European leasing sector faces profit pressure

The latest results from the Leaseurope Index, a quarterly survey tracking key financial indicators for European leasing companies, reveal a notable deterioration across all key performance indicators (KPIs) for the second quarter of 2024.

The fifty-third edition of the Index surveyed a sample of 19 European lessors and showed a mixed landscape for the industry, with overall financial health weakening despite growth in new leasing volumes.

The survey revealed that new leasing volumes increased by 9.3% compared to Q2 2023, reaching nearly €30 billion. However, the overall financial metrics painted a challenging picture for the sector, as profits, income, and risk indicators all experienced declines.

Profit and profitability under pressure

Pre-tax profits among the surveyed firms fell sharply by 20.2% compared to the second quarter of 2023. This drop was accompanied by a decline in operating income, which decreased by 2.3%. As a result, the profitability ratio—a key measure of financial health—deteriorated significantly. The weighted average profitability ratio fell from 52.6% in Q2 2023 to 42.7% in Q2 2024, while the median profitability ratio, which minimises the impact of outliers, dropped even more dramatically from 52.4% to 35.5%.

Rising costs and escalating cost/income ratios

Operating expenses for European lessors continued to climb in Q2 2024, increasing by 8.3% year-on-year. Combined with the drop in income, this led to an unfavourable shift in cost/income ratios. The weighted average cost/income ratio rose to 47.4% from 45.5% in the same period last year, reflecting worsening efficiency within the sector. The median cost/income ratio saw a similar deterioration, edging up to 49.8% from 49.2%.

Loan loss provisions and risk costs surge

Another area of concern was the sharp increase in loan loss provisions, which surged by 177% compared to Q2 2023. This steep rise in provisions contributed to the cost of risk worsening across the board. The weighted average cost of risk ratio increased from 0.07% to 0.2%, with the median cost of risk also rising to 0.22%, indicating growing pressure from deteriorating credit conditions.

Declining RoA and RoE indicators

Both the return on assets (RoA) and return on equity (RoE) indicators—measures of how efficiently firms are using their assets and capital to generate profit—worsened during the second quarter of 2024. The median ratios also reflected this downward trend, signalling that firms are struggling to maintain profitability amid rising costs and increasing economic uncertainty.

Stefan Davidsson, Executive Vice President of DNB Finans, highlighted the challenges facing European lessors. “On the back of strong growth in previous years, the first half of 2024 showed some increasing headwinds for European lessors. Macroeconomic uncertainties and prolonged weakness in business investment are impacting indicators like profitability and cost/income ratios in Q2 2024,” he said.

However, Davidsson remained cautiously optimistic about the future, pointing to the European Central Bank’s third interest rate cut of the year and a continued drop in inflation as positive signs. “These factors may support a gradual recovery in business investment as projected in the latest European Economic Forecast,” he added. Davidsson emphasized that “with this forecast, together with a steady increase in the use of leasing, lessors should be prepared to leverage on opportunities within a challenging business environment.”

The full Q2 2024 Leaseurope Index can be accessed on Leaseurope’s website.