F&I Management & Training

ING Lease UK’s decision to cease writing new business and run-off its total portfolio is unlikely to be the last of its kind according to LPM Outsourcing (LPMO).  

LPMO believes that banks are still reviewing the implications of operating within the confines of Basel III and its associated capital adequacy requirements.  As a direct result of these requirements, other leasing portfolios may begin to look unattractive for bank investment if lending margins are insufficient.

Ian Dennis, business development manager at LPMO, explained: “Basel III requires banks to add to their capital base or reduce their lending. More specifically, Basel III may also make it harder for some banks to find sufficient capital for longer term financing such as leases.  

“The first leg of the credit crunch created a withdrawal of some players from the market, however, the number of run-offs never hit anticipated levels as lessors held onto their portfolios.  

“The departure of ING Lease UK is likely to trigger a renewed round of soul searching within banks. Banks are also going through a process of regularly reviewing their capital adequacy requirements and how that affects their overall strategy. Over the next 12-18 months we expect to see further run-offs as the long term fixes to the banking system are put in place.”  

However, Dennis stressed that an increase in run-offs, as banks and finance houses reshape their strategy, does not necessarily mean an overall reduction in funding from leasing.  

Easy access

“Some funders with easy access to competitively-priced funds, such as deposit accounts, will be adding to their asset finance activities just as some will be reducing their exposure to leasing.  

“But with so many banks competing for equity capital and competitively priced funds it is inevitable that some banks will view leasing products as non-core to their business, resulting in the run out of leasing portfolios.”  

Dennis added that the challenge for banks and finance houses is to squeeze the maximum possible value out of any asset finance books that they put into run-off. Whilst they may prefer to sell their book of leases to a competitor it may be hard to realise the embedded value in the portfolio and manage the potential impact upon their own balance sheet if sold at a loss.  

“The problem,” he said, “is that some of these portfolios are literally too big to sell and the number of potential buyers is very few. There still remains a discrepancy between the sale- and purchase-prices available for portfolios. This has persuaded a lot of institutions to run these books off themselves to ensure that they extract all the revenue from the portfolio.  

“That’s gives them the option of reducing the size of the portfolio over time, until it is small enough in size to make it into a more manageable purchase for a wider range of buyers.”  

Balancing the cost of run-off versus the portfolio-embedded income  

A primary concern of funders that decide to put books of business into run-off is how to ensure that costs are paired back so that the entire process is a profitable as possible.  

“When lessors consider how they effectively manage the book,” Dennis said, “they typically retain a skeleton staff to handle the back office administration of the portfolio. Because of the specialist nature of the leasing sector staff costs can be higher than in other areas of finance.”  

“Service standards have to be maintained but running these closed portfolios to maximise the cash collected is a key objective.  Using an outsourcing partner can be a way to reduce the overhead costs involved, especially if the existing software platform can be retained and the migration of data avoided. Outsourcing to a third party can provide a branded solution for the client and enable consistent service levels whilst reducing the need to retain staff.”  

“Basel III creates winners and losers in the asset finance market but for those operators that decide they just want to scale back on the capital they commit to the leasing market, there is an increasing pressure to do so in as cost effective a way as possible.”

“The likelihood is that following the departure of ING, others will review their own portfolios, scale back on their field forces and revise their business models. Such changes could see an expansion of the desire to outsource the management of the “run out” to third party outsourcers like LPMO.”   

DATED: 05.12.12

FEED: AFL