Having benefited significantly from state support for business finance in recent years, the Hungarian lease industry is broadly confident that its newly found growth – new business in 2016 was a remarkable 24% higher than in 2014 – can be sustained. Paul Golden speaks to key industry figures to find out why
Annual cumulative statistics for the Hungarian lease market show that new business was up by 9% last year compared to 2015 and 24% higher than the figure for 2014 in a market that generated new lease volumes of HUF518bn (€1.68bn) in 2016.
The pace of growth slowed markedly in the final three months of 2016 and was also well down on the same period in 2015, although this can be explained by the fact that the final three months of 2015 accounted for 36% of the leasing volume for the whole year as the second phase of the central bank’s funding for growth scheme closed.
The scheme attracted a very high volume of new business deals – especially in the form of financing tender-related agricultural machinery acquisitions – and also contributed to a fall in interest rates. It provided funding at a maximum interest rate of 250bps to the end user by capping margins to lessors at 200bps. This favourable rate – combined with an extensive advertising campaign that included TV spots and billboards – was a key factor in generating strong demand.
The Magyar Nemzeti Bank, Hungary’s central bank, decided to let the scheme expire by the end of March, although the impact of this decision could be mitigated partially by the bank’s existing market-based lending scheme and EU-funded schemes. The IMF describes the macroprudential rules introduced and strengthened in recent years as a prudent pre-emptive measure to improve lending practices.
Zoltan Toth, secretary general of the Hungarian Leasing Association (Magyar Lizingszovetseg) notes that volumes have grown continuously over the last two years, particularly for equipment financing and the SME sector.
“The performance of the market over the last two years is so outstanding that it should be examined on a broader spectrum,” he says. “It is well known that lease volumes fell by 75% between 2008 and 2010, but by the end of 2016 the sector had managed to pull back all that reduction and more. The leasing sector plays an extremely important role in financing micro, small and medium-sized enterprises – roughly 55% of our current client portfolio belong to this group and the quality of the portfolio has risen, which is also a very positive change.”
The main driver of last year’s growth was vehicle lease, particularly the truck lease segment, which accounted for both the largest sum and the highest percentage of vehicle financing. The primary reason for growing new business volume in the automobile and small commercial vehicle segments was the expanding market, while in the case of truck lease it was the higher proportion of these vehicles being lease financed.
Company cars are one the best benefits in Hungary in terms of taxation, and with operational lease market penetration at around 20% of the total company car market, there is space to grow explains Timea Pesti, managing director of LeasePlan Hungary.
“The government has also introduced new measures to grow electric vehicle penetration in Hungary,” adds Pesti. “As well as educating customers about operational leasing, sustainability is the other focus of our educational activity.”
The agricultural machine submarket has produced favourable results in the last few years, explains Toth. “Before 2011, the segment accounted for less than 10% of the total annual financed amount, but since then its market share has shown a remarkable, double-digit growth. Unfortunately, the expansion pace of agricultural machines, construction machines and the category of other machines and equipment significantly decreased in the last quarter of 2016. In the case of construction machines this downward tendency was so strong that the growth figures even turned negative.”
The Hungarian leasing market received a strong shot in the arm from the government during 2014-2016, with the central bank’s funding programme creating sizable customer demand for asset financing and contributing to a 42% expansion of the market between 2013 and last year.
The country has also achieved several consecutive years of high economic growth and debt reduction. Despite robust private sector consumption, GDP growth temporarily slowed in 2016 to an estimated 2%, mainly as a result of a decline in investment due to subdued absorption of EU funds, related to the beginning of a new programme period.
However, the IMF estimates that growth will reach around 3% this year, driven by a recovery in investment and continued strong consumption as wage increases boost disposable income. Employment is projected to grow further and the economy may begin to operate at full capacity during 2017.
Alfred Hagn, CEO of SGEF in Hungary observes that the bad debts caused by the global financial crisis are already largely written off, and portfolios have become healthier. “The increase of the market share of the state-owned leasing enterprises [Merkantil group, MKB Euroleasing group, and Budapest Leasing group] is continuous and the economic outlook for Hungary, and for the leasing market in particular, is positive.”
As the overall economy performs well, customers can comply with their financing obligations, keeping the risk cost of the sector low says De Lage Landen (DLL) country sales manager Hungary, Attila Illes.
“However, the benefits of the increasing volume and lower risk costs is counterbalanced by lower attainable margins, caused by the international interest-rate conditions on the market and the local interest-rate environment, influenced by government programmes,” he continues.
“These three impacts are driving the attention of the cautious part of the market to the questions of: What if the artificially created demand slows down? Or risk cost increase and portfolio margins were not sufficiently high to cover those costs? Or a combination of these factors comes together and drives the market to the worst-case scenario?”
Illes also warns that lessors’ profitability has taken a considerable hit, with lease companies reverting to the pre-2008 strategy of competing aggressively on price. “Customers with good – or even acceptable – risk profiles are either shopping around directly or dealers are doing so on their behalf in order to achieve even lower interest rates,” he says. “That pricing spiral had driven the gross margin of the leasing companies to a level that might not even cover their operational costs.”
While overall market growth has enabled most leasing companies in Hungary to achieve their desired volume target, either by supporting portfolio stabilisation or fuelling growth, Illes says this volume growth has not been high enough to compensate for the drop on the margin side, so the overall result is rather negative. “If we take into consideration that the volume hype is likely to be over but that turning back the margins is almost impossible, the outlook is not bright.”
The large, traditional leasing companies suffered the highest losses from the global financial crisis, so they have become much more careful in new business generation, while new market entrants have taken advantage of the post-crisis period and become significant market players, suggests Eszter Horvath, head of corporate leasing sales for Raiffeisen Corporate Leasing Hungary.
“Due to the EU and state subsidy systems discriminating against leasing financing – as the ownership is not with the lessee during the leasing term – in many cases leasing has been superseded by loan products and other bank financing structures,” says Horvath.
“Unfortunately, leasing has no real tax advantage either except in the case of corporate car financing, where we can offer open-end financial leases to our corporate clients who have additional benefits due to the VAT reimbursement possibility,” she adds.
“We also have to acknowledge that the beneficial refinancing sources worked out by the government in order to intensify investments in Hungary could also become available for leasing structures, although always with some delays compared to the bank loan products.”
Toth notes that manufacturer-owned lessors only play a significant role in the automotive sector, and that most operate in tight cooperation with other, mostly bank-owned, leasing companies. “The significant players belong to the major multinational financing groups, if we do not consider as ‘independent’ lessors companies that are in ownership of a foreign financing institution, but not directly owned by a bank operating in Hungary.”
Around 70% of leasing companies are bank-owned, suggests Deutsche Leasing Hungary general manager, Katalin Nyikos. “There are some captives engaged in car finance and some independents and smaller, privately owned companies. The ownership structure has not changed significantly, although due to some losses suffered from exchange-rate movements [ the forint versus the Swiss franc] in the retail business in the past few years, some players have shut down their activities or streamlined their business.”
According to Illes, the manufacturer-owned players are a strong presence in the heavy truck segment, where Scania, Volvo and Cargobull Finance play significant roles. “The bank owned lease companies – especially those with local bank shareholders – have become very strong in the agricultural segment, distributing the subsidised funding product and gaining higher market shares.”
Asked what the Hungarian Leasing Association does to improve the perception of leasing, Toth explains that it tries to achieve better, more supportive legal, tax and economic circumstances for the industry through communication and cooperation with policymakers.
“We promote our industry and the important role of leasing in supporting the economy through new investments and financing the SME sector,” he says. “We also educate lessees and potential lessees about this form of financing, highlighting the benefits.”
Nyikos observes that since Deutsche Leasing Hungary provides professional services with a full range of products to its vendors – German investors as well as Hungarian SME customers – it has the chance to finance follow-up investments: “Besides traditional leasing products we can also co-finance EU subsidy programmes in almost all sectors.”
DLL is partnering with vendors and supporting dealers to help them grow their sales, explains Illes. “We have been actively looking for new opportunities, opening up to new segments in the local market by deploying our knowledge in the healthcare and clean technologies financing segments. We are also focused on building up new products and services such as fleet solutions, fair market value leasing and servitisation products.”
Horvath refers to Raiffeisen Corporate Leasing Hungary’s plan to support corporate investment via well-structured, efficient and beneficial leasing solutions mostly in the mid-sized and large corporate segments. “The main goal of this year is also to launch a standardised leasing product for micro and small enterprises, with cheaper refinancing sources and easier procedures, encouraging them to develop their business activity.”
According to Hungarian Leasing Association members, 2017 is expected to produce a modest 5% overall sectoral growth, with automobile financing expected to stand out with an estimated expansion of 7-10%.
“This positive tendency can be explained by an expanding market fuelled by private individuals’ income growth and a higher proportion of retail financing,” says Toth. “In the segments of commercial vehicles and agricultural machines, the most likely scenario for this year is stagnation or only slight growth because the funding for growth scheme and other preferential tender opportunities have been phased out.”
Although increased investment in manufacturing machines and other equipment is expected, it is likely to be counterbalanced by the negative effect of other tender opportunities. “In the case of construction machines, the expected public and private investment plans have caused some moderate optimism so experts predict approximately 5% growth,” adds Toth. “Similar trends can be observed in the real estate financing segment as a result of the population’s stronger housing demands and construction sentiment.”
Illes says positive expectations for economic growth and EU funding have created optimism, although he warns that the high investment volumes of recent years cannot be sustained. “The first-quarter figures for 2017 are higher than for the same period last year, but there were several payouts in the first three months of the year for subsidised funding, which will not continue into the coming quarters,” he concludes