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European fleet leasing: Sector consolidation set to slow amid weakening tailwinds
Mon 03 Apr, 2023 - 9:01 AM ET
After an extended period of controlled, largely organic growth, the European fleet leasing sector experienced some fairly transformative changes in 2023.
In early April, multi-brand car manufacturer Stellantis folded its Free2move Lease subsidiary into Italy-domiciled fleet lessor Leasys S.p.A. (rated ‘A-’/Stable by Fitch), a joint-venture with Credit Agricole Consumer Finance (‘A+’/Stable), with the aim of reaching a full-service leasing fleet of over one million vehicles by 2026.
And in May, Societe Generale subsidiary ALD S.A. (‘BBB+’/Positive) completed the acquisition of its closest competitor, LeasePlan Corporation N.V. (‘BBB+’/Positive), creating by far the largest non-captive fleet lessor globally with a fleet of around 3.3 million vehicles.
Fleet lessors generally benefit from long lease terms, stable utilisation rates and sound diversification by counterparty and industry. These factors allowed fleet lessors to experience limited negative effects from the pandemic, and in fact, supply chain disruptions boosted residual values and gains from fleet disposal.
To illustrate, historically ALD estimated that net used car sales per unit would range between EUR100 and EUR400. While the firm’s result in 2019 of EUR254 was comfortably within this range, it rose to a staggering EUR2,846 in 2022 before moderating marginally to EUR2,535 in the first quarter of 2023. Interestingly, the reduction in 1Q23 was not due to a drop in used car sales prices but almost entirely because of a change in its depreciation policy, i.e. an increase in estimated residual values.
In our view, the strength of current tailwinds in the European fleet leasing sector are unsustainable and will abate in the second half of 2023 and during 2024, which is reflected in our “neutral” 2023 subsector outlook for commercial fleet lessors. Supply chain disruptions continue to ease, for instance, illustrated by a 17.9% year-on-year increase in EU new car sales in the first quarter of 2023. Residual values, at least for electric vehicles, have recently come under pressure, partly due to Tesla’s decision to cut its prices. This will inevitably lead to a reversion of net gains from the sale of used cars closer to the long-term average (below 15% of total recurring revenue) from unsustainably high levels of between 30% and 40% of total recurring revenue in 2022.
However, despite European fleet lessors’ material exposure to residual value risks (unlike U.S.-based lessors which typically offer open-ended leases with the lessee bearing the residual value risk), we do not expect meaningful net losses from residual value results for rated lessors because of generally prudent residual value risk policies and continued favourable structural trends for the industry. These include increasing leasing penetration rates and the larger lessors’ proven ability to adapt to changing client behaviour by, for instance, expanding their retail and broader mobility offerings.
While there is greater uncertainty around the trend for residual values for electric vehicles, the phasing in of electric vehicles at larger lessors has been prudent and still only accounts for a relatively small proportion of overall fleets (estimated at around 15% in Europe at end-2022 by Citi Research), limiting the impact of potential residual value reversion.
As a result, fleet leasing will remain a fairly attractive business to operate, in particular for banks, as it provides revenue diversification and strong and comparatively stable profitability. Moderately lower profitability in the medium-term due to lower residual value gains and higher funding costs at lessors will likely partially close the gap between lessors’ and banks’ overall profitability in fleet leasing, making further capital allocation to leasing businesses incrementally less attractive.
In conclusion, because of this, and also because industry consolidation is already well-progressed, we believe further larger-scale consolidation to be less likely in the medium-term. However, continued pressure on funding costs and the increasing importance of scale means that consolidation among smaller, sub-scale lessors will likely continue, while competition among larger players will incentivise them to increase scale and diversify their product offering through smaller bolt-on acquisitions and partnerships.
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Please contact Christian Kuendig for more details on this report.
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