LeasePlan Bank: insights into flexible savings

In 2010, LeasePlan decided to set up its own savings bank. In order to be able to follow an investment strategy that reflects the needs of a savings bank, it is important to have a good idea of customer saving behavior. LeasePlan Bank therefore decided to investigate the interest and liquidity typical terms of its savings.

In 1963, LeasePlan Nederland started equipment leasing and providing services to the business market with the ‘Maatschappij tot Verhuur en Financiering van Bedrijfsmiddelen’. Not much later, the company was focusing entirely on leasing vehicles. The operational form of leasing, where all services are provided – including maintenance and insurance as well as financial leasing – was still new at the time. It turned out to be very successful and LeasePlan began its own activities in Belgium and Germany in 1972. Since 1983, LeasePlan also has a branch in the United States.

LeasePlan now has more than 1.55 million vehicles and employs 7,200 people. The company’s revenue is EUR 6.475 billion and it is active in 32 countries. “We are steadily building on international expansion,” says Rob Keulemans, director of LeasePlan Bank. “We are now working on the start-up of a branch in Malaysia. And our strategy is to continue to grow in Asia”. The profit is growing with the expansion: in 2015, LeasePlan reported a net profit of EUR 442 million, an increase of EUR 70 million (+19%) compared to 2014.

Requesting a banking license

LeasePlan’s history is closely linked with banks and, for part of its existence, the company was part of ABN Amro. “In the history of the company we have basically always been a bank,” says Keulemans. “In the period that LeasePlan was part of ABN Amro, LeasePlan applied for an independent banking license. We got this license in 1993. Until 2009, we funded ourselves on the capital market, with bank lines and securitizations”. That all changed with the crisis, however. “That made it clear that the dependence on wholesale funding was too big. Therefore, a funding-diversification strategy was developed in which the retail bank was a new component. We already had the full banking license, meaning we could attract savings,” says Keulemans.

After thorough research into the savings market and consultation with DNB, in 2009, LeasePlan started incorporating the savings bank: LeasePlan Bank. Keulemans explains: “In a year’s time, we were able to set up all systems and the organization. In February 2010, we opened and our product was distinctive for that time; our interest was linked to the onemonth Euribor plus a fixed surcharge. At the time, there was the obvious suspicion as to how banks set their interest. Our transparent interpretation of the savings product proved successful; we got a lot of savings.” LeasePlan Bank is a lean and mean savings bank, with only two products: flexible savings and term deposits. “We only have 17 full-time employees on the payroll, and thus outsource a lot. That works very efficiently”, says Keulemans. “Like some other Dutch banks, we are also active in Germany. With the advent of SEPA, among other things, we did not have to open a branch there. Our German operations are done cross-border from Almere. We now have about 200,000 customers in the Netherlands and Germany. We manage around EUR 5 billion in savings and, thanks to our transparent model, we have a very loyal customer base.”

Evidencing an increased duration of savings

At first, the flexible savings were lent on an overnight basis to the central treasury organization, which is responsible within LeasePlan for the intercompany funding of the countries. “That approach went well for a while,” says Keulemans. “In the meantime, however, we gained a better understanding of customer behavior. The special feature of flexible savings is that you do not know in advance what the duration will be. It was evident that it was longer than overnight, but without historical data, you cannot prove that.”

“The question was: how can we make a loan portfolio that also mimics the interest typical behavior?”

To get a better idea of customer behavior and thus manage the risks, the bank decided to investigate the interest and liquidity typical terms of the flexible savings. “The liquidity typical part is the most tangible,” says Michelle Ebens, associate strategic finance at LeasePlan. “Because the question is: if a customer has a deposit, how long is it for? The next step was: how can we make a loan portfolio that also mimics the interest typical behavior? If we create eight loans per month, with various maturities, each month an amount is released and you can then reinvest it every month. It is the intention that the proceeds from this so-called replicating portfolio continue to cover the cost of savings”.

Setting up a replicating portfolio

LeasePlan Bank attempted to translate customer behavior into the loan portfolio, which replicates the behavior of the savings. For this replication, there are two commonly used investment methods: the marginal investment and the portfolio investment strategy. The difference between these is that the marginal investment strategy invests the volume with a fixed allocation in fixed maturities. “And we have opted for the marginal strategy”, explains Ebens. Her role in the project was to gain an understanding of the interest and liquidity typical period of savings. And then analyze how this knowledge could be best implemented in practice: what are the advantages/disadvantages of all the possibilities, what are the risks, how does treasury deal with it? They received help from Zanders consultant Wouter Dikkers. “It’s a tricky matter, but since we are not bound by all kinds of restrictions, we could set up the investment methodology exactly as we had devised it,” he says.

Valuable new insights

The interest is no longer linked to the one-month Euribor plus a fixed surcharge. The bank now tells its customers each month what the interest is. “This is now also based on what follows from our model,” said Ebens. “The tricky thing about the project was changing something that had been done in a certain way for five years. We knew that it could be better, but to know how we had to or could change, that takes time.”

Keulemans nods in agreement: “Previously, we lent everything briefly to our central treasury organization. But that means that you increase other risks, such as interestrate risks. The approach of this model has put us on the right track. The insight that it provides is very valuable. We now create loans that mimic customer behavior, with which savings are invested longer and the cost is lower. And that is good for the company.”