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An Industry Prospectus

Ten Reasons to Invest in Leasing

1. Unique business models based on asset ownership 2. Resilience and stability in times of economic crisis 3. Low cost/income levels 4. Low cost of risk, in line with provisions 5. Consistently protable business 6. Flexibility to manage changes in funding & liquidity costs 7. Leasing is extremely capital efcient 8. Strong internal controls tailored to deal with asset specicity 9. Asset ownership ensures few defaults and low losses 10. Asset expertise and management are the core of leasing

Purpose of this document ................................................................................................................................................ 4 About European leasing ....................................................................................................................................................... 5

What is leasing European leasing market Leasing to European SMEs

Key features of the European leasing industry .................................................................... 8

1. Unique business models based on asset ownership ........................................................................ 8 2. Resilience and stability in times of economic crisis ..................................................................... 11 3. Low cost/income levels ................................................................................................................................................. 13 4. Low cost of risk, in line with provisions ....................................................................................................... 14 5. Consistently protable business ........................................................................................................................ 15 6. Flexibility to manage changes in funding & liquidity costs ................................................ 17 7. Leasing is extremely capital efcient ............................................................................................................ 18 8. Strong internal controls tailored to deal with asset specicity ....................................... 19 9. Asset ownership ensures few defaults and low losses .............................................................. 20 10. Asset expertise and management are the core of leasing..................................................... 22

Data Sources ............................................................................................................................................................................................ 24

Overview Presentation of the Leaseurope Index Benchmark sources (OECD, Eurostat/AMECO & ECB)

Leaseurope Index Glossary ...................................................................................................................................... 26

Denitions Ratios


Contact ................................................................................................................................................................................................................. 27

This document describes the business models and valueaddition of the European leasing industry, with an emphasis on the features that make it an attractive investment proposition. It analyses the industry's performance and returns over recent years, contains information proving that leasing is a capital efcient activity and provides an overview of industry risk management practice. Data from the Leaseurope Index and Annual Survey are used to quantify the leasing sector, while banking gures from the OECD and Eurostat are used to quantify

traditional lending. Wherever possible, leasing gures are compared to traditional lending gures in order to show the leasing industry in a comparable context. In addition, the ndings from the Deloitte reports Implicit Risk Weights for SME Leasing in Europe and The Risk Prole of Leasing in Europe: The Role of the Leased Asset have been integrated. All of this information is distilled into ten key reasons why leasing is a good investment, with supporting data and analysis.

Disclaimer Deloitte Conseil SAS France was commissioned by Leaseurope to produce a Deloitte point of view paper on European Leasing: An Industry Prospectus. Data presented in the report were obtained from sources which we considered reliable and coherent. Deloitte Conseil has retained a strictly independent and impartial view in the creation of this report and the conclusions presented therein are, and will remain, those of Deloitte. Consequently,


Deloitte Conseil shall not have any liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the results, advice or recommendations set forth herein.

What is leasing?
A lease is a contract whereby a leasing company (known as a lessor) makes an asset it owns available to another party (called a lessee) for a period of time and in exchange for payment. Across Europe, a range of different types of contractual agreements fall under the notion of leasing. The common feature of all these arrangements is that the lessor retains ownership of the leased asset throughout the contract term. It is the inbuilt security provided by the retention of ownership rights that allows lessors to provide businesses with the use of assets in situations where traditional loans to obtain equipment would not be available to these rms. Almost any type of physical asset can be leased, as can certain intangible assets. Examples of leased assets include: plant and manufacturing equipment, IT equipment and software, printers, photocopiers and telecommunication equipment, construction and logistics equipment, vehicles and other

Leases t on a continuum ...

... with most leases being a combination of an asset nance and service solution


... nancing the use of an asset

The leasing industry dynamic Asset supplier

Payment for asset Asset title (lessor has ownership)

Leasing company
Rental payments Right to use the asset


means of transport, medical equipment, renewable energy equipment, infrastructure, utilities and property, to name but a few. Leasing companies can be banks, bank-owned subsidiaries, independent rms or the nancing arms of manufacturing companies, known as captive lessors. Leasing is used by businesses of all sizes and the public sector (e.g. leasing to schools, hospitals, etc.) to obtain the use of assets. According


to Leaseurope calculations, the majority of leasing is for SME clients, with SMEs accounting for approximately 50% of all new leasing business. Leasing is easy to access and is distributed via many channels; for instance through retail banking networks, directly from leasing companies, through brokers or from vendors and dealers of assets at their point of sale.


... providing an asset-related service solution


Total equipment volumes granted by client type (%) - 2011

4.5% 1.6% 17.2% 28.1% Corporate SME Consumer Public sector Unknown 48.5% Source: Leaseurope Annual Survey & Oxford Economic

European leasing market

Leasings economic importance lies in the fact that it is a major source of investment support for European businesses. In 2012, European lessors granted new leases worth almost 253 billion and the portfolio of leased assets in their hands at the end of that year was worth almost 732 billion, according to Leaseuropes Annual Survey. In 2012, leasing enabled 20% of all equipment investment in Europe.1 Total new business volumes by asset type (%) - 2012
11% 17% 6% 16% 7% 253 billion 43% Real estate Machines & equipment CVs Cars ICT Big/other

Leasing to European SMEs

According to Eurostat, one of the main reasons SMEs report as creating difculties in their accessing nancing is their inability to provide sufcient collateral or guarantees to the lender.3 In comparison to other forms of nance, leasing is ideally positioned to assist SMEs as it allows them to nance up to the full purchase price of an asset without requiring any collateral because the leased asset being leased is the collateral. For startup SME that do not have a strong SME nance landscape
Long term (LT)

Leasing allows businesses and other types of lessees to manage their working capital more effectively by spreading payments for the use of the asset over the contract period. It also allows clients to nance 100% of the purchase price of the asset without requiring additional collateral. Asset ownership also makes a lease an ideal product for securitisation. With regular income ows from the lease contract combined with the additional security provided by the underlying physical asset, lease contracts are well suited to creating low risk ABSs.

credit history, for those who may not be in a position to post collateral, or for SMEs in sectors that are generally perceived as being riskier, leasing is particularly advantageous in comparison to other types of nance.4 Leasing also caters well to the needs of very small rms (micro entities) which form the category of small business that suffers the most from a lack of access to nance. Lastly, while some forms of nance are better suited for companies that are at a certain point in their lifecycle, leasing is appropriate for use throughout the lifespan of any SMEs business.

Private equity

Finance need

Leasing SME banking Micronance Trade nance

By helping its clients to invest more, leasing can foster greater economic growth. Oxford Economics nds that a relatively small increase in the uptake of leasing would create an important boost in European GDP growth.2

Short term (ST)

Younger / smaller / no collateral / no credit history

1 2

SME lifecycle

Older / Larger / known risk and track record

Leaseurope calculation based on new equipment leasing volumes as a percentage of GFCF for equipment. Oxford Economics (2011) The Use of Leasing Amongst European SMEs. 3 Eurostat (2011) Access to Finance Statistics. 4 European Investment Fund (2012) The importance of leasing for SME nance

Leasing has been a constant source of support for millions of European SMEs, providing nance during times of crisis. Around 40% of all European SMEs make use of leasing, which is more than any other individual form of lending.5 Additionally, according to the OECD, it is the nancing source with the highest rate of successful applications amongst SMEs.6 Studies have shown that the majority of small businesses SME Application Success Rates (OECD)
Int'l trade or export nance Advanced payments (by customers) Trade credit (by suppliers) Bank overdraft or credit line Factoring Leasing Bank loans

witness an increase in their business as a result of leasing.7 Additionally, SMEs that use leasing invest on average 57% more than those who do not.8 Leasing is therefore not only a reliable source of support for SMEs even in the most uncertain economic conditions, but it also contributes to the success of their businesses and helps them increase their investment levels.

2010 2007

100 0 20 40 60 80 Application success rate

Oxford Economics (2011). OECD (2012) Measuring Entrepreneurial Finance: A European Survey of SMEs. European Bank for Reconstruction & Development EBRD (2011) Special Study: Banks Leasing Operations (Regional). 8 Oxford Economics (2011).
5 6 7

Much more than a nancial service a complete asset solution

Leasing companies dont just fund assets. They build comprehensive asset solutions for their clients, meeting both their nancial needs and operational requirements in one packaged product. Lessors can take on and manage residual value risk so their clients need not worry about second hand asset values. They are also able to work in partnership with a network of various service and asset specialists, integrating their skills into a seamless leasing solution for the client. At the macro level, because lessors possess in-depth asset knowledge, leasing allows for more efcient resource allocation compared to when a client owns an asset outright. Lessors may also offer other nancial products in some cases nancing the entire value chain of their corporate clients, including stock and oor plan nancing, factoring services and other loans.

A variety of business models that adapt to clients specic needs

A range of business models can be found within the European leasing industry. These depend on the leasing rms strategy and

market position and may often be combined to best address client needs. The specialised nance model refers to independent nance companies or bank owned leasing companies who position

Basic business model



Distribution channel Direct/ brokers

Specialised Alternative Finance source of nance to banks/bank loans Vendor Supports manufacturer sales

Independent nance companies or bank owned leasing companies


Leasing company Point of sale (Independent or bank owned) accompanies the development of their manufacturer and dealer clients by providing sales nance support


Additional service Leasing is part of a range Banking for bank clients of nancial solutions networks provided by a bank to its clients, when this is the product that best suits the clients nancing needs Support a brand Specialises in asset risk managements Financing arm of a manufacturer Point of sale

Captive Asset specialist

Focuses its business on Direct/point specic asset categories, of sale building asset expertise and taking on residual value risk

leasing as an alternative source of nance to bank loans. In these cases, business is done directly or through brokers. The product model is usually carried out by a bank or a bank ownedleasing company. Here, leasing is viewed as being one of a range of nancial solutions that can be provided by a bank to its clients through the banking network. The vendor model involves a leasing company (either independent or bank-owned) supporting the sales of their manufacturer or dealer partners. Here the leasing company accompanies the development of manufacturer and dealer clients by providing sales nance support and other services such as back-ofce support and sales staff training. While the lease is funded by the 3rd party lessor, these programmes can still be manufacturer branded and the leases will granted by the manufacturer at their point of sale. The captive model is similar but the lessor (funder) in this case is the nancing arm of a specic manufacturer or dealer and supports that particular brand by providing lease solutions at the

point of sale. The asset specialist model focuses on leasing specic asset categories (often car, trucks, IT solutions, etc.), building asset expertise and taking on residual value risk as an integral part of their business model. These companies specialise in asset risk management and either provide their services directly or at the point of sale. This wide variety of business models, and leasing companies capacity to combine and adapt them, means that they are in a uniquely exible position to match their product offer to client needs. Additionally, lessors can choose to focus on leasing specic assets, such as vehicles or IT equipment for instance, or remain generalists providing all types of assets. They may also make use of a wide range of distribution channels, including banking networks, manufacturer/ dealer points of sale, brokers and direct sales.

A lease is a multipartite relationship supporting asset manufacturers, supplier sales, and the asset needs of end-user clients
Bank-owned or independent lessors (also known as third party lessors) will typically work with a range of asset suppliers, either with manufacturers or with their distribution networks and dealers. The close partnerships they forge enable mutual added-value exchanges, such as information on asset values for the lessor, or backofce functions such as collections management for the supplier. Captive leasing companies support their parent companys sales, and can cooperate with third party leasing companies for the provision of certain services, including funding, if that will better suit their clients needs. Clients can either decide themselves which asset best suits their need or, if theyre not sure, turn to the leasing company for advice. They can also rely on the

The wide variety of business models, and leasing companies capacity to combine and adapt them, means that they are in a unique position to match their product offer to client needs

leasing company to take care of asset-related services, such as consumables, spare parts, software, insurance, and asset replacements. When it comes time for the asset to be replaced or upgraded, the client can easily turn to the lessor for this without any interruption in the services provided. For lessors, this ensures a very stable client base, with a high degree of repeat business and an uninterrupted stream of income ows.

Multiple and diversied sources of income through the provision of services

Leased contracts are modular products, where multiple service

components can be packaged together into a single monthly fee for the client. The total fee thus covers the use of the asset itself, as well as its insurance, maintenance and many other services. In addition to asset-related enduser client services, lessors who partner with manufacturers are able to provide these vendors with tools such as back-ofce support, reporting or collection services. Lessor-vendor relationships also often give rise to bulk discounts or subsidies for the lessors from manufacturers, which in turn can be passed on to clients in the form of lower rentals. The chart below summarises the variety of income streams lessors can benet from.

Early termination fees

Multiple income sources

Discounts/subsidies from the asset supplier Services to vendor partners (back-ofce, collection) Service-related income (maintenance, replacement, insurance, etc.) Residual value gains


A resilient business
The leasing business is impressively resilient. While European leasing activities have not been immune to the adverse economic conditions of past years, the business has been much less affected than general banking activities. Over the 2009-2012 period the European leasing portfolio9 remained broadly stable, while classic lending product outstandings decreased. A slight reduction in the lease portfolio was seen in 2012, but this was far less severe than for European bank loans in the same year. Comparing the 2009-2012 Leaseurope data for total new European business volumes for equipment leases10 with gross xed capital formation for equipment provides an additional perspective on the stability of European leasing through the economic cycle. As show in the graph above, new lease production usually follows the same path as total equipment investment in the overall economy. However, it actually exceeded total
110 100 90 80

Leasing vs. banks lending activity (Index = 100)

09 10 11 12 full year full year full year full year Leasing portfolio (Source: Leaseurope Index) Bank portfolio (Source: OECD)

Leasing new business growth vs. gross xed capital formation growth
20% 10% 0% -10% -20% -30% 01 02 03 04 05 06 07 08 09 10 11 12 European Union (27 countries) Euro area (17 countries) Leasing-Equipment


equipment investment in 2011 and 2012, implying that leasing was responsible for nancing a greater share of investment in these difcult years. Lastly, leasing support real investment,

is popular amongst businesses (SMEs and corporates) and lease contracts are mostly mediumterm in length, features which further contribute a certain stability to the business model.


Source : Leaseurope Index Source : Leaseurope Annual Survey


Income resilient to reductions in new volumes

The leasing industry has also demonstrated the capacity to maintain income levels in tough economic conditions as evidenced over the 2009-2012 period when its new business volumes declined by 5.29%, but its operating income increased by 13.53%. This can be attributed to the unique characteristics of the leasing business model discussed above. Moreover, leasing company turnover tends to be structurally stable due to a

positive time lag between leasing income and the evolution of new business. Moreover, lease income includes interest income as well as additional fee and service income which are spread linearly over the life of the lease contract (as opposed to interest income which decreases over the contract life).

Strong revenue in crisis periods compared to classic banking

A comparison of Leaseurope gures with ECB statistics on mediumsized banks shows that lessor and bank operating income levels have

diverged signicantly. Mediumsized banks operating income decreased considerably between 2009 and 2010, while lessors steadily increased theirs between 2009 and 2011. This probably reects the deep deleveraging medium-sized banks went through up to 2010. Despite this however, European lessors were able to manage the impact of the liquidity crisis more efciently (see point 6)

Over the 2009-2012 period, the European leasing portfolio remained broadly stable, while classic lending product outstandings decreased

Leasing vs. banks operating income (Index = 100)

120 115 110 105 100 95 90 85 09 10 11 12 13 Leasing Medium-sized banks (source: ECB)

Stable cost/income compared to classic banking

The leasing industry has managed to keep their cost/ income ratio stable over what has been a very challenging 5 year period. Varying between 45% and 50%, this level of cost/income is consistently lower than that of classical banking and is evidence that leasing rms commercial revenues are strong and stable. Moreover, it shows that lessors manage their costs proactively. Between 2009 and 2012, medium-sized banks total cost/ income ratio increased by 9.6 percentage points, while over the same period leasings cost/income ratio decreased by 0.2 percentage points. This stability in leasing cost/ income can be traced back to the fact that any slowdown in operating income growth is mirrored by an equal or greater slowdown in cost growth. For example, in 2013 operating

income increased by 1.2% while operating expenses decreased by -2.4%, a testament to the leasing industrys capacity to adjust their expenses to their forecasted income quickly. Several different factors help to explain why leasing cost/income is so stable, particularly in relation to classic banking. Firstly the nature of structural costs are different from those of classical banks, for instance, lessors do not have their own network of

bank agencies. The monoline nature of lessors means that by denition they specialise and can put in place more focussed and efcient processes than universal banks, helping to keep costs low. Secondly, lessors enjoy a diversity of income sources with many benets compared to classical banking (see point 1). These include a higher share of noninterest income (fees and services) and interest margins may also be higher.

Between 2009 and 2012, mediumsized banks total cost/income ratio increased by 9.6 percentage points, while over the same period leasings cost/income ratio decreased by 0.2 percentage points

Leasing vs. banks cost/income (%)

70% 60% 50% 40% 30% 09 10 11 12 13 Leasing Medium-sized banks (source: ECB)



Cost of risk for the leasing industry is appropriate and remains quite low over the period, varying between 0.65% and 0.9%. These gures are particularly low in comparison to ECB banking gures, which reached 1.95% in 2012.3 The evolution of leasings cost of risk is mainly due to the volatility of loan loss provisions, since the average portfolio remains stable over the period (variation of less than 1% over the period). Low loss provisions are due to low leasing loss rates as discussed in point 7. Moreover, the cost of risk for leasing has remained much more stable than that for mediumsized banks. The leasing gure decreased by 0.13 percentage points between 2010 and 2012 while the bank gure escalated by 0.74 percentage points over that time. This indicates that European lessors generally hold a better quality portfolio than mid-sized EU banks.

Leasing vs. banks cost of risk (%)

2.0% 1.5% 1.0% 0.5% 0.0% 10 11 12 13
Leasing - weighted average value Leasing - median value Medium-sized banks (source: ECB)


European lessors generally hold a better quality portfolio than mid-sized EU banks

ECB cost of risk is calculated as Impairments loans and receivables in the income statement / Assets Loan and receivables

Growing protability levels

The protability of the European leasing industry is relatively high and has managed to stay out of negative territory despite the recent crisis, remaining in a range of approximately 20% to 30% between 2009 and 2013. This contrasts sharply with the protability levels of medium-size banks, which are substantially lower and have steadily declined from 2009, reaching an all-time low of -30% in 2013. Despite the challenging economic conditions of the last few years, including stalling new business and rising loan loss provisions, European lessors have managed to not only maintain protability, but enjoy increases. Average annual protability increased from 2009 and 2013, dropping slightly from 2011 to 2012, due to a rise in cost of risk for a small number of companies. The median ratio however, which represents the typical leasing rm in the data sample, continued to increase steadily. Protability is partially immune to any pressures on

new volumes and consistently outperforms this metric: for example, new business increased by 0.8% from 2012 to 2013

whereas protability increased at a much higher rate of 7.2% over the same period.

Leasing vs. banks protability (%)

40% 30% 20% 10% 0% -10% -20% -30% -40% 09 10 11 12 13

Leasing - weighted average value Leasing - median value Medium-sized banks (source: ECB)

Net prots high compared to riskweighted assets

Other important KPIs include return on equity and return on assets. Given a lack of information sources on leasing company equity levels, we proxy equity by using regulatory capital for credit risk xed at 8% of risk weighted assets. We use this Return on Regulatory Requirements


(RORR) as a measure of the structural protability of the leasing business. Net prots are high when compared to the risk-weighted assets of leasing companies, with the weighted average RORR varying between 15% and 17% over the period and median RORR increasing to 24% in 2013. These high levels of RORR imply that the European lessors have room to build up reserves, enhance the quality of

their own funds by increasing the level of Core Tier 1 capital and reinforce the level of their own funds in general, should

their RWAs increase. Leasing is therefore well placed to meet incremental requirements of the Basel 3 framework.

Return on regulatory requirements (%)

30% 25% 20% 15% 10% 5% 0% 10 11 12 13 Leasing - weighted average value Leasing - median value

In addition, the leasing industrys return on assets (which in this case is a return on leased assets or ROLA) remained relatively stable between 2010 and 2013, between 0.8% and 1% for the weighted average ratio and slightly higher for the median. It is important to put the level of this ratio into perspective. Lease contracts typically last for around 4 years and are thus mediumterm contracts, where annual ROLA only covers on average a quarter of the return on a leasing contract. In contrast, mediumsize banking contracts will cover a much wider portfolio of different durations, including short term lending.

Despite the challenging economic conditions of the last few years, European lessors have managed to not only maintain, but enjoy increases in protability

Return on leased assets (%)

1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 10 11 12 13 Leasing - weighted average value Leasing - median value

The sources of funding for European lessors typically depend on their business models and ownership structures:
1) Liquidity and funding are managed centrally at the parent company level Bank-owned leasing companies benet from the various sources of liquidity and funding of their parent company (deposits, direct loans, inter-bank markets, access to ECB renancing, etc.).

2) Liquidity and funding is directly managed by the leasing company (independent funding This funding model involves diversied means and instruments of funding, combining long-term assets with good returns to target long-term investors. Favoured instruments include: securitisation programs bond issuance programs EIF/EIB funding support and specic nancing programs with clients.


In the context of Basel 3 implementation, an increase in the cost of funding and the need to seek new funding sources is expected to occur across the entire spectrum of the nancial services industry. Leasing companies, including bank-owned rms, just like all nancial industry players, are looking to nd alternative sources of funding (capital markets, institutional investors, etc.). Securitisations are a particularly promising funding tool for the leasing industry. They provide investors with additional security thanks to the presence of the leased asset underlying each individual lease contract in the securitisation. As the securitisation market picks up, we expect to see increasing volumes of SME-lease, auto-lease and other lease backed transactions. Like other market players, lessors also have to deal with the issue of funding becoming increasingly local with liquidity having a tendency to concentrate in country/regional pockets.

The exibility to manage funding/liquidity costs

With base rates currently being quite low and margins performing well, the cost of funding/liquidity has not been a major issue so far for many lessors. This is because leasing companies benet from income exibility that is simply not available to other types of players, rendering them less sensitive to these general increases in funding/ liquidity costs. While bank parent companies or other funders normally pass on any increased cost of funding/ liquidity they experience to leasing companies, lessors themselves are often able to pass this on via new business. Lessors can also rely on adjustment mechanisms built into the existing portfolio. For instance, the service elements of leases can be linked to an index that uctuates according to costs. On top of interest and service income, lessors also earn income on residual values, which are part of the original structure of the contract.

Leasing companies benet from income exibility that is simply not available to other types of players


The unique feature of a lease is the lessors ownership of the leased asset. These ownership rights provide lessors with an extremely valuable and efcient form of in-built security which makes leasing extremely low-risk and thus capital efcient. Asset ownership represents a major advantage for lessors compared to other nancial products such as traditional loans, which are typically not secured on physical assets but rather with nancial collateral or personal guarantees. Our recent reports Implicit Risk Weights for SME Leasing in Europe and The Risk Prole of Leasing in Europe: The role of the leased asset demonstrate that default and loss rates for leases are signicantly lower than for traditional lending. According to the latter study, which was based on a portfolio of 3.3 million lease contracts in 15 European countries, loss rates on Corporate and Retail SME exposures were 19.3% and 25.6% respectively. This compares very favourably to the gures of the EBAs EU-wide 2011 stress test where equivalent

loss rates for Corporate and Retail SME lending were 31% and 36% respectively.

Why are lease default rates low?

Default rates within the leasing activity are low because the leased asset is crucial to the clients core business activities. Businesses therefore prioritise lease payments because they need these assets to run their business.

then sell or re-lease the asset in order to decrease any losses on the default. If the value of the asset exceeds the amount outstanding at default, the lessor would actually make a gain in the case of a default.

Capital requirement regulation (CRD4/CRR) recognises the low risk nature of leases, particularly under the advanced internal ratings based approach. There are additional capital benets for leases beyond those described above. With more than half of all leasing volumes being granted to SMEs, lessors benet from the scaling factor (reduction) in risk weights applied by the European legislator to SME exposures in the context of the CRD4/CRR.

Why are lease loss rates low?

As the asset is a key working tool for the lessee, many defaulted leases regrade to a healthy situation with a zero loss. Additionally, ownership of the asset makes repossession fast and straightforward for the lessor (if it is necessary at all). The lessor can


Default and loss rates for leases are signicantly lower than for traditional lending



The focus of lessors on assets (e.g. valuation, tracking, repossession, re-marketing) as well as on their clients (e.g. their knowledge of asset distribution chains or the development of credit policies) has led to the development of a specic control culture within leasing companies. Lessors are also acutely aware of the need to ensure sound reporting, monitoring and controls in order to maintain transparent business relationships with their owners, regulators, clients and other partners. In addition to the organisational and management benets of controls, lessors are able to leverage these skills to offer sophisticated reporting tools to their vendor or service partners. This information provides partners with addedvalue, in-depth insight into the behaviour of their clients that they would not otherwise have access to.

Controls in the leasing businesses are ensured through various means: Internal procedures and controls Controls by the internal audit function Reporting to the parent company: control of data and analysis External audit Supervision by regulators Communication with partners (asset manufacturers, service providers, etc.)

The following chart looks at the typical internal procedures and controls leasing companies put in place. They are usually built on ve main pillars:

The focus of lessors on assets, as well as on their clients, has led to the development of a specic control culture within leasing companies

Three levels of control Direct management Risk functions Internal audit

Independence of sales, asset management* and risk management functions

Credit and asset risk policies for each asset and each market**

Backtesting of estimated exposure and residual values with observed historical data

Special committees dedicated to monitoring and improving asset management

* The asset management function is responsible for modelling asset value curves for each asset category ** Details on credit and asset risk policies are found below: Lease origination: Instructions and limits for residual values and contract durations Controlling the purchase price compared to the underlying assets market value Contract management: Monitoring the value of the asset and its evolution over time Controlling and updating asset value assessment curves Breach of contract: Controlling second-hand market prices and costs relating of the assets resale


Pre-default management
Lessors are able to use a variety of tools to avoid default situations. Firstly, they have the ability to share risk with their customers. For example, when second hand asset prices suddenly decrease, lessors can negotiate contract extensions, formally or informally, and avoid potential losses. When contracts are extended, not only do asset values have time to recover, the client is also paying for additional use of the asset. Extensions will be designed so that (revised) expected future market value will be sufcient to cover the lessors remaining asset exposure. Clients benet from this strategy too as they are obtaining prolonged use of an asset they know for a cheaper price.

Moreover, lessors proximity to and understanding of their clients business means they have early insight into any potential difculties their customers may face. Since rentals are (typically) monthly payments, any missed lease payment is a red light. Lessors also benet from early warning signals through partnerships with vendors and service providers should any missed payment of other services or fees occur. Bank-owned lessors are also in the unique position to provide their banking groups with early warning signals on the behaviour of group clients. While increases in bank credit lines could be due to a number of factors, if a client struggles to make a lease payment, despite the importance of the asset to their business, they are likely to be in nancial difculty.

Default management
Leasing companies have two routes at their disposal to manage defaults. 1) If a low recovery amount is expected on the asset, the best outcome is to get the contract to regrade. In such cases, the client needs to be assessed in terms of how important the asset is in running their business and their probability of regrading. As discussed earlier, altering the duration or terms of the contract in order to keep contracts performing can be benecial to both the leasing company and the client. According to our research, around 60% of defaulted lease contracts return to a healthy position.


Lessors also benet from a certain amount of leverage vis--vis customers simply through their ability to exercise their ownership rights and repossess the leased asset in default situations. Ownership rights serve as deterrent to the client defaulting in the rst place.

2) If a regrade is unlikely, and/ or high recovery amount is expected on the asset, the default is handed over to the recovery team


Recovery is performed according to the asset type, involving remarketing experts who assess the best course of action, including re-lease possibilities and/or the potential disposal value of the asset if it is sold. Again, according to our research, asset sale proceeds contribute signicantly to low losses for leasing, accounting for around 80% of total recoveries. Moreover, since the leasing company is the legal owner of the asset, repossession is much quicker

and simpler than in cases where a loan is backed with other collateral (e.g. no need to force bankruptcy). Other sources of recovery, aside from the asset itself, are also possible. For instance, in cases where the lessee has breached the contract, the lessor can seek recourse and/or require the customer to pay penalty if contract terms are not respected, regardless of asset repossession (e.g. early termination penalties).

The risk mitigating power of asset ownership in leasing Defaults regrade with zero loss If no regrade, quick & efcient repossession Asset re-deployment minimises losses Asset sale proceeds substantial Leasing losses low

Asset sale proceeds contribute signicantly to low losses for leasing, accounting for around 80% of total recoveries


Asset management is key to the industrys success

As shown in point 2, the leasing sector has proven to be resilient to the nancial and economic crisis. Asset expertise and high quality asset management skills have played an important role in achieving this through: Asset specialisation which ensures predictable and stable returns Excellent supplier/client relationships which facilitate negotiations and ensure sustainable, long-term partnerships where risks are shared to the benet of all parties Knowledge of and participation in the entire business process/value chain of their partners/clients Maximising returns on asset sales through the understanding and use of multiple remarketing channels and geographies

Different facets of asset risk

The general term asset risk covers a number of aspects: Residual value risk, or the risk that the future second hand value of the leased asset, predicted at the start of the contract, will be lower than expected. Depending on the lessors business model, lessors will either decide to take residual value risk and will then manage this as part of their core business through the skills described in more detail below. In other cases, lessors may decide that they do not want to take on signicant asset exposure and will then either seek to protect themselves through lease payments that cover the entire asset value or by taking out asset protection. This is often provided through manufacturer or dealer buy-back agreements, other forms of residual value guarantees or third-party insurance. Risks related to asset sales: here lessors have developed thorough understanding of secondary asset markets including their levels of liquidity, their geographical location and the benets of

different resale channels. This knowledge ensures that asset sales are timely and maximise the potential resale value of the asset. Risks related to asset suppliers: to avoid liability, lessors seek to work with high quality asset and service providers with excellent products and after-sale services. Additionally, lessors will have contingency plans in place should an agreed upon supplier fail in its duties.

Asset risk management tools

Expertise and independence is crucial in achieving high quality asset management. Lessors have developed teams of asset experts and business specialists by country and product market, operating both centrally and locally and who make use of the following asset management tools: Asset valuation curves These are granular down to each asset type and include market values and asset depreciation curves, with risk assumptions for residual values.


Valuation methodologies, which rely on: proprietary databases internal resale data internal asset experts second hand market data and backtesting Asset committees, which monitor collateral values and special provision committees that evaluate the effect of market downturns on asset values Expected asset values are audited by the Risk Department and compared to what is observed in cases of actual recovery The remarketing department, in charge of maximising recovery, by choosing the most appropriate resale channel (auction, vendor network, wholesale, direct, etc.) and the best market (local market, global markets)

Beyond the above asset management strategies, lessors also put additional, back-up tools in place. For instance, to mitigate the effects of an asset supplier not fullling a buyback agreement, networks of alternative buyers are established or other tools such as online sales platforms are used. Lessors also closely monitor the number of repossessions achieved compared to the total number of mandates given. This is in order to assess the effectiveness of their repossession networks which include a variety of subcontractors and brokers so as to avoid overreliance on a particular organisation. Moreover, resale prices are compared to the net book value of the asset and outstanding nancial amounts to ensure that asset sales perform well and as expected. Lastly, special attention is paid to the rare cases where assets are never returned or sold. Conclusions drawn from these cases are then integrated into future decisionmaking processes.

Lessors have developed teams of asset experts and business specialists, operating both centrally and locally


The analysis herein is based on two main types of data: 1) Qualitative data collected from a panel of European leasing companies12 covering the following themes: Leasing business model and protability Leasing companies nancial structure Quality of risk management and internal control 2) Quantitative data Key performance indicators from the Leaseurope Index, based on detailed data from a sample of 17 European leasing rms, which is used to carry out a top-to-bottom income statement analysis New European equipment and automotive leasing volumes as reported annually in the Leaseurope Annual Survey by its Member Associations. Annual percentage changes are calculated on the basis of

a homogenous sample and are adjusted for uctuations in exchange rate ECB and OECD European banking sector gures are used as point of comparison Macro-economic data is taken from Eurostat and the European Commissions AMECO database

European lessors on a quarterly basis. Its purpose is to provide timely and regular information on the European leasing and automotive rental market. The term leasing is used in its broadest sense, covering hire purchase, nance and operating leasing which includes long term rental. Leasing is dened according to International Financial Reporting Standards (IAS17). Sample: The following leasing companies report the required gures on a voluntary and condential basis, which Leaseurope then aggregates to get European results:

Presentation of the Leaseurope Index

Conducted by Leaseurope, the Leaseurope Index is a unique survey that tracks key performance indicators of a sample of 17

ABN AMRO Lease ALD Automotive Arval Iccrea BancaImpresa BNP Paribas Leasing Solutions Caterpillar S.A.R.L.

Credit Agricole Leasing & Factoring De Lage Landen DnB Finans ING Lease LeasePlan Leasint

Nordea Finance UniCredit Leasing Societe Generale Equipment Finance UBI Leasing


Xerox Financial Services Europe


Coverage: This sample is broadly representative of the European market in terms of geographic coverage and asset coverage and it represents a signicant share of the total European leasing market. Scope: Consolidated gures are reported for the entire European activities of the participating companies. Europe is dened in the widest sense as EU27 + EFTA + other countries e.g. Turkey, Ukraine, Russia, Serbia, Croatia etc. Each company reports gures in euro regardless of which countries they operate in or which currencies they report in. More information on the Leaseurope Index can be found on the Leaseurope website. Denitions of the Index variables and ratios can be found on pages 50 and 51.

Benchmark sources (OECD, Eurostat/AMECO & ECB)

Leasing data is compared to the overall banking context in Europe by benchmarking volumes, earnings and various KPIs to those of general banking activities in the EU and with the same business capacity as lessors (i.e. mediumsized banks).

Eurostat / AMECO: AMECO is the macro-economic database of the European Commission's Directorate General for Economic and Financial Affairs. It contains data for EU-27, the euro area, EU Member States, candidate countries and other OECD countries. Data for Member States and candidate countries are based on the ESA 95 system. We contrast gross xed capital formation for equipment to new leasing volumes.

ECB: Since 2007, the ECB collects and aggregates EU banking sector income statements and balance sheets. Banks are classied according to their size and origin (e.g. large domestic banks, medium-sized domestic banks, small domestic banks and foreign banks). The most relevant subpopulation for comparison purposes is mediumsized banks as both businesses deal with medium-sized deals (determined by the ECB according to the size of their total assets reported to the EU banks total consolidated assets - between 0.5% and 0.005%). We use ECB raw data from 2009 to 2012 and compute ratios to compare them to Leaseurope indexs gures in the corresponding period.

OECD: In The Role of Banks, Equity Markets and Institutional Investors in Long-term Financing for Growth and Development (Report for G20 Leaders) February 2013, the OECD provides quarterly gures on the sum of a large numbers of banks business activities in derivatives, lending, and all other activities (securities etc.).13 We use the lending gures to compare to the evolution of the leasing portfolio, bearing in mind that these lending gures will include both short and long term loans.

Leasing companies taking part in a Deloitte research project on the riskiness of European leasing activities on behalf of Leaseurope 13 This study is available on the OECD website at: http://www.oecd.org/nance/private-pensions/G20reportLTFinancingForGrowthRussianPresidency2013.pdf


Total operating income: Net interest income + net fee and commission income + net insurance result + trading prot + other net income (including rental income net of depreciation on operating leases and prot on sales of assets linked to leasing activities) Total operating expenses: includes inter alia staff costs, other administrative expenses, depreciation and amortisation Loan loss provision: Net loan loss provision - write offs + recoveries over the period (including writeoffs/recoveries of assets) Pre-tax prot: Total operating income costs provisions Portfolio at end of period: Total portfolio of leased assets including outstanding loans to customers and assets on operating lease at the end of each period (nonperforming loans are included). The gures reect the depreciated value of assets at the end of the period.

New business volumes: Total value of new contracts approved & signed by both sides (lessor and lessee) during the period during the reporting period, excluding VAT and nance charges RWA: Total risk weighted assets (RWA) as dened by currently applicable prudential requirements (under the approach used by each rm, be it standardised or IRB) at the end of each period

Cost of risk: weighted average of all companies' loan loss provision (annualised) as a percentage of average portfolio over the period. The weight used is the average portfolio over the period. Average portfolio is calculated as the mean of the value of the portfolio of leased assets at the beginning and end of each period. Return on assets: weighted average of all companies net prot (annualised) as a percentage of average portfolio over the period. The weight used is the average portfolio over the period. Average portfolio is calculated as the mean of the value of the portfolio of leased assets at the beginning and end of each period. Return on equity: weighted average of all companies net prot (annualised) as a percentage of 8% of average risk weighted assets over the period. The weight used is the average portfolio over the period. Average portfolio is calculated as the mean of the value of the portfolio of leased assets at the beginning and end of each period.

Protability: weighted average of all companies' pre-tax prot as a % of total operating income. The weight used is the new business volume for the relevant period. Cost/Income: weighted average of all companies' operating expenses as a % of operating income. The weight used is the new business volume for the relevant period.



European Federation of Leasing and Automotive Rental Associations Boulevard Louis Schmidt 87 1040 Brussels Belgium Hayley McEwen Advisor, Statistics & Economic Affairs Telephone: +32 2 778 0571 Fax: +32 2 778 0578 E-mail: h.mcewen@leaseurope.org Website: www.leaseurope.org


April 2014