First Leasing Bank Bahrain Leading Leasing Bank

His Excellency Sheikh Ahmed bin Ahmed Al Khalifa declared that “2009 will be a difficult year for the financial sector and the global economy but with a well-kept live banking sector project financing in Bahrain remains good.” What is your assessment of the global banking industry sector and here in Bahrain in particular?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: Not only have we noticed the global impact by reading the news about the global economic crisis, the bank is working to source capital beyond the GCC region, and we have directly experienced the tightening of liquidity in many markets, including our own. Normal banking activity is restricted and this de facto restricts trade activity. It is impossible to predict when bank lending activities will return to normal and corporate trade and revenues will return as well. Once the retail banking sector returns to business as usual and funding the economic activity among corporates and consumers, we will be on the path to recovery. First Leasing Bank (“FLB”) closely monitors its lender liabilities and lessee assets for positive signs from either side of our balance sheet – the bank has neither seen a total meltdown nor clear signs of recovery. FLB has a growth mandate and is still growing toward maturity as a financial institution. We need capital and debt capital in particular to grow. Local banks in the GCC are not readily lending and the concept of leverage is viewed in much more conservative terms here in the GCC compared to Asia, the Americas and Europe. That conservatism should help many banks through this crisis. However, by not lending, these same banks perpetuate the recession or depression. Limited to no lending in the region has slowed FLB’s growth, but our bank is a fixed income, cash flowing business, which greatly helps us weather this economic storm. In general, well-managed retail banks are fine in the GCC. Wholesale investment banks will likely not fare as well. The investment banks in the GCC have exposure to an overheated real estate market, which has slowed down dramatically. Many banks have projects in mid-development and unknown foreseeable demand by true end-users and not speculative buyers. Investment banks with funds and capability to finish their development projects, and have solid end-use demand for such projects, should be OK. All others carry much more uncertainty. Leasing has much less risk than the real estate market. First Leasing Bank has tremendous demand for its products, especially in this economy of restricted banking activity. When banks aren’t lending, leasing demand increases. Leasing has historically been a strong recession business, if lessors’ have access to capital to meet demand. Middle market equipment leasing hasn’t really been penetrated in the GCC, and continued growth is inevitable. There is strong demand for leasing products. Some banks offer “ijarah” or shariah compliant leasing, but it is mainly offered as a side product. Banks traditionally don’t take asset valuations and management into consideration offering their “ijarah” product to the market.  As a bank with a traditional leasing company strategy, FLB combines the credit knowledge of banking and finance companies with asset knowledge and management expertise of equipment management and rental companies. We do not compete directly with banks nor do we directly compete with equipment management and rental companies. The founding shareholders of First Leasing Bank believed they could develop a leasing market in the GCC. Since inception the bank has done just that. Demand is high and growth is only restricted by funding at the moment. There is definitely a niche for leasing in the GCC if you look globally – most other markets in the world have a fairly mature and robust leasing sector.  The GCC is not an emerging market, it is a relatively developed market without a developed leasing segment.  The recession has not impacted First Leasing Bank from a demand perspective because leasing is a growing market. Also, leasing penetrations increase during economic downturns, when banks stop lending. What is the size of the potential GCC leasing market?  We’ve taken a look at global demographics and conservative macro–economic penetration numbers from the limited data that produced for leasing. Globally, leasing activity averages just under 2% of GDP. The range by country can go from 8% of GDP to under 1%. If we apply the global average penetration to the GCC, the annual leasing market should be about USD 10-20 billion.

You mentioned that there is a lack of such an institution in this market.  Why is this so?  Is there any cultural aspect of leasing that has prevented other companies from entering the market?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: That is an excellent question. There are financial services companies and banks offering leasing, but not on a pan-regional basis and not with an emphasis on leasing as a core product. FLB is an anomaly, in that we are licensed as an investment bank, but we focus on leasing instead of a broad investment mandate. Leasing is a fixed income business and not as lucrative as higher risk, higher reward investment banking activities. If you analyzed all the new banks coming into the Bahrain market recently – and Bahrain is a financial hub in the GCC – you would see these banks were established to focus on more traditional investment banking activities and take advantage of a high growth market in terms of real estate and infrastructure development. There are relatively few retail banks, which have a more conservative risk / return profile, similar to our bank. So, shareholder return requirements are one of the drivers of why leasing has not been pursued. Also, many asset-backed lending products offered by regional banks are labeled as “ijarah” or leases when in fact they are not. FLB offers traditional leasing products which bring added value, capability and alternative payment structures to the GCC.

So you mentioned the market potential is great but the people are not accustomed to this product.  How are you going to communicate this to people?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: We go to market a couple of different ways – directly through relationship managers (our sales team) and indirectly through general awareness approaches, such as advertising and press releases. Traditionally, leasing companies, especially those targeting corporate customers, do not advertise much.  However, in the GCC region, and Bahrain in particular, we do advertise. FLB has an informative and functional website (www.1stleasingbank.com), which likely has our broadest reach. We don’t monitor our internet traffic yet, but we will do so in the future to measure overall effectiveness and to target specific customers, regions and campaigns. FLB also attends financing and equipment-based conferences to speak and generate general awareness around two areas: 1) the benefits of leasing and 2) differentiating leasing vis-à-vis financing or rental products that our audiences will likely have already used and have as a frame of reference. There are asset-based backed loans in the MEA region which are called leases or ijarah offered by regional banks. There are short term rental products offered by equipment management companies as well. We differentiate from these products by demonstrating how leasing bridges the gap between asset financing and asset renting.  Leasing is a complimenting product, not a competing product. Accordingly, we combine our knowledge of both asset-based financing and equipment management. FLB leverages its equipment knowledge, to differentiate from bank offered asset financing. Typically this allows us to offer longer and more customized payment structures than those offered in asset financing. Also, FLB will offer leasing for 100% of the asset value, lease used equipment and a wider variety of asset types vis a vis bank asset financing. FLB mitigates credit risk with equipment knowledge. Banks only look at credit risk, which limits the scope of their asset-based financing products. Conversely, equipment management and rental companies only focus on asset knowledge – they do not place an emphasis on credit risk assessment, which limits their products to short term periods and typically with no options to own or purchase the asset at a customer’s discretion. FLB leasing products can do this. There are other country-specific leasing companies in the GCC typically offering the same products as FLB.  Most of fellow leasing companies are not yet competitors. The market is too open and there is market demand we all collectively cannot satisfy. These companies are compatriots and colleagues with a common goal. Hence, we try to compliment and coordinate our messaging; there is a common goal in evangelizing and making the market aware of the benefits of leasing and how leasing fits into an existing market of financial products and asset management products.

Are the people in the region still reluctant to induce leasing companies or your product?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: No.  We build upon what the customers already know and are comfortable with. FLB offers finance leases which are similar to asset-backed financing from the banks. FLB also offers operating leases, which are similar to long term rentals from equipment management companies. Asset-back financing is more pervasive in the market and accordingly, FLB writes more finance leases than operating leases. As we get customers comfortable with finance leases the next step is usually to start doing operating leases. Typically, our install base of customers, who have a level of trust with FLB, are open to the next step, operating leases. Operating leases provide low rental payments for asset utilization and an option to continue renting, purchase or return the asset at term end. Once a customer realizes it is not prudent to own all of its equipment and benefits of letting FLB assume some of its asset risk and management worries, they are ready to make the transition from 100% finance leases to a mix of operating and finance leases. This is our typical evolution in having a mixed portfolio of both types of leases. Last year we started writing operating leases and we do that with our install base as they become more knowledgeable of and willing to use FLB’s full leasing capabilities. It is an educational process and we build upon what our customers and the market already know.

Who are your customers?  Where did they come from?  Are they mostly from the GCC or international companies?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: Both, but largely GCC customers.  We have a direct business development team, so we go out and knock on the doors of buyers of assets and people who do have projects and need capital equipment for those projects.  In that regard, we tend to get local companies and also regional companies.  However, when we align with suppliers of assets, then we are aligning with large multinational corporations (MNCs).  MNCs tend to sell to larger companies and entities that might have a large regional presence but have corporate headquarters in Asia, Western Continental Europe, or the U.S. So our customers are local, regional and international (or global). However, since most of our business is direct with asset buyers, our customers are largely local and regional companies in the GCC.

First Leasing Bank made a net profit of three million dollars last year and the bank’s income from financial activity grew to 8.4 million from 3.6 million in 2007.  Your total portfolio grew to 142 million from 54 million at the end of 2007.  How do you assess your financial performance and how have you been affected by the global financial crisis?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: We are still in growth mode.  FLB is a young company and not operating yet at a steady-state level. Even though we almost tripled our portfolio last year, we fell short of our planned growth.  Lack of demand is not the reason for this shortfall. Demand for leasing in the GCC region is actually very robust.  FLB has a very healthy pipeline and we have enough quality transactions to originate, such that we can meet our growth objectives. However, leasing is a capital intensive business – we must have access to debt to fund and grow our business. Our growth has been restricted only by our inability to access debt at planned levels. We are not that steady state until we can reach at lease 3:1 debt to equity leverage. Last year, despite the global financial crisis, we raised close to USD $100 million in debt and a 1:1 debt to equity leverage. However, we still need another another USD 200 million to reach our planned capital and portfolio levels by the end of 2009. FLB has the infrastructure to generate USD 250 million in annual lease originations and sustain a portfolio of USD 500-750 million. We have a very robust infrastructure and it has great potential.  The founders set up a beautiful company for taking advantage and making a substantial footprint in the region – quickly.  The only thing impeding our growth right now is our access to capital and in particular debt capital.  FLB has steady cash flow and is profitable – all good news, but we’re not at a steady operating levels until can raise a significantly higher levels of debt capital to fund our planned growth. The global financial crisis has slowed our debt raising and also, the lack of lending and liquidity in our own GCC region. What are we doing this year to address lower levels of capital to fund our business?  We are typically writing more transactions at smaller funding levels and shorter terms to reach more customers with the amount of funding we have and produce higher cash flow and portfolio churn. We continue to focus on capital rasing, typically small relationship building loans or murabaha from local Bahraini and GCC lenders. FLB is also proactively working to raise capital with sources outside the GCC region.

If you had the complete capability, how would you solve this problem of access to capital, seeing as that is your main problem?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: For FLB, I think it is a combination of things.  We have to slow down our growth expectation.  If we could get a USD $200 million line today, we could deploy that funding in the market very quickly – lease demand is very high. Although in this market, we definitely need to be very selective on our lease transactions. Fast lease portfolio growth may not be prudent. We want to ensure the portfolio performs and we do not incur losses. If we remain profitable in 2009, FLB will have 3 years of profitability and can have the company rated by Moody’s Fitch, Capital Intelligence or other rating agencies. Once the bank is rated, we improve our ability to raise capital.  Our shareholders and board are fairly understanding of our current situation. Our board has pledged its help to raise capital, and we have some very prominent institutions and individuals on our board. However, thus far it has been difficult for us to collectively raise capital and raise debt capital.  Getting back to the question, if we had complete capability, we could raise debt capital and leverage the bank to 3:1 debt to equity. Our debt liabilities would be perfectly term-matched with our lease receivable assets to mitigate liquidity and cash flow risk. FLB would also have a diversified mix of institutions providing debt so our liabilities diversified as well as our lease portfolio. Lending diversity would be geographically, by tenor, amounts and with limited individual institution exposure – all to mitigate risk. We manage our bank to achieve these objectives, once liquidity returns and FLB has a greater capability to raise debt. We are presently developing those kinds of relationships with lending institutions. FLB is also working to develop consistent syndication lines, lease funds and securitization vehicles; to have access to all forms of funding capability and to mitigate risk.

What kind of geographical area are you looking to raise capital?  Are you trying to raise capital locally or globally?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: We are scouring the globe!  Either directly, with our board members and affiliated bank partner – or indirectly, through mandated agents and brokers. I would say our best bet to raise debt capital is locally, because local institutions have the same Know Your Customer (KYC) requirements and better understand regional risk and the regulatory environment and our regulatory body, the Central Bank of Bahrain. We do have interest from Islamic institutions from the UK, Western Europe and in Asia and we’re pursuing those relationships.

When do you think you’ll be able to achieve a 3 to 1 debt to equity capitalization?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: I honestly do not know.  We will continue to work very hard to get there but it’s very difficult to assess when.  If we raise equity and bring in a financial institution that wants to align with us, they can help incubate us toward our 3:1 target leverage.  It could happen in a short period of time if we brought in a strategic shareholder that could quickly help us grow.  If we do it on our own we have to go through a normal gestation period; we have to get the bank rated in 2010 and remain profitable over a long period of time to demonstrate stability. On our own, we may reach 3:1 leverage in maybe two years best case scenario, or in a more expected scenario 3 to 5 years, and in a worst case scenario five years and beyond.  But that is purely speculative and subjective judgment on my part.  If markets change and banks start lending again that could change very quickly as well.

We’re delivering an award for the most green company. What is your strategy and policy towards sustainable development, either internally or among the profits that you’re developing?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: I do not want to sound insensitive but we have not proactively identified green projects as a target area; only because we have a mandate to develop a diversified portfolio.  However, if there is investment in green projects we would like to be right there enabling those projects.  It really depends on where the economy goes and where governments and corporations spend their project budgets and related capital asset investment.  In addition to being open to leasing assets dedicated to green projects, we try to be good corporate citizens.  We typically try to turn the lights out and save energy when we can. We try to keep our travel down and generally try to not spend as much, like wasting paper and things of that nature.  We also have looked at going on a single work schedule so that everyone is here at the office at the same time every day so we don’t have extended hours where we are using additional facility resources.  Those are relatively small things but I think they add up.  On the investment side, we would dearly love to support green type activities.  Companies need equipment and assets, so we are hoping to participate by providing leases.  We go where the market spend goes. We see a lot of opportunity in healthcare and government infrastructure projects. We like to think FLB is a good corporate citizen by an enabling capital expenditures and projects to develop infrastructure growth and development in the GCC region.

Would you be able to tell our audience what your dream is for First Leasing Bank, and also your vision as a foreign person about Bahrain?

First Leasing Bank in Bahrain CEO, Greg Brinkerhoff: First Leasing Bank has a mandate to be a GCC-centric company.  The next big development step for us is to access Saudi Arabia via joint venture so we have the GCC 100% covered. Also, to achieve maturity as a bank and company – reach a proper capitalization structure such that we are providing a viable investment return for our shareholders. Keep growing and offering a good service to the community.  Once we go on-shore in Saudi Arabia we will go on shore to all the other GCC countries which we presently cover offshore from Bahrain. We will set up branch offices so that we have local salespeople and a local presence. Bahrain is our hub and we will continue to highlight our role as pioneer in the leasing market, which has been enabled and supported by the Central Bank of Bahrain. We will move into other MEA markets outside the GCC. We will penetrate by two factors; ease of entry and where the business opportunity lies.  It is not unreasonable for us to be a multibillion dollar entity.  For FLB it is really how much do we want to grow and how much market share do we want or can sustain?  We will get into specialty assets over time and as bigger entities come in and the leasing market gets competitive, we will be a large general coverage institution or we will play in niche markets for specific assets.  FLB can be relatively small or it can be a very large scale player. Either direction is fine, as long as we keep evolving and successfully adapting to changes in the market.