part of the central bank.
When racing to gain more profit or a larger market share, she argues that leasing companies prefer to pay less regard to the debt threshold of their customers.
In a hypothetical situation, if the larger leasing companies continue to ignore this threshold, they take on a higher risk and, if they go bust, this could have a knock-on effect into the entire market – similar to the domino effect in the sub-prime lending crisis in the US.
While smaller leasing companies would not have this effect on the market if they go bankrupt, this is not true of the larger players, Dimonu argues, which is why they face tougher rules.
“The sole purpose of the central bank is to ensure that this galloping growth is made in the most cautious conditions,” she says.
Romanian fraud schemes have also begun to affect more leasing companies. These firms are sensitive to both the customer defaulting on payments and the failure of the supplier to distribute a decent product.
“We have to accept the supplier with whom our clients have negotiated a certain price for a certain product and that leaves us vulnerable because we have no means to verify a specific supplier,” says Adriana Ahciarliu.
At the moment leasing companies have access to the credit bureau, which contains a list of individual customers who have defaulted on their loan payments. To remedy this, leasing companies could have access to the Centrala Riscurilor Bancare (the Banking Risk Centre), which contains lists of companies and individuals who have taken out a credit. “To protect ourselves we have to take on the risk of the suppliers, which leads to an increase in our costs,” says Ahciarliu.
The BNR is currently setting up some regulations to allow larger leasing companies, those within the Special Register, access to the centre. The bank is now waiting for the approval of the Ministry of Economy and Finance. “By the end of 2008 we hope everything will be ready,” says Dimonu.
State of leasing
Value of leasing market in assets
2007: 4.9 billion Euro
70 per cent: financing of vehicles [3.3 billion Euro]
21 per cent: financing of equipment [1.1 billion Euro]
9 per cent: financing of real estate [461 million Euro]
Leasing players by value of assets
Banks: 65 per cent
Leasing companies: 29 per cent
Brand owners of leasing product [captives]: 6 per cent
Type of leasing customer by value of assets
Companies: 73 per cent
Individuals, family associations, micro-enterprises, NGOs: 24 per cent
Public sector: 3 per cent
Report by Alexandra Pehlivan