Amid competition from nonbanks for most commercial and retail banking products, bankers seem to be rediscovering equipment leasing as a valuable commercial service.
Bank leasing groups that were relatively inactive in recent years are gearing up for growth. Also regional banks, with assets in the $100 million-to-$1 billion range, are entering the leasing business for the first time to protect market share and increase profitability.
There are plenty of other good reasons.
* Banks currently have high liquidity and are experiencing difficulties in growing commercial lending products with satisfactory spreads.
* Many banks that were not net tax-payers due to credit losses and depressed taxable income, are now generating large profits. Leasing continues to be one of the best tax-deferral products available.
* Well-managed leasing groups average 150 to 175 basis points return on assets compared to overall bank ROA's generally in the range of 100 to 125 basis points.
* Leasing is so well accepted by businesses acquiring equipment that banks must be concerned about losing customers and market share if the leasing service is not offered.
* Leasing is a transaction business in which long-term relationships are established after a transaction is successfully completed. Leasing is therefore a good entry product for new banking relationships.
* Bank leasing groups over the years have a history of favorable credit loss experience with net chargeoffs averaging less than 0.5% of receivables.
* Bank leasing groups have consistently been conservative in booking residual risks at lease inception. Consequently, bank lessors have consistently generated residual gains on leased assets during early terminations and at lease maturity.
* Efficiency ratios of bank leasing groups holding assets for their own accounts average 30-35%. Leasing generates impressive earnings for relatively modest investments in infrastructure.
Still, if the banks are to expand in leasing and prosper, some fundamental issues for new entrants should be addressed and resolved in early discussions by leasing management with senior bank officers.
Strategically, is the bank prepared to invest in the infrastructure to own and manage leasing assets over the long term, rather than lending with assets as security? The bank should recognize leasing as a business rather than just a product and get prepared to support the business long-term by allocating the necessary resources to be successful.
Consistency in leasing is important if customers and competitors are to view the leasing group as a serious player, constantly offering leasing products in the marketplace.
Interruptions in business negatively impacts existing customers requesting add-on business. Sizable portions of new leasing annual volume from present lessees is common, averaging in the 35-40% range for well managed leasing companies.
Periodically withdrawing from the market allows competition an opportunity to pirate away good customers that often cannot be regained. Competitors use inconsistency to their advantage when a leasing company re-enters the market after an absence.
Some of the resources that are necessary from the parent company for a successful leasing group are: adequate compensation packages to attract and retain the necessary leasing talent; consistent taxable income allocations to allow a certain amount of tax deferral leases to be constantly offered; reasonable funding and residual strategies to allow competitive pricing; and investment in the essential hardware and systems for pricing, accounting and other support functions.
If these issues are resolved satisfactorily, then the next area to consider is how the leasing entity is to be structured and housed.
The recent trend among banks seems to be to discourage the autonomy of bank leasing companies by domiciling the leasing groups within bank groups or by centralizing department reporting in the bank in Legal, Human Resources, Taxes, Funding, and MIS.
Also there is a tendency in some banks to have leasing controlled by customer relationship managers. In the past the most successful bank leasing companies were companies that were cost efficient and somewhat autonomous to preserve the entrepreneurial nature of leasing which can present a separate career path from banking.
The autonomy generally promotes more flexibility, responsiveness and a better team spirit than when leasing is housed in a bank environment.
With autonomy goes the responsibility in the leasing group to be diligent in providing responsive, professional service to the bank groups. Leasing groups should implement proper strategies to support the bank objectives of good customer service and promote a team approach to relationship banking with joint calling efforts.
The leasing group should be strategically positioned with bank senior management to continually interface, educate and communicate to make certain the rest of the bank is aware of how leasing serves banking needs.
While leasing referrals from the bank can be important to overall profitability and to accomplish overall corporate objectives in customer service, bank leasing companies must generally do direct marketing on their own to be successful. Usually the volume of leasing referrals from the bank is not sufficient to sustain a bank leasing company, especially if the bank groups are not being incented to refer leases.
However, it is essential that prompt and efficient service be given to bank referrals even if they are a small percentage of overall volume, otherwise bank disenchantment with leasing can occur. The costs of the leasing infrastructure must typically be spread over a larger base of business than can be generated from bank referrals in order for the leasing group to generate the necessary returns to compete effectively for essential resources within the parent company.
Also direct marketing can produce diverse income streams, product lines and geographical distribution of assets, allowing bank lessors to weather the economic cycles and continue to produce important year-to-year increased earnings.
Syndications of credit "over lines" and securitizations capabilities can be important in successfully managing the portfolio to take advantage of cyclical residual markets. For instance, managing the portfolio by disposing of aged leveraged leases in the nonearning accounting phase when equipment markets are strong is an important strategy to improve tax base and to increase shareholder returns.
The competitive marketplace can be difficult for bank lessors who compete on price alone. A diversified approach in offering both tax and non-tax-sensitive products can be advantageous. Specializing by product or industry when particular expertise is necessary to be competitive, or when competitive advantage can be gained, can increase the chances of success.
Over the thirty years that banks have been in equipment leasing, substantial profits have been earned and there is still good potential for future profitability and growth in leasing. Leasing is being viewed by banks as an important banking service in growing corporate assets in a high liquidity environment in which banks are experiencing some difficulty in increasing corporate loans with satisfactory spreads.
Leasing is well accepted by businesses acquiring equipment and represents a good entry product for banks in establishing new banking relationships. Banks are concerned about losing customers and market share if the leasing service is not offered. Leasing historically has proven to be safe business, with credit losses controlled and residual experience good.
Profitability has been impressive with strong returns on assets and equity, while investments in infrastructures have been modest.
Leasing is also one of the best tax deferral products available to banks to offset record earnings which are continuing to be reported.
For these reasons, it is understandable that banks are currently viewing leasing favorably and it is reasonable to expect increased bank leasing activity in the coming years.
Mr. Chapman is the former founder and chairman, president and CEO of Security Pacific Leasing Corp. Today, he is a partner in the Alta Group, a consulting firm in Salt Lake City.
