Seminar Paper for the Seminar Banking Industry (5 th Semester) Winter term FH Bachelor s degree programme Banking and Finance

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1 BANKING AND FINANCE BACHELOR-STUDIENGANG Seminar Paper for the Seminar Banking Industry (5 th Semester) Winter term 2010 FH Bachelor s degree programme Banking and Finance Topic of the seminar paper: Student name: Enrollment number: Date: 28 December 2010 Impacts of the Financial Crisis on the Austrian Leasing Industry Leisser, Bianca Seminar tutor: Christoph Marat M.A.

2 Statutory Declaration I assure that: I have drafted this bachelor thesis independently, not used sources and aids other than specified and also not used otherwise impermissible help. I have not submitted this bachelor thesis either in Austria or abroad in any form as an assessed work for any examination. Date Signature

3 Table of Contents Table of Figures... II List of Abbreviations... III 1 Introduction Research Question and Hypothesis Methodology Developments during the crisis Impact on Business Segments Products Foreign Markets Impact on Customer Relations New Business Relations Existing Customer Relations Risk Weighted Assets Key figures of the Austrian Leasing sector New Business Relations Monetary Lease quota Capital Requirements International Comparison Outlook for this Industry Executive Summary Empiricism Bibliography Table of Appendixes I

4 Table of Figures Figure 1: New Business in Austria from 2004 to Figure 2: The Austrian Monetary Lease Quota (in %) II

5 List of Abbreviations AFRAC AG BAWAG PSK BWG ca. Cf. CRM e.g. EFRAG EM et seq. EU Euribor FASB FH IASB IFRS IT KfZ LKW Mag. Mio. MMag. Mr. Mrs. n.p. österr. PR RBI u.v.m. US/USA Austrian Financial Reporting and Auditing Committee Aktiengesellschaft Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse AG Bankwesengesetz zirka confer, compare Customer Relationship Management exempli gratia European Financial Reporting Advisory Group Eigenmittel et sequens Europäische Union / European Union Euro Interbank Offered Rate Financial Accounting Standards Board Fachhochschule International Accounting Standards Board International Financial Reporting Standards Information Technology Kraftfahrzeug Lastkraftwagen Magister Millionen / Million Doppelmagister Mister Misses / Mistress no page österreichisch Public Relations Raiffeisen Bank International und vieles mehr United States/United States of America III

6 usw. v.a. VKrG z.b. und so weiter vor allem Verbraucherkreditgesetz zum Beispiel IV

7 1 Introduction As the global financial crisis is one of the most current topics nowadays it seems important to disclose its background. In this paper the focus will be laid on the leasing sector. So this paper aims to examine the impacts of the financial crisis on the leasing market participants. In order to achieve this goal two research questions were created, which will be described within this chapter together with the hypothesis and the methodology. 1.1 Research Question and Hypothesis By creating and answering the following two questions this will give the best insight into the troublesome topic the paper deals with. At first it is of relevance to answer the following question: What did the development of the Austrian leasing industry look like during the last five years and which impact had the global financial crisis?. As the topic already illustrated, the focus will be on the impacts of the global financial crisis. Therefore a close look will be taken at some key figures, especially from 2008 to 2009, as they often uncover lots of important facts for this paper. Furthermore, some experts of the leasing industry also gave an insight into the problems of the financial crisis and its effects on the leasing industry. But as this paper should not just give an overall outline of the negative effects of the global financial crisis, it is essential to also go into detail and show the impacts on the leasing companies themselves as well as the customers. These aspects are reflected by the second research question: How did the global financial crisis affect customers as well as several business segments of the leasing companies?. As these two questions are aimed to be answered, this paper will give a detailed insight into the different aspects resulting from the global crisis. The aim of the following chapters is to back up these facts with some key figures and to show an international comparison. The last chapter of this paper is taken in by an outlook for the leasing industry. The content is based on the opinion of the interviewed experts. Moreover it includes a conclusion on the whole paper too. 1

8 According to the obvious impacts of the financial crisis on the whole economy, including the Austrian economy too, one can assume that the leasing industry has been affected as well. Especially the real estate sector might have been hit due to property bubbles for example. 1.2 Methodology This paper is mainly based on literature research. The first concern was to find a balanced mixture of different literature. Therefore books, theses and other literature were read to obtain information, which might be of relevance to the topic. Concerning the result of the key figures of this paper a lot of time was spent to collect, elaborate and calculate the crucial figures and rates in order to be able to interpret them afterwards. Especially the information provided by Leaseurope and the Verband österreichischer Leasinggesellschaften were of major importance. What is more, also interviews with three experts from the Raiffeisen Leasing, the Verband österreichischer Leasinggesellschaften and the Banque PSA Finance were conducted, which contributed a lot to this paper. These experts were so kind and shared their knowledge with the author. On the one hand a broader overview over the Austrian leasing sector was transmitted as the Verband österreichischer Leasinggesellschaften is the representative organization for the interests of Austrian leasing companies. On the other hand, according to the interviews with the other two representatives it was possible to take a look behind the curtains of Raiffeisen Leasing and Banque PSA Finance, as leasing companies tracking their own goals. After summarizing the most important issues of the interviews and filtering out the crucial literature it was possible to write a paper concluding the most important facts of the broad bandwidth of information received. 2

9 2 Developments during the crisis As many economies in the world and especially the financial industry were affected by the global economic crisis, there definitely also was an impact on the leasing industry. The respective impacts will be examined in this chapter. 2.1 Impact on Business Segments Products According to the expert from the Verband österreichischer Leasinggesellschaften, there was a change of demand in leasing products on the part of the customers. However it is quite sure that for example the increase of need in additional products like fleet or building management cannot be ascribed to the financial crisis as this demand already emerged before the collapse of the economy. Customers even realized the advantages of these services like cost and time savings before being exposed to financial problems. 1 When going more into detail concerning the three main categories of leasing products, one will find interesting movements in each of them. Regarding the product leasing sector especially entrepreneurs realized the benefits of leasing machinery or IT equipment. Most of these financing alternatives seem to be a good investment for non-durable goods, as they are always up to date concerning technology. Moreover, the lessee avoids maintenance costs for the product. All together these are the essential factors for entrepreneurs having suffered from the financial crisis, as they are not sure of their financial position. 2 What is more, due to these leasing investments lessees can on the one hand improve their own liquidity and on the other hand improve their rating, as the leased object stays within the lessor s ownership and therefore does not debit the balance sheet of the lessee. 3 1 Cf. Steinmann (2010) p Cf. No Author (2010), Wird der PC nun zum Auto?, n.p. 3 Cf. Fric (2009) p.1 3

10 2.1.2 Foreign Markets As many Austrian leasing companies also established branches in other countries, there might have been impacts on these too. According to Raiffeisen Leasing the impacts of the financial crisis also were considerable in these countries, partly even worse compared to Austria. 4 However, there are several countries like in the Far East or South America, which could gain importance concerning Cross-Border Leasing in the foreseeable future. 5 But as the main focus of this paper is on the negative impacts of the financial crisis and as this chapter deals with the impacts on the foreign markets one should rather be concerned with the negative developments through the crisis, especially in the CEE countries. A number of Austrian leasing suppliers investing into the Eastern countries had to face losses into the millions. Although the CEE countries were seen as being the strong countries worth investing in they also were heavily hit by the financial crisis. For example Carinthian Hypo-Leasing lost about 25 million Euros in Croatia within nine months. For this and other downturns amongst other aspects heavy breakdowns concerning the sales of new cars can be made liable. The reason might be that there did not exist any scrapping premium in these countries. The only country providing this premium was Slovakia. The motor vehicles market had to face the highest losses in Romania and Hungary, where the declines amounted to approximately 60%. As these are also countries, where Austrian Leasing companies established their branches, this has also effects on Austria. What is more, another reason for the slowdowns might have been that especially commercial banks reduced their financial supports in the affiliated companies in the East as the money was needed in the home countries like Austria. Nevertheless, nowadays the risks are assessable. 6 4 Cf. Weber (2010) p Cf. Steinmann (2010) p.28 6 Cf. Depolo (2010) n.p. 4

11 2.2 Impact on Customer Relations As there have been impacts on several business segments, there might have been impacts on the customers themselves too. These customers can be divided into new and existing customers New Business Relations The shares for new business relations fell by nearly a quarter from 2008 to And as most of the effects hit Austria in the last quarter of 2008 and 2009, this can definitely be linked with the financial crisis. The decreases of 23.2% to 5.3 billion Euros were to a great extent due to the reserved propensity to invest on behalf of the businesses but also private households. When separating the whole leasing industry into its main sectors, it is quite clear that the real estate sector was worst affected. Compared to the other two sectors, where the decreases accounted for 28.3% in the movable assets sector and 16% in the motor vehicles sector the decline of new leasing contracts in the real estate sector made up 35.4%. 7 The decline of the latter might amongst other aspects have been due to the property bubbles, thus the rising prices and conditions and the uncertainty on behalf of the investors as they were not sure whether Austria would be spared from the financial crisis and if not which impact the crisis would have. In this context especially trading companies restrained in terms of real estate projects. 8 This then led to a decrease in investment demands and thus to fewer contract formations. Furthermore, due to the financial crisis smaller investments were effected and bigger ones delayed to the future. 9 Another factor might also have been the duration of the leasing contracts in this sector, as these often only lasted some years. The renegotiation for the contracts then fell into the period of the financial crisis and therefore lessees tried to either 7 Cf. No Author (2010), Leasing-Neugeschäft brach ein, n.p. 8 Cf. Raiffeisen Leasing (2010) p Cf. Steinmann (2010) p. 28 5

12 reduce the prices or did not prolong the contracts at all. This resulted again in a decline of contract formations. 10 There might have been other reasons for the declines too, especially in the real estate sector, but these are the most crucial ones. Nevertheless, for example regarding Raiffeisen Leasing the new business volume accounted for 721 million Euros including the domestic and cross-border leasing. 11 Some years ago this would have been a satisfactory result, but since the importance of leasing rose during the last years companies expect a yearly volume increase of 5 to 7%. These expectations have not been reached in 2009 and will not be reached in the near future Existing Customer Relations It is pretty easy to show the changes concerning new customer relations as these figures are available at least once a year. However, it is also of relevance to focus on existing customers. These customers already had a business relation with any Austrian leasing company. Nevertheless, these customers have also been affected by the financial crisis. This fact induced some leasing companies like Raiffeisen Leasing to change their business strategy. As the main business of Raiffeisen Leasing is the business-tobusiness sector, their account managers visited mainly business customers. They analyzed the financial situation of their customers and checked their continuity chance. The majority had good chances not to be affected by the financial crisis in vast extent if the leasing company came their way. Most of the customers just needed a prolongation of the contract s duration or a temporary reduction of the leasing rate size. The majority then survived the financial crisis, but Raiffeisen Leasing also had to deal with defaults, even concerning huge projects. But due to their pro active acting, these outages stayed within an assessable scope. 13 Some of the companies in restructuring also became insolvent, but this can not be ascribed completely to the financial crisis Cf. Steinmann (2010) p Cf. Raiffeisen Leasing (2010) p Cf. Weber (2010) p Cf. Weber (2010) p Cf. Steinmann (2010) p. 28 6

13 What did not appear that often was that customers changed their leasing providers. The customers would have had to pay a lease contract fee at the new provider and this is not lucrative. Nevertheless, this could change in 2011, as then the credit agreement fee will be cancelled and therefore customers could get more volatile. 15 Currently this fee makes up 0.8% for a duration of 5 years or less, in any other case it accounts for 1.5% Risk Weighted Assets The sum of all risk weighted assets of any credit and financial institution is used in order to calculate the equity capital requirement, as this sum is multiplied with 8% according to the current Basel agreement. 17 In this context leasing provides advantages for the lessor, especially within a crisis. The first one is that there are fewer securities needed as the leasing object stays in the lessor s ownership and therefore is already a security. According to this proprietary right the lessor takes in a stronger position than a credit granter until the expiration of the contract as well as at an early termination, e.g. caused by insolvency. In this case the leasing company can profit from its position during a crisis, as it would be much more sophisticated for a credit granter to claim his or her rights. Additionally, the stronger ownership position as well as the applicability of the leasing object have a considerable impact on the approval of the financing. Hence, in most cases the lessor can avoid additional securities. Another crucial advantage for leasing companies in times of crisis is that liquidity problems can be prevented, as the leasing contract is matched with the economic lifetime of the leasing object. As a result, a short maturity of the contract and thus liquidity problems can be avoided. This all in all means that the lessor has to take less risks, especially in times of stress, as it is much easier to reclaim the leasing object. Quite on the contrary, regarding a credit agreement the investment on which the contract is concluded is passed into the ownership of the debtor. The credit grantor will register securities for good measure. At worst the bank might receive nothing, if there was no warrantor and nothing else, which can be taken from the debtor Cf. Feldscher (2010) p Cf. RIS Gebührengesetz (2010) online 17 Cf. OeNB (2010) online 18 Cf. Steinmann (2010) p. 28 7

14 But there are not just positive aspects for a leasing company within a crisis, as their refinancing situation was hampered. Since the financial crisis also the refinancing costs increased. According to Banque PSA Finance the risk surcharges were raised from approximately 20 to now approximately 300 basis points, when raising money at the Euribor. This means that if the Euribor makes up for example 1.5%, the interests would then amount to 4.5% including margin. Currently, these risk surcharges decrease to approximately 2.5%, which still is a lot compared to the Euribor in this example amounting to 1.5%. In the short term it is indeed possible to take up money with surcharges of 40 to 50 basis points, but it is not possible to refinance over e.g. 3 years. Thus, the high surcharges have to be accepted. This fact is not that hard for bank-owned leasing companies like Raiffeisen Leasing or banks in general as they can use the money of customer deposits, with very low interests by the way. As usual leasing companies, which are not connected to a bank, for example Banque PSA Finance, can not take this advantage, they will be confronted with high risk surcharges. These high surcharges are related to the financial crisis Cf. Feldscher (2010) p. 38 8

15 3 Key figures of the Austrian Leasing sector 3.1 New Business Relations As this paper already dealt with the impacts of the financial crisis on new business relations it might be of relevance to back up these facts via a bar chart describing the developments of new business relations volumes from 2004 to Figure 1: New Business in Austria from 2004 to From 2004 to 2008 it can be observed that there have been ups and downs in each of the leasing sectors, except the motor vehicles, where each year an increase of new business relations was able to be reached. In 2009, the figures look quite different as each of the sectors had to experience a plunge of the new business relations volume. According to this chart the motor vehicles sector tabled the lowest decrease with 16%, whereas the share of new movable assets contracts declined by 28.3%. The sector registering the highest loss in new customer relations from 2008 to 2009 was the real estate sector, where the decline made up 35.4%. The most important reason for this decline was the property bubbles and thus rising prices. All together, in ,541 new contracts have been concluded and the leasing volume amounted to 5,265 million Euros, thus a minus of 23% to the previous year No Author (2010), Branchenbilanz der österreichischen Leasing-Gesellschaften 2009, n.p. 21 Cf. No Author (2010), Branchenbilanz der österreichischen Leasing-Gesellschaften 2009, n.p. 9

16 3.2 Monetary Lease quota The monetary lease quota describes the share of fixed asset investments financed by leasing. 22 The Austrian monetary lease quota separated into the three main sectors looked as follows during the last five years: Figure 2: The Austrian Monetary Lease Quota (in %) 23 It is obvious to see that the motor vehicles sector was and still is the most important leasing sector in Austria. The reason might be that especially leasing of motor vehicles is simple, easily understandable, transparent and comfortable. 24 Although the scrapping premium led to an increase of cash and credit purchases, the motor vehicles sector was able to increase the quota from 55.81% to 66.2% from 2008 to Regarding the other two sectors, movable assets and real estates, this was not the case. The movable assets sector had to experience a loss of approximately 5%, whereas the real estate sector s share decreased by only less than 3%. 25 The reasons for the declines were dealt with in the previous chapter. 3.3 Capital Requirements Regarding the equity a lessee has to provide in order to be granted a leasing financing one has to distinguish between private and business customers. In former 22 Cf. Müller (2009) p Hudec (2010) p Cf. Steinmann (2010) p Cf. Hudec (2010) p.10 10

17 times, there was a regulation, which implied that every private customer had to raise 20% of the requisite money on his or her own. This regulation was abolished by the consumer credit law and nowadays every leasing company can determine the size of the equity ratio independently. According to the financial crisis it is in the interest of every credit and financial institution to raise this ratio as it is a kind of security for them in hard times. Thus, nowadays this equity ratio is based on the solvency of the lessee and also differs depending on the drafting of contracts, for private as well as business customers. The overall guideline amounts to 30%, which is also the case for the Banque PSA Finance. However, these are internal guidelines, which are not valid for every leasing company. 26 So every leasing company also decides autonomously which measures are and will be taken regarding the financial crisis. 3.4 International Comparison In Europe, Hungary, Romania, Bulgaria, Estonia and Latvia are the countries which lost half or more of their new business shares compared to the previous year, mostly due to having been affected by the financial crisis. 27 Nevertheless, compared to other European countries like Austria the Eastern European leasing market experienced very high growth rates in recent years 28. Also countries like Slovakia, the Czech Republic, Poland and Spain were hard hit by the crisis, as they lost 35 to 50 percent compared to their previous year s relations. The next group of countries with 25 to 35% less new business relations also includes Austria. Other countries besides Austria are Italy, Greece and Great Britain. Finland, France and Switzerland had to face a decline of 15 to 25%, meaning that they were least of all affected. Summing up, one can say that in comparison to other European countries Austria came off moderately. 29 Regarding the whole world, it is not that easy to compare Austria with international countries as amongst other aspects no figures are available. In the US for example leasing takes in less importance compared to previous years, especially in the motor vehicles sector Cf. Feldscher (2010) p Cf. Steinmann (2010) p Haiss / Kichler (2009) p Cf. Steinmann (2010) p Cf. No Author (2008), Leasing wird in den USA zum Auslaufmodell, n.p. 11

18 4 Outlook for this Industry As the concept of leasing nowadays is a popular alternative to credits, this will not damp in the future. On the one hand it is a modern form of financing enabling people to use something, which is actually not their own. On the other hand leasing will be regulated more strictly in the future, for example regarding the consumer credit law, where customers can profit from more rights and transparency. 31 However, it remains to be seen which overall settlements will be decided by the European Union. 32 One of the latest novelties regarding the leasing regulations is also the new international financial reporting standards (IFRS) accountancy rules. According to these new regulations lessees as well as lessors will be confronted with a reform of leasing balancing by the second half of 2011, when the standards will be fixed. The reform includes that there will not be differentiations between operate and financial leasing in the balance sheet any more. As a result, all surrenders of use will be evident in the balance sheet which also means additional expenses for auditors due to the adaption of IT-processes, the quantification of effects on the balance of sheets as well as profit and loss statement or the generation of transparency over all leasing contracts in advance. 33 All in all, this new regulation is criticized by about 300 international institutions and until 15 th December notes were able to be added based on a discussion paper. The implementation of the new accountancy rules is planned for Probably this implementation might create new leasing models, but this will be seen then. 34 Regarding leasing in general, it will also be essential to find an overall solution for the customers, which means that not only the leasing products but also the general service will gain importance in the future. In other words, it might be of relevance to increase the know-how of account managers, e.g. via trainings. What is more, as also fleet and construction management will become more important it will be of 31 Cf. Feldscher (2010) p Cf. Steinmann (2010) p Cf. Adolph (2010) p.1 et seq. 34 Cf. Steinmann (2010) p

19 relevance to offer such services. 35 Some leasing providers like LeasePlan already offer these management services, but they are not yet widely spread. 36 In General, the proximity to the product is a crucial point for the future. Regarding the classical leasing products, so the motor vehicles, movable assets and real estates, these will most probable stay important in the future. 37 Especially the real estate sector already showed an increase of 22% in the first half of the year 2010, which is mostly linked to public investments. This sector is seen as the growth engine of the leasing industry. The movable assets sector is the only one showing regressive figures, due to the reserved propensity to invest on behalf of the entrepreneurs. 38 However, it might be vital to watch out for any popular movements and developments. Regarding cars it might for example be essential to know about any alternative modes of driving and maybe also to offer these. It has also proven that leasing providers offering several types of leasing products, thus e.g. not only motor vehicles, have a bigger chance to survive a crisis, as it is more likely to succeed when offering more than one branch of business. 39 What is more, concerning the types of leasing financing the future might be characterized by a tendency to more operate leasing contracts. Nowadays operate leasing plays a more important role for corporates than for private clients, but this may change in the future. The only question, which has to be answered, is who may take the liability risks. These days, such risks are sometimes taken by the leasing companies themselves. 40 Furthermore, it has to be seen which outcomes will arise from the abolishment of the credit agreement fee, as this will most probably cause a tendency towards more credits. 41 All in all, whether the leasing or rather the whole financial sector will be spared from another financial crisis in the future is unpredictable. Actually there is talk of other bubbles especially in Europe, but whether these really exist or even dwindle into another crisis will be shown in the future. Maybe leasing companies can prevent or lower such effects when following the customers needs and wants more precisely. 35 Cf. Steinmann (2010) p Cf. Feldscher (2010) p Cf. Weber (2010) p Cf. Fric (2010) n.p. 39 Cf. Weber (2010) p Cf. Feldscher (2010) p Cf. Feldscher (2010) p

20 5 Executive Summary The aim of this paper was to evaluate the impacts of the financial crisis on the Austrian leasing industry. The first chapter is taken in by an overall description of the research questions and the methodology. Afterwards one tried to find out the developments during the crisis within several business segments as well as on customer relations. Within this chapter one came to know that the crisis definitely affected these areas, as for example leasing machinery or IT equipment definitely has its advantages, because the lessee is always up to date concerning technology and also avoids maintenance costs, which may be of relevance within a crisis too. Regarding foreign markets several leasing companies were affected, as they built branches in the past and the financial crisis also had negative effects on these branches abroad. Another important segment of this paper is the effects on new business as well as existing customer relations. Of course the financial crisis affected new business relations as for example entrepreneurs postponed the investment of huge objects like lorries into the future due to insecurity. Concerning existing customers there have not been mentionable impacts as it would not be lucrative for them to change the leasing provider, as the customers would have to pay lease contract fees for changing the provider. Furthermore, the last part of the second chapter describes the advantages of leasing regarding the risk weighted assets within a crisis. As the leasing object stays the ownership of the lessor, it is much easier for a lessor to claim rights during a crisis compared to a credit grantor. The third chapter is taken in by some key figures completing the second chapter. These key figures include the new business relations, the monetary lease quota, the changes in capital requirements as well as an international comparison. Concerning the new lease quota it was obvious to see that the leasing sector had to cope with losses of 23.2% from 2008 to 2009, whereby the real estate sector was worst affected. This is also visualized by the monetary lease quota describing the fixed asset investments financed by leasing, which also accounted for a loss due to the crisis. What is more, also the capital requirements changed throughout the crisis, 14