Leasing companies rating, 2007

Growing up with oxygen cut-off

Roman Romanovsky, Pavel Samiev

The leasing market has grown in 2007 by 2.6 times and totaled 39 bln dollars. It failed to grow even higher due to the liquidity crisis, which also impacted the market balance of power.

The Russian leasing market has gone up in 2007 by 165% - the highest acceleration rate in the last seven years. One explanation is that the leasing was bridging the gap between a demand for investment resources (3 years and more) and insufficient offer of “long” money by banks. According to Expert RA, the new business at the leasing market in 2007 amounted to 39 bln dollars, and the leasing companies’ consolidated portfolio - 47 bln dollars. The result of domestic lessors’ activity is in line with our forecast for 9 months of 2007.

Diagram 1. The leasing market in 2007 increased by 2.6 times

Chief factors of growth are an investment demand of the economy on the rise and a still good margin for the most active players. At the same time a dramatic increase of the market was not solely preconditioned by hyper-activity of leasing companies and their clients. The final result was influenced by two additional factors: first, last year saw 6% dollar rate decrease. Second, increased inflation took care of approximately 10 percentage points. “Cleared” market increment totaled 123%, which is confirmed by ruble calculations (997 bln rubles in 2007, 400 bln rubles – in 2006г) taking inflation into account. Still, it is very good result to be envied by most of other markets.

Share of leasing in GDP last year was almost doubled and achieved 3.02%. Leasing share in basic assets investment was 15.5%. But it may reach, according to foreign experience, 40%, which implies good prospects for the Russian leasing market future.

Demand for leasing by economic units is still very high. At the same time the market situation is quite ambiguous, according to Galina Kostyleva, Raiffeisen-Leasing managing director. “On the one hand, demand for leasing, especially for leasing finances with acceptable rates is several times as big as supply in the modestly financed SME segment. On the other hand, leasing companies compete for strong players with good credit history and consistent financial indicators”. Dealing with small business allows leasing companies to diversify their clientele, but main revenues come from large and medium size lessees. Dmitry Gorizontov, general director of Petersburg Leasing Company, says the situation is remindful of Pareto principle: “20% of clients from medium and large business bring 80% revenues. The number of deals gives the opposite picture”.

Diagram 2. Packaging equipment turned to be the fastest growing segment in 2007

2007 was characterized by a notable number of deals with natural monopolies, totaling scores of billion rubles (RG Leasing supplies of rolling stock for RZhD, Business Alliance financing energy objects, VTB-Leasing financing energy and oil-extracting equipment, Iliushin Finance Co financing aircraft purchase). Such deals strengthened the above companies’ status at the market. In particular, RG Leasing moved from position 10 to position 2 in the list of the largest Russian leasing companies (table 1). The banking capital presence in the top-10 lessors’ list went up, too: a number of bank “daughters” increased from 5 to 7.

The market locomotives

The fastest acceleration in 2007 was shown by the packaging equipment segment (Avanguard-Leasing financed plant-building in Omsk), aircraft transport (large Iliushin Finance Co contracts, VTB-Leasing entering aircraft segment) and telecommunication equipment. Each segment expanded by about 4 times. Construction equipment deals went up by 3.7 times, due to enormous volumes of construction in the growing Russian economy (diagram 2).

The leasing market growth averaged to 2.6 times, but the railway transport segment remained at the level of 2006 – 24.4% (table 2).

Source: "Expert RA"

VAP: it is twenty five again. Billion rubles

The non-compensated VAT to leasing companies by the end of 2007 remained unchanged comparing to 2006 figure - 1 bln dollars. On the one hand, considering the increased market volume, it is a sign of relative improvement. On the other hand, the progress is not obvious – the refund is often made following court orders.

Federal Tax Service (FTS) has been using the growing leasing industry to gain funds for the budget, although such a policy contradicts to general economic idea of leasing and hampers efficiency of lessors’ operations. Leasing companies are to modernize main assets of the country and not spend time litigating in courts.

Besides, actions of the tax service undermine repute and international authority of Russian leasing companies, since FTS accuses them of bad faith. Many lessors try to attract foreign investments, and existence of legal actions is not a good contributor to an image of local companies. They say abroad, that working in Russia is “one big tax risk”.

Relations between tax authorities and lessors changed after Hans Leasing case, but the changes were quite unexpected. In 2007 amount of outside control and a number of check-ups only went higher. According to our information, there were about 900 000 check-ups, mostly VAT-related. Amount of claims and court cases builds up, despite regular court rulings testifying to imprompriety of tax bodies’ actions.

VAT-related changes in the tax legislation (to be paid once a quarter) would rather bring additional losses to leasing companies instead of making their life easier. If a deal is signed in January, you may ask for VAT offset in 2-3 months at best, three more months are spent for check-ups. As a result you have to wait for six months. In practical terms the process may be eighteen months long.

According to our studies, many medium-size companies do not demand VAT compensation at all. By waiting for offset from leasing payments, they actually give free credits to the state budget (over 1 bln dollars in 2007), paying interests for the money attracted.

At the same time many try to avoid any court litigations with FTS, although the practice shows: the lessors, consistently sticking to their guns in important issues, later feel more comfortable in their relations with tax bodies and get more respect and loyalty from the latter.

According to lessors themselves, the problem may be solved in a practical way by introducing a permitting VAT offset instead of a notifying one. Tax authorities should be given right to bring VAT offset claims only following the results of a subsequent check-up, if it will prove improper VAT offset.

Financial insufficiency

The last autumn compressed liquidity influenced the Russian leasing business in an ambiguous way. On the one hand, banks significantly cut crediting clients (including leasing companies) due to limited resources. Before the liquidity crisis lessors were actively expanding their cooperation with banks as chief suppliers of long-term funding. According to Dmitry Gorizontov, general director of Petersburg Leasing Company, banks changed their attitude towards lessors. “Leading banks started offering their products to leasing companies. Managers of dependent lessors were even ordered to diversify their liabilities. We seem to see here influence of two factors: on the one hand, any bank should keep on its progressive pace and retain its market share, on the other hand, a truly market leasing business should have diversified liabilities”.

Since August 2007 interest rates tend to go higher. “Interest rates’ growth has already averaged 2%. As a result, leasing companies make their services more expensive for the same 2%. Some lessors still claim to hold prices for their services intact, but many of them have suspended their deals with small businesses, since banks consider such deals highly risky and provide no funding. Besides, the tendency is to raise a bottom threshold for leasing agreements – sometimes to double it – to cut off “minor deals”, - says Mikhail Karasev, LeasingPromHold general director. But, on the other hand, rates for loan capital go up everywhere, therefore demand for lessors’ services is not going down so far.

The liquidity crisis made enterprises more interested in leasing. Since banks cut crediting corporations in the second half of 2007, the latter started looking for alternative sources of financing. As a result, demand for leasing services went up to encourage leasing companies for further development. Not all of them followed the trend. Some independent leasing companies at the second half of 2007 had problems with attracting resources – the bond market capacity shrunk, credit decisions took longer time, crediting volumes decreased. DeltaLeasing general director Oleg Rakitsky says that the international financial crisis affected the leasing industry by more rigorous demands by creditors to leasing companies. “Consistent access to financial resources came to forefront. Some companies had to suspend their operations in the fourth quarter of 2007. Access to stable sources of financing with affordable rates will make a serious competitive advantage in 2008”.

At the same time, banks did not resort to “belt-tightening” in case of their “daughter” lessors. Some of them did increase the cost of funding in line with the market trend, but the volume of credit resources corresponded to required levels.

Diagram 3. The market increment showed a sufficient build-up in the first half of 2007, but decreased in the second

The situation obviously fostered activity of bank-affiliated leasing companies. “Top-10 Russian lessors’ list is clearly headed by bank-attached companies. These companies have better development prospects in the near future, since the main problem for lessors in 2008 will relate to a search of sources of financing – not a search for clients and deals. Therefore companies without close ties with financial groups or banks will be facing complicities in attracting finances”, - says Anton Borisevech, VTB-Leasing general director.

Non-liquid consequences

Comparing situations in the end of 2006 and 2007 helps to assess influence of “crisis effect” on the leasing business development. The leasing market operates seasonally, and deals are mostly signed in the fourth quarter. The market increment in the fourth quarter of 2006 comparing to the third was 82.4%, similar indicator in 2007 - only 49.3% (diagram 3). In the absence of suppressed liquidity the Russian leasing market in 2007 might be about 50 bln dollars.

Descending trend is clearly seen when comparing market volumes of 2007 and 2006 – instead of characteristic acceleration in the second half of the year, growth rates of incremental revenues were decreasing (table 3).

Diagram 4. Domestic lessors showed faster acceleration in the first half of 2007, foreign ones – in the second

Decreased market development in the second half of 2007 was accompanied by high activity of leasing companies owned by foreign banks and investment funds (Locat Lesing Russia, Raiffeisen Leasing, LK MMB, Karkade, Europlan). In the first half of the last year such companies sufficiently lagged behind Russian private and state owned lessors in the incremental rate of new deals. But they made it up by the end of 2007 and passed by domestic lessors in rates of business growth (diagram 4). Foreign banks and investment funds, owning such companies, were almost untouched by the liquidity crisis. Therefore available investment resources were directed to the speedily developing Russian leasing market.

Leasing companies are still ready to invest into their own development. “In the period of crisis the demand for consulting and management information system might have gone down, - says Dmitry Kurdomonov, Homenet Leasing director (leasing activity automation development). – But it did not happen. Lessors are still interested in attracting higher technologies to their business. The leasing market leading players understand: automating your business means investing in your future and making you more competitive. Large and average retailers and foreign groups are especially active in the field”.

We expect the leasing market to reduce its incremental growth down to 55-60% in 2008, with the total market value reaching 1600 bln rubles. Large state and quasi-state orders of individual nature (“Olympic construction”, energy equipment and aircrafts), state programs in support of certain branches of industry (agriculture) and “retail” leasing (cars and trucks, construction machinery) will be the main areas of growth.