Leasing Synergies
By Rob Luke
Improving cross-selling between leasing and commercial banking units requires a judicious mix of incentives and managerial integration.
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Cross-selling is often viewed within the context of retail banking, but it's a priority on the commercial side as well. Institutions long have sought to leverage corporate lending relationships to sell fee-generating products, such as cash management services. Now the push is on to do the same with equipment leasing.
Banks currently control almost a third of that industry, as measured by net assets, but they may not be making the most of their presence. Until recently, in fact, most tended to manage their leasing units as semi-autonomous, fee income-producing subsidiaries — not exactly a prescription for maximizing cross-sales.
To capitalize on perceived synergies between lending and leasing, many institutions are integrating these subsidiaries more tightly. "We need to tap into the established customer base, where the potential for cross-selling is high," says William Purcell, president of the mid-market division of Portland-based U.S. Bancorp Equipment Finance.
There are challenges in correctly aligning capabilities with customer segments, however, and in eliciting cooperation between commercial bankers and their leasing counterparts. Careful targeting is required if cross-sell efforts are to be meaningful to clients. And although referrals may be company policy, employees will not proactively refer clients to other units if their own department loses credit for the transaction.
Like so many other campaigns aimed at boosting synergies, it's important to map out capabilities to see which customer groups would benefit. Some equipment lessors focus on big-ticket items such as aircraft and heavy agricultural and manufacturing machinery, for example, while others finance computers and office equipment. Still other lessors serve companies that seek leasing's tax advantages.
Then, to improve coordination, it helps to bring together lease executives and commercial bankers, establish joint goals and monitor progress. Some banks have even combined their commercial bankers and lease specialists in the same offices to facilitate "one-stop shopping" for customers.
Additionally, the institution needs to compensate both sides for an effective working relationship, and that requires a referral system that distributes rewards fairly. Some institutions use a supplemental sales accounting system that assigns credit equally to both sides in the referral process.
Consolidating Market
The leasing business is consolidating rapidly, having lost about a third of its players in the past five years. Last August, for example, number one-ranked GE Capital snatched up 22nd-ranked Heller Financial Inc. in a $5.3 billion deal that gave GE Capital one-fourth of the total equipment leasing market.
The consolidation is driven by a quest for economies of scale and funding advantages conferred by size. For example, the larger lessors generally enjoy higher credit ratings and easier access to funds. The top 10 leasing companies now control 58% of the market, as measured by net assets, according to Monitor 100, an industry newsletter published by Molloy Associates, Wayne, Penn.
This plays to the strengths of banks, whose access to funding from deposits and the wholesale markets cannot be matched by non-bank independents. "A major competitive driver in equipment leasing is access to the capital markets and debt markets at competitive rates," says consultant John C. Deane, founding principal of Alta Group, based in Lake Tahoe, Nevada.
U.S. Bancorp, Wells Fargo & Co. and Citigroup Inc. have been among the major acquirers in recent years. Citigroup's CitiCapital subsidiary is already the second largest player in the entire industry, after GE Capital. As a group, bank-owned lessors currently control nearly a third of the industry's total assets, according to Monitor 100.
"Banks have always been a presence in the market, but lately they've gone after it in a really big way," says Ralph Petta, a vice president at the Arlington, Va.-based Equipment Leasing Association.
Advantages of scale are most evident during economic downturns, such as the one the nation is currently experiencing. The smaller independents, lacking robust credit ratings, are now having difficulty securitizing their assets on Wall Street. This threatens their funding and often drives them into the arms of acquirers — or out of the business altogether.
Not all potential leasing acquisition targets are attractive to banks, however. Many of them inhabit niche markets in small-ticket leasing, where banks have traditionally not played. Banks prefer big-ticket lessors, which sport wider margins and earn more revenue per contract. However, purchase premiums can be high for these diversified big-ticket firms. GE Capital, for example, paid a 50% premium above Heller Financial's trading value.
Key Equipment Finance, the market's fifth-largest bank-owned equipment lessor, hasn't made an acquisition since 1997, when it bought the former Leasetec Corp. While the subsidiary of Cleveland-based KeyCorp has shopped around, "we haven't seen anything of the caliber we want," says Key Equipment chief executive Paul Larkins, based in Superior, Colo.
Minneapolis-based U.S. Bancorp, by contrast, has found opportunity in the current market. Its subsidiary, U.S. Bancorp Leasing, has purchased two smaller independents during the past two years — Lyon Financial and Oliver-Allen Corp. These units specialize in small-ticket and high-tech equipment leasing respectively. "Our strategy is to acquire companies that take us into new markets," Purcell says.
Shadow Accounting
When banks do acquire leasing companies, they face the issue of how best to integrate them. The historical pattern has been to leave the acquired unit as an independent, semi-autonomous subsidiary. But that approach increasingly is seen as limiting. "Now the focus is shifting to integration," says consultant Deane. "The question becomes: How can the leasing division maximize its coverage of a given customer or trade area using the bank's delivery systems?"
Synergies cannot be taken for granted, however. Even as some banks step up leasing, others have abandoned the field, questioning the contribution to profits and commercial relationships. Mellon Financial Corp., for example, sold its leasing operations to GE Capital Corp. earlier last year. "We saw leasing as a transactional kind of business," says Mellon CEO Martin McGuinn.
To move from transactions to relationships, it's important that the leasing subsidiary achieve some congruence with the bank's commercial customer base. An agricultural lender, for example, might benefit from owning a farm equipment leasing company to facilitate one-stop shopping by its customers, thereby strengthening those relationships.
The issue then becomes how to get the leasing specialists and commercial bankers to work together effectively. One option is to place the commercial banking and equipment-leasing units within the same business group. The units' respective leaders could then report to somebody responsible for, say, mid-market banking, with "one person on the hook for growth in both areas," suggests Mark Wassel, Chicago-based senior manager of Cap Gemini Ernst & Young's lending and leasing group. Wassel declines to give specific examples, but said some banks appear to be reorganizing along these lines, albeit "not as effectively as they could be."
In any case, banks are clearly working harder to improve coordination between their lease specialists and commercial bankers. Key Equipment Finance began that process back in 1993 when it first brought the two groups together for annual meetings to set joint business objectives. Both sides are held responsible for the results, which are carefully monitored.
Convergence was further enhanced, Larkins says, by merging the offices of the leasing bankers and commercial bankers. Key Equipment Finance has also combined its several specialist equipment leasing operations under one roof and brand to advance the one-stop shopping concept.
U.S. Bancorp Equipment Finance had a tradition of autonomous operation until its parent company merged with Firstar Corp. in October 2000. Purcell is working to more closely integrate the lease specialists and commercial bankers to facilitate cross-selling. The process is a challenge for possessive representatives, he says, who view business going to another division as a loss for theirs.
Like KeyCorp, U.S. Bancorp is bringing the two groups together to set joint goals, and increasingly locating them in the same offices. The company takes pains to reward both sides equally for referrals, across divisions as well as within them. In part, this is accomplished through a "shadow accounting system," which allocates credit to both sides in a cross-sell referral.
Purcell says leasing sales productivity has "improved dramatically" over the last year since the new system was implemented, but he concedes the bank probably won't attain its goals for several more years. This highlights the need for a clear vision and a sustained integration effort — fundamentals familiar to seekers of synergy in other areas that must be applied in leasing/commercial banking as well.
Mr. Luke is a freelance writer based in Carbondale, Ill.