- The penetration of the leasing services in Russia will be limited in the next few years. Slow economic growth and high interest rates constrain the development of the Russian leasing market.
- Dominant players will continue to impair competition. The top 5 companies will continue controlling over 70% of the market in the medium term.
- The capital of some leasing companies remains under pressure. The largest industry players hold a relatively large amount of problem leases on their balance sheets. Due to their weak capital generation capacity to cover problem debt with provisions, they have to rely on shareholder support.
- Retail leasing companies will continue exhibiting higher predictability in their business and financial standing due to low counterparty concentration as well as liquid collateral and its efficient collection and sale procedures.
- External support will remain one of the key factors in the stabilization of industry risks. Market leaders are affiliated either with the government or with large financial and industrial groups, which partially mitigates the risk of weaker capital positions and grants them access to reliable funding sources.
- Leasing market reforms should contribute to the development of the industry in the long term by introducing regulations on leasing companies and by making their activities more transparent. At the same time, the reforms are unlikely to have a critical effect on the competitive landscape.
Russian leasing market: current environment and prospects
For more details please see ACRA’s macroeconomic forecast titled World trade tensions may escalate to economic downturn by late 2019, dated July 23, 2019.
Weak economic growth, which limits capital investments in the country, along with interest rates that are still high continue to constrain development in the leasing industry. The rapid growth of the leasing market in 2018 (+30%) that substantially outpaced economic growth (+12.8% in nominal terms) was primarily driven by two factors. Firstly, exports of loose cargo (mostly bituminous coal) increased while the rolling stock deficit remained. Secondly, the development of the taxi and car sharing segments as well as incentive programs for transport leasing boosted demand for motor vehicles. As coal exports are projected to decrease in 2019-2020 and unfavorable macroeconomic conditions to continue, ACRA expects the growth of the total leasing portfolio to remain below 10-15% over the next couple of years.
Figure 1. Leasing market breakdown by industries
Sources: Rosstat, ACRA
Although leasing services saw a volume boost in 2018, the leasing portfolio size to GDP ratio remains below 4%. This ratio is often used to analyze developments in the leasing industry. However, ACRA believes it is more reasonable to measure the penetration of leasing services in the economy using the ratio of the total amount of financial lease contracts to total capital expenditures in a country (excluding real estate investments). Both ratios are similar in an economic sense: fixed investments include the purchase of vehicles, machinery and equipment, while the total amount of financial lease contracts represents investment expenditures on the purchase and use of leased assets.
The penetration of leasing services is calculated as the ratio of the total amount of financial lease contracts to total capital expenditures (excluding real estate investments).
In 2018, the level of leasing services penetration stood at 9.8% as compared to 8.5% in 2017. Although this indicator is expected to reach 10.4% in 2019, its value will still be substantially lower (two to four times) than that in developed economies.
National projects in urban development (e.g., public transportation, environmental projects, upgrade and/or replacement of utilities and construction equipment, etc.) will help develop the leasing industry. However, the largest leasing companies will most likely handle the bulk of these projects, which will further increase industry concentration, and therefore, reduce competition. In terms of concentration, the leasing and banking industries look very much alike: the top five companies in the sector control around 70% of the market.
Further development in the Russian leasing industry will be determined largely by the progress of reforms in the sector. Currently, the leasing industry is known for its lack of financial transparency — the majority of leasing companies (controlling around 50% of the market) do not make their financial reporting publicly available. The reforms are aimed at enabling the creation of self-regulated organizations, implementing a register of leasing companies (similar to the licensing of banks), and introducing minimum capital requirements as well as new accounting and reporting rules for leasing companies (including using a new accounting standards and prudential ratios as well as streamlining existing reporting types). In ACRA’s opinion, the above initiatives should push bad-faith players and those companies with leasing services as a non-core business to exit the market and help make the industry much more transparent. At the same time, the new regulations, which will take effect in 2022 at the earliest, are unlikely to have any significant impact on the competitive environment in the leasing industry.
Large companies have close links with their shareholders
As noted above, the leasing industry is very similar to the banking sector in terms of the dominance of large market players, which limits competition. Moreover, companies affiliated with banks (with the latter often being their largest creditors) currently control at least 50% of the market (by size of the total lease portfolio). However, the most favorable position is held by leasing companies affiliated with government-owned entities and/or financial and industrial groups capable of securing enough business for them (the credit ratings of leasing companies take into account potential financial and non-financial support, see Fig. 2). Some leasing companies get their orders from manufacturers rather than lessees; they offer competitive prices, however. The rest of market players continuously improve their service quality in order to stay competitive, and this is one of only few advantages of the current competitive environment in the sector.
Figure 2. Leasing companies with ACRA ratings
* Number of notches between SCA and the final credit rating of the company.
High problem assets may force companies to increase their provisions
The below analysis of the financial situation in the leasing industry is based on data from leasing companies that have ACRA ratings (see Fig. 2). These companies account for roughly half of the market in terms of portfolio size.
ACRA’s estimates show that the share of problem and potentially problem exposure is around 15-20% of the total lease portfolio, while large companies, primarily government related, hold the majority of potentially problem assets. Moreover, the reserves for impairment are substantially lower than the amount of problem debt (the average cost of risk in the leasing industry was around 1%-2% in 2018-H12019). Therefore, in the absence of external support, the capital positions of certain leasing companies may be under pressure.
Figure 3. Problem and potentially problem exposure and impairment reserves
Source: ACRA estimates, IFRS reporting
It is worth mentioning that the retail leasing segment (passenger cars and freight vehicles; commercial, construction, and other specialty vehicles) features higher asset quality due to the considerable diversification of the business, efficient collection procedures, and highly liquid collateral. In contrast, leasing companies servicing large businesses (railroad, water and air transport; construction machinery) show high concentration on individual clients. ACRA estimates that the top ten lessees usually form over half of the lease portfolio owned by the dominant market players, while the liquidity of leased assets depends on the available amounts of the respective machinery in the market.
Given the above specifics, the capital adequacy and profitability of retail leasing companies are more stable and predictable, while companies that do business with large clients are usually not profitable enough to support their operating activities and are often exposed to one-off events. Therefore, their capital position and the sustainability of their business will continue to depend on potential external support.
Figure 4. Return on assets of leasing companies rated by ACRA
Sources: ACRA, IFRS reporting
Figure 5. Capital adequacy* of leasing companies rated by ACRA
* According to the Methodology for Credit Ratings Assignment to Leasing Companies under the National Scale for the Russian Federation
Source: ACRA, IFRS reporting
According to ACRA’s estimates, the funding concentration of leasing companies will remain high over the next 12-18 months. Our analysis shows that the share of the top five creditors (holders of securities and lenders) can vary from 30% to 60% of total liabilities. Almost all top ten leasing companies (by portfolio size) rely on funding from affiliates, including government entities. This type of funding will continue to prevail in the near future. However, in the long term ACRA does not exclude the possibility of somewhat improved diversification in the funding structure, provided that regulatory framework is efficient and the transparency of the sector sees a significant increase as a result of planned industry reforms.