European lessors’ pre-tax profits rise by 15% in Q2 2104 and herald “significant recovery”

Total new leasing volumes reported by the sample Leaseurope members participating increased by 8.8% in comparison to the same quarter a year ago, reaching just over €18 billion. The portfolio of outstanding contracts remained stable, declining by -0.7%, while risk-weighted assets continued to decrease by a much larger amount (-6.1%).

Profit & profitability

Total pre-tax profit of all the companies increased substantially by 15.1% for Q2 2014 in comparison to Q2 2013 (see table 1).

 

Table 1 – Aggregate Data Q1 2013 – Q2 2014

	2014 Q2		2014 Q1		2013 Q4
Aggregated data provided by companies (all figures in millions of euro for the relevant period)	Sum of values (€ ms)	% change vs Q2 13	Sum of values (€ ms)	% change vs Q1 13	Sum of values (€ ms)	% change vs Q4 12
Operating income	1,971	2.7	1,905	3.2	1,883	4.0
Operating expenses	888	-1.2	870	-0.8	957	-0.4
Loan loss provision	392	-13.1	381	-7.3	1,581	210.7
Pre-Tax Profit	648	15.1	648	16.0	-683	-307.7
RWA at end of period	152,942	-6.1	151,941	-10.5	161,833	-3.8
Portfolio at end of period	316,301	-0.7	217,190	-1.7	216,538	-3.8
New business volumes	18,031	8.8	16,039	9.5	18,408	6.8

	2013 Q3		2013 Q2		2013 Q1
Aggregated data provided by companies (all figures in millions of euro for the relevant period)	Sum of values (€ ms)	% change vs Q3 12	Sum of values (€ ms)	% change vs Q2 12	Sum of values (€ ms)	% change vs Q1 12
Operating income	1,841	4.5	1,920	5.7	1,847	3.8
Operating expenses	881	-0.9	898	1.1	877	0.5
Loan loss provision	395	6.9	451	0.8	412	33.2
Pre-Tax Profit	564	13.2	563	19.8	558	-6.6
RWA at end of period	164,006	-2.1	162,953	-3.4	169,779	-0.6
Portfolio at end of period	218,015	-2.7	217,867	-3.2	221,055	-2.0
New business volumes	15,820	0.7	16,578	-5.9	14,646	-8.9

The average profitability ratio increased from 29.2% in Q2 2013 to 33.3% in Q2 2014 (see table 3), the highest level seen in over two years.

 

Table 3 – Weighted Average Ratios

	2014		2013
Weighted Average Ratios	Avg Q2 14	Avg Q1 14	Avg 13 full year	Avg Q4 13	Avg Q3 13	Avg Q2 13	Avg Q1 13
Profitability (%) – average of all companies’ pre-tax profit as a % of total operating income	33.3	32.7	11.8	-48.3	29.5	29.2	31.6
Cost/Income (%) – average of all companies’ operating expenses as a % of operating income	44.6	45.3	47.0	49.8	47.0	46.0	46.7
Cost of Risk (%)* – average of all companies’ loan loss provision (annualised) as a percentage of average portfolio over the period	0.7	0.7	0.7	2.9	0.7	0.8	0.7
Return on Assets (%)* – average of all companies’ net profit before tax (annualised) as a percentage of average portfolio over the period	1.2	1.2	0.4	-1.3	1.0	1.0	1.0
Return on Equity (2010=100)* – index of all companies’ net profit before tax (annualised) as a percentage of 8% of total risk weighted assets over the period	155	151	59	-137	125	122	120

* denotes that the quarterly numerator (either loan loss provision or net profit) has been annualised in order to calculate the relevant ratio for each individual quarter.

The aggregate annual data are shown here as reported in the Q4 2013 survey.

Leaseurope calculates weighted average ratios based on the data provided by participating companies.

The profitability and cost/income ratios are weighted by new business volumes over the relevant period. For example, each company’s individual profitability ratio is weighted by its new business over the period Q2 2014 to arrive at the weighted average ratio of 33.3% shown in the table. The cost of risk, RoA and RoE ratios are weighted by the average portfolio over the relevant period.

Within these aggregate results there lies a large degree of variation in performance by company, with a few companies suffering continued losses but most enjoying strong results (see table 4).

 

Table 4 – Quartile for Ratios Q2 2014

	Profitability Ratio	Cost / Income Ratio	Cost of Risk Ratio	RoA Ratio
Minimum	-121.1	20.5	0.0	-1.8
Quartile 1 (25%)	26.0	35.0	0.1	0.6
Quartile 2 (50%) i.e. median	45.2	43.7	0.3	1.8
Quartile 3 (75%)	52.4	49.8	0.9	3.2
Maximum	66.8	55.6	2.9	5.7
Weighted Average	33.3	44.6	0.73	1.20

The weighted average for Q4 2013 is heavily influenced by extreme outlier values and is thus not an accurate representation of the overall sample.

Quartiles show the value of the boundary at the 25th, 50th, or 75th percentiles of a frequency distribution divided into four parts, each containing a quarter of the values in the dataset. In the table, Quartile 3 (75th percentile or upper quartile) identifies that 3/4 of the population members have a value below this quartile figure. The median value shows the middle value of the 17 observations in the data set. The median is not influenced by outliers at either end of the dataset and can therefore be a useful metric of the ratio of the “typical “company in the sample.

 

Income, expenses & cost/income

Compared to the same period a year ago, operating income increased (2.7%), while operating expenses decreased by -1.2%. This resulted in a further improvement of the average cost/income ratio in Q2 2014 to 44.6%, which is the lowest level of this indicator seen since Q2 2010.

 

Loan loss provision & cost of risk

Loan loss provisions decreased substantially in Q2 2014 compared to the same period of the previous year (-13.1%), following on from the improvement seen in Q1 2014. The average annualised cost of risk declined in Q2 2014 compared to Q2 2013, to the relatively low level of 0.7%.

 

RoA and RoE indicators

RoA and RoE 1 both increased significantly in Q2 2014 compared to Q2 2013, reaching 1.2% and 155, respectively. An RoA figure of this level hasn’t been seen in three years, while RoE has shown even more impressive gains, reaching the highest level ever recorded in the survey and improving further on the high level seen in Q1 2014.

Bernard Muselet, directeur général adjoint of Credit Agricole Leasing & Factoring (pictured), commented: “I am pleased to see that financial ratios in Q2 2014 have continued to build on the significant recovery experienced in the first quarter of the year. The strength seen in profitability and cost/income ratios, particularly in light of the pressure on portfolios, is a real testament to the resourcefulness of the European leasing industry.

“New business volumes are also beginning to pick up again, amidst an increasingly stable recovery in most European countries. As domestic demand solidifies and investment by firms continues to recover, lessors can expect to continue benefitting from these improved market conditions.”