Contrary to the pessimistic forecasts, the results of the industry in the turbulent 2020 are expected to be no worse than in the calm 2019.
The hard work of leasing market participants allowed us to get out of the deep spring peak, caused by the pandemic and quarantine, to the highest levels in the third quarter and, obviously, to consolidate the success in the fourth.
The exact results will be known in January, but today you can analyze the trends.
Leasing in numbers
Thus, the volume of financial leasing in Ukraine in the 3rd quarter of 2020 amounted to UAH 9,131 million, based on statistics recently published by the new market regulator – the National Bank of Ukraine.
This result indicates that the market grew by 62% compared to the previous quarter, and by 41% compared to the first quarter of this year. Positive dynamics indicate a steady recovery of business activity after the recession caused by the problems of the pandemic and its consequences.
But to analyze the real state of the industry, it is advisable to consider the results of the full financial year, which can still be done on the basis of data for 2019.
Last year, the value of new leasing agreements reached UAH 26.3 billion, ie the market grew by 18% compared to the previous year. And this is not the best result for the post-crisis years. Thus, the growth of the leasing market in 2018 amounted to as much as 70% compared to the previous year, and in 2017 – 32%.
It should be noted that these figures do not include data on leasing services of banks, as they are not published separately by the Regulator.
As the cost increases, so does the number of leases signed. Thus, in 2018 the number of signed contracts increased by 33%, and in 2019 – by 50%. The total number of contracts reached 15.5 thousand. All this indicates that leasing services are becoming more popular and widespread every year.
Of course, the positive dynamics of the market coincides with the growth of Ukraine’s economy as a whole. But the growth rate of leasing is significantly ahead of the dynamics of Ukraine’s GDP in recent years, possibly stimulating its growth to some extent.
According to official statistics, the total value of capital investments in Ukraine reached UAH 584 billion. (about 22.6 billion US dollars) in 2019. Leasing provided about 5.83% of these capital investments in 2019, thus contributing to the renewal and development of enterprises that attracted it. In 2018, leasing provided 6.52% of capital investments.
At the end of 2019, there were 630 institutions that had the right to provide financial leasing services in Ukraine. This number included 78 banks, 439 financial companies and 113 so-called legal entities – lessors (hereinafter UOL).
As of January 1, 2020, the value of existing financial leasing agreements amounted to UAH 38,997 million. (about $ 1,651 million). The most active group in the leasing market is UOL. They make up only 18% of all licensed institutions in this market, but generate 71% of the total value of the leasing portfolio.
Financial companies account for 71% of the total number of licensees to conduct leasing business. But they hold only about 3% of the total portfolio value. Another 26% is in the hands of banks. Both of these groups of market participants do not consider leasing as their core business.
The most active players in the domestic leasing market are companies that are members of the Ukrainian Association of Lessors, and they generate 80% of new business in leasing.
Historical data on leasing services provided by leasing and financial companies show that the leasing portfolio, although still falling in 2017 (due to the crisis of 2014-2015), began to grow in 2018 (by 11%), and the dynamics of growth further accelerated up to 15% in 2019.
The Ukrainian leasing market is traditionally mostly focused on vehicle leasing. The value of this type of assets was 63% of the leasing portfolio at the end of 2019. Agricultural machinery also has a significant share in the portfolio – 18.5%. These two groups formed more than 80% of the leasing portfolio in Ukraine.
In addition to transport and agricultural machinery and equipment, the leasing portfolio includes the following types of assets: real estate (6.5%), construction equipment (4%) and industrial equipment (2.7%). No significant changes in the structure of leasing portfolio assets in Ukraine have been observed over the last couple of years.
The largest number of leased vehicles are cars. According to the latest data collected by the Ukrainian Association of Lessors among its members, this group accounted for about 83% of all vehicles registered by leasing companies during the first half of 2020.
Another 8% were trucks, light commercial vehicles (LCV) had about 5%. Other types of vehicles had a share of less than 5%.
At least 13% of all passenger cars registered in Ukraine as a whole were financed through leasing, as well as at least 11.4% of light commercial vehicles.
The structure of the leasing portfolio by industry at the end of 2019 shows that transport (23%) and agriculture (20%) are the most common industries that use leasing services in Ukraine. Together, these two industries account for 43% of the leasing portfolio.
Still present, but with a much smaller share, are services (7%), construction (4%), food industry (4%), mining (3%), processing (2%), metallurgy (2%).
This concentration of leasing in transport and agriculture does not correspond to the structure of the economy as a whole and is indicative of the fact that the leasing market has great potential for growth and diversification.
Most often, a leasing contract in Ukraine is signed for a period of 2 to 5 years. After the Ukrainian economy achieved macroeconomic stabilization and GDP growth, the average duration of a leasing contract began to shift from short-term contracts (2 years or less) to medium-term ones (2-5 years).
Changing the market regulator is the main event of the year
On September 12, 2019, the Verkhovna Rada of Ukraine adopted a Law that changed the procedure for regulating the Ukrainian leasing market (abbreviated as the Law on SPLIT).
The National Commission for Regulation of Financial Services Markets of Ukraine (hereinafter – NC) was previously the state regulatory body for the leasing market.
The SPLIT law stipulates that the NC will be disbanded after the transition period, and its functions will be divided between the other two existing state institutions. Accordingly, the National Bank of Ukraine (hereinafter the NBU) took over the regulation and control of the leasing market of Ukraine from the NC.
The transition of leasing market regulation to the NBU is considered by market participants themselves as a positive step. The NBU has been an example of promoting and implementing reforms since 2014. It introduced a new policy that supported macroeconomic stabilization and laid the groundwork for economic growth in 2015-2019.
Among the measures taken by the NBU, measures to combat inflation and introduce a flexible exchange rate, clean up the banking sector, reform the internal structure of the NBU, etc. were of particular importance. Thanks to the implemented reforms, the NBU has gained a reputation as a progressive state institution.
The market expects that the transition to NBU regulation will give a positive impetus to the development of leasing in Ukraine.
The SPLIT law provided for a transitional period until June 30, 2020, during which the NC transferred, among other things, its leasing supervision functions to the NBU. The NBU began regulating the financial services market on July 1, 2020.
On July 2, 2020, the President of Ukraine issued a Decree dissolving the Tax Code in accordance with the SPLIT Law. Thus, the transfer of functions from the Tax Code to the NBU was completed.
During the mentioned transition period, the NBU took measures to prepare for the transition of the functions provided by the Law on SPLIT. The NBU has transformed its internal structure to include new functions.
He also hired new employees to be in charge of the non-banking financial services market. To do this, the NBU has chosen a combined approach.
Some of the new employees have transferred to the NBU with NC and have experience in this segment. A large number of workers were hired from the market itself. The NBU believes that this approach will provide a high level of experience in its structure.
During the transition period, the NBU had a close dialogue with representatives of various segments of the non-banking financial services market, including the leasing industry. Based on its own analysis and this dialogue, the NBU has prepared and published six so-called “White Books”.
These books are sectoral documents where the NBU analyzes the current state of various market sectors, identifies existing problems and describes the changes that need to be made in the regulatory approaches of each sector.
One of these books is devoted to the non-banking leasing industry. Here are the main points outlined in the NBU White Paper on the leasing sector below.
Leasing companies are registered as financial institutions
According to the existing regulatory framework, a legal entity was allowed to have a leasing license and operate in the leasing market, but not to be registered as a financial institution.
This is important because businesses that are registered as financial institutions have stricter regulatory requirements for operations and reporting in Ukraine.
The NBU plans to change this approach. The new policy will allow financial leasing services to be provided only to those companies that have been licensed to operate as a financial company and have the status of a financial institution.
Existing legal entities that are licensed to provide leasing services, but are not currently financial institutions, will be automatically re-registered.
Easier access to the market
Until recently, the procedure for entering the financial services market had two stages. The first stage is that a company that has decided to carry out regulated activities must register as an appropriate institution and be entered in the State Register.
After that, the company had to obtain a license (or a number of licenses) for the activities it plans to carry out. The NBU intends to simplify this process and combine obtaining a license and company registration into a single procedure.
The new license will also be different and will be similar to the designer. The new structure will allow the company to select and include in the license only those services that it plans to provide depending on the chosen business model.
Regulatory requirements will be based on a risk-based approach. This means that companies that have licensed lower-risk activities will have easier regulation and less control.
Ownership structure
One of the key requirements of the new regulation will be to ensure a transparent ownership structure for all financial institutions.
Leasing companies will have to notify the NBU of changes in the ownership structure in the prescribed manner. The NBU will have effective tools to verify the reliability and transparency of the ownership structure.
If the NBU has reason to believe that the ownership structure communicated to it is not transparent or the business reputation of the owners is not impeccable, the regulator will have the right to take measures to bring the ownership structure of the leasing company in line with the law.
The new approach proposes to maintain the procedure for agreeing on the significant participation of leasing companies as a key element in verifying the transparency of ownership structures and the impeccable business reputation of owners.
At the same time, the thresholds for approval and the depth of revision of funding sources will be determined using a risk-based approach.
Business plan to get started
The licensing procedure will include an assessment of the business plan of the leasing company, which will be made by the NBU, and which will serve as a prerequisite for granting a license to this company.
The purpose of this assessment is the NBU’s desire to ensure that the founders have sufficient own resources, or can attract sufficient additional resources to implement the business model they have chosen. The aim is also to confirm the company’s ability to achieve the planned customer engagement and achieve the planned key performance indicators.
The NBU will evaluate the business plan in terms of its feasibility and feasibility. The business plan must convincingly demonstrate that the company is able to maintain a stable financial position and meet its obligations.
Sources of funding
The following sources of financing will be allowed: from participants (shareholders) and affiliates of the leasing company; from other financial service providers, as well as from international financial organizations; on the terms of subordinated debt from qualified investors, including those who are not financial institutions; by issuing debt securities, including by publicly offering corporate bonds among individuals or legal entities, subject to compliance with the requirements established by the Tax Code and the NBU.
Related services
Leasing companies will be able to combine the provision of financial services with the provision of certain types of ancillary services or operations (intermediary activities to secure leasing assets; repair and maintenance of leasing assets; sale of leasing and withdrawn assets; leasing assets, consulting, etc.).
Qualification requirements
The NBU plans to establish qualification requirements, including requirements for impeccable business reputation and professional suitability for managers of the leasing company and for impeccable business reputation of the company’s owners, subject to significant participation.
Capital requirements
The NBU believes that it is advisable to establish a single prudential requirement for leasing companies – a regulatory requirement to maintain a minimum level of equity. Leasing companies will have to maintain equity at UAH 3 million. in case the company will provide only financial leasing services, or UAH 5 million if the leasing company plans to provide two or more types of financial services.
The Ukrainian Association of Lessors, together with representatives of other non-banking markets, is currently working closely with the Regulator to develop new regulations and improve existing ones. Cooperation looks quite constructive.
On the potential of leasing in various sectors of the economy – in the second part of the article.
Author: Roman Zherdytsky,
Analytical Department of the
Association “Ukrainian Union of Lessors“