Ever since the sub-prime mortgage bubble burst in 2008, people have been trying to spot the seeds of a future crisis. It’s human nature.
While many eyes are focused on geo-political issues, out-of-whack algos or a major rates rise, there’s an altogether less likely bubble starting to emerge: leasing.
Leasing is on the rise: the top 50 leasing markets grew new business by 6.5%, the fifth consecutive year of growth, according to this year’s Global Leasing Report. It’s easy to see why. Bank lending has come under considerable strain since 2008, as capital requirements have increased dramatically.
“Emirates came out in favour of further leasing arrangements last year following the completion of a $1bn 12 year leasing deal”
At the same time, the reasonably lengthy period of low growth in many major economies has rendered many companies and individuals less flush, and therefore less able or willing to make purchases outright. Add to that geo-political uncertainty in the form of Brexit, anxiety over China’s growth and an unexpected US President, and the numbers make sense.
Nowhere is this more apparent than the airline and automotive industries. Emirates came out in favour of further leasing arrangements last year following the completion of a $1bn 12 year leasing deal.
In a June 2017 report, independent consultancy, IBA, cited multiple unscheduled redeliveries in the last 12 months due to, “regional economic problems, cash flow reductions and exchange rate pressure,” at airlines, especially as the dollar (in which most airlines bear costs) has strengthened against earnings, which are typically in local currencies. This contributed to the recent well-publicised costly leasing problems at South African Airways, when the value of the South African Rand fell to an all-time low against the dollar in December 2016.
It’s a similar picture in the automotive world where there are worries about the rate of growth of credit. In November last year, New York Federal Reserve bank warned that sub-prime car loan “delinquencies” were a “significant concern”. In the UK alone, a staggering £31.6bn was borrowed for car purchases in 2016, according to the Finance and Leasing Association. That’s a rise of 12% on the previous year.
One result of all this is a change to the associated accounting rules. IFRS 16 is due to replace IAS 17, which has remained unchanged for more than 30 years, in January 2019, with Chairman Hans Hoogervorst declaring that the old standard did not, “truly reflect economic reality”. While there is still a couple of years to go until the implementation date, the general industry view is that the scale of the changes mean firms should not delay their preparation.
No one would dispute that all this needs very careful management. But the reality is that until now, financing has typically been managed in siloed spreadsheets, separate to the central treasury and cash management systems of corporates.
And while that may have been appropriate in the past, forward-thinking corporates are now increasingly looking for a single view of risk across the organisation, and that means a treasury and risk system that can incorporate all aspects of financing risk. With the levels of risk on the rise, it’s time for treasurers to focus their attention on getting this right.
In a world where connectivity is on the rise and transportation costs have been falling, it’s a paradox that over the last decade there’s been a decline in trade as a share of economic activity. At the same time, there has been a significant slowdown in technology investment across the trade finance industry – the only exception being the technology needed to support regulatory compliance and risk management.
The future of digital treasury tech will bring about the death of shared services, payment factories and supply chain finance, argue Standard Chartered executives. They met with GTNews to discuss seeing a greater connection between treasury and the physical supply chain and the dramatic digital advances being seen in Asia, Africa and the Middle East.
Despite significant technological advances in recent years, many banks are being held back by legacy technology. Estimates suggest banks spend up to 80% of their IT budgets on legacy technology maintenance.
Many may think the phrase “trade finance” is really just a euphemism for financial complexity. Yet the historically paper- and manually-intensive processes are giving way to modernisation and digitisation. Pay close attention to the changes.