Grenke fOllow up: Recap & Fundamentals (and why Grenke is actually a stealth insurance broker)
Disclaimer: This is not investment advice. Please do your own research and never believe anything from anonymous bloggers !!!!
A first a quick quick recap on what happened since the last post.
Friday’s written statement from Grenke pre press/analyst was actually pretty lame. I think they made clear that the money laundering and Ponzi issue were indeed minor issues but they didn’t shed any more light on the whole CTP issue.
Unfortunately I missed the press/analyst call. From what I have heard there was nothing new.
A quite surprising statement from Grenke on Monday was more substantial. All past M&A transaction with Franchises will be checked by an independent auditor, Grenke AG will have the option to buy the existing non-consolidated franchises and Wolfgan Grenke will (temporarily) step down from the Supervisory Board. It is also mentioned, that in the future, Grenke AG will fund new franchises.
The only issue that is still open is who were the old owners of Sacoma/CTP. Viceroy released a short notice to put the finger into this wound, but somehow mixing up various entities that have a “CTP” in their name.
Overall I do think that Grenke has some fundamental issues (more on that later) but I do not see any more evidence that within Grenke AG there is a high risk of substantial fraudulent activity.
Why I bought the bonds and not the shares
As mentioned in the comments in the previous post, I have bought a “full” (i.e. 6% portfolio weight) position in Grenke unsecured bonds at an average price in the low 60s. The reason why I bought the bonds is relatively easy: Relatively to the stock, bonds were a lot cheaper in my opinion and as a bond investor I have to only answer the question: Will Grenke go bust or survive.
Relative valuation: Yes, the stock lost almost 2/3 from the beginning of the year but still trades above book value and at around 12x 2019 earnings. This is still not cheap, as 2020 and maybe 2021 will be potentially ugly years, but more on that later.
However for a senior bond to lose a single cent on the Euro, the equity and the hybrids would need to be totally wiped out. When senior bonds trade at levels of like 60% or so, normally the company should be in real actual distress, i.e. having problems in rolling debt etc. At Grenke this is currently not the case. As the allegations are targeting more Wolfgang Grenke’s personal dealings, my assumption still is that within Grenke AG, things are mostly Ok.
Of course even a bond investor should look at fundamentals which will come later in the post. In my practical experience, bond managers rarely even bother to read a bond prospectus and even less look at fundamentals of the company. Bonds are bought based on ratings and spreads. So I guess a lot of bond investors decided to sell first and ask questions later as they didn’t want to be caught up in the “next Wirecard”.
As always, there is of course a certain risk that this really turns bad, but at the low 60 for me the risk/return was attractive, especially with the current low yield environment. However I do not expect a smooth ride all the way up to 100%.
A quick look at fundamentals: Impairments and non-performing assets
Grenke is at the end of the day a subprime small ticket SMB (Small/Medium Business) lender. Especially in the last 18 months or so, Grenke seems to have grown especially strong in “Southern Europe” with Italy being the biggest market. In the 2019 report they mention that the overall share of Southern Europe has increased to 30.7%.
Grenke unfortunately only drills down the sectors into Industrial (25%), Service (75%) and agricultural (<1%). Now here comes the fundamental issue for me:
The Covid-19 crisis has affected different sectors very differently. Some sectors have even benefited whereas other sectors are almost wiped out, especially the hospitality sector. In the SMB lending business, this time it is not about single address risk but exposure against the most effected sectors. However as an outsider, one doesn’t have a chance to see for instance how exposed Grenke is towards the hospitality sector (hotels, restaurants etc.) or other equally hit sectors such as small inner city retail, gyms etc.
What one can do as an outsider is to look how conservatively they create “reserves” by booking impairments. These are numbers that I have extracted from the annual reports and from the last half year report:
| 2017 | 2018 | 2019 | 6m 2020 | |
| Total lease assets | 3966 | 4696 | 5646 | 5675 |
| Level 2 non-perf. | 106.7 | 256 | 381 | 489 |
| Level 3 non-perf. | 264.3 | 382 | 461 | 620 |
| Total level 2&3 | 371 | 638 | 842 | 1109 |
| Impairment “reserve” | 230.8 | 279 | 363 | 437 |
| reserve in % of non-performing | 62% | 44% | 43% | 39% |
| reserve % of level 3 | 87% | 73% | 79% | 70% |
| Assets in arrears in % of total | 9.35% | 13.59% | 14.91% | 19.54% |
| Impairment in % of total | 5.82% | 5.94% | 6.43% | 7.70% |
What we can see is that problematic assets increased significantly from 2017 to 6M 2020 in total from 9,35% to 19.54% of total lease assets. However the impairment reserve rose slower. The coverage ratio both for total and for the really critical assets declined. Unfortunately I didn’t find comparable early numbers but it looks like Grenke has lowered the level of reserves against credit losses, despite the fact that the severity might be a lot higher now. If Grenke would have reserved on the 2018 and 2019 levels, they would have shown a loss or maximum break even.
So impairments are an issue and I expect that Viceroy will come out with a “hit piece” within a few days/weeks as Perring mentioned this topic in the podcast I had linked to earlier.
I do not think that this is an existential threat, however it could potentially drive a necessary capital increase at pretty dilutive terms if the worst case happens and defaults strongly increase in the next 6-18 months.
Fundamentals (2):
There are is one line item in Grenke’s P&L that is not self explaining: “Profit from the Service business”. As we can see in the following table, this line item drives the profitability of Grenke:
| 2017 | 2018 | 2019 | 6M 2020 | |
| EBIT | 135.6 | 158.2 | 174.3 | 51.5 |
| Profit from service business | 70.6 | 85.6 | 101.7 | 56.5 |
| in % of EBIT | 52.06% | 54.11% | 58.35% | 109.71% |
What is it ?
Looking into note 4.4. in the annual report reveals, among less important stuff, an extraordinary profitable “side” business: 109 mn EUR revenue in “service and protection” business require only 8 mn of corresponding costs, resulting in an EBIT margin of 93%.
The question is: What kind of “service” does create such margins ? Grenke is not very transparent (as always) but this is my interpretation: Grenke only finances the lease if the asset is insured (see Grenke FAQ). As a special service, it brokers the insurance and what they show is actually commission income. I have no information on this, but my assumption is that this is very low claim insurance and that the majority of the premium is kept by Grenke as commission. It would be interesting to know what percentage of the premium is attributed to commission and what percentage ultimately results in claim payments. My feeling is that claim percentage is ultra low.
As we can see, The share of this line item grows consistently from 52% of EBIT in 2017 to more than 100% in the first 6M of 2020. One could of course divide this number by the operating profit or any other line but my argument is as follows: As the report it, the only costs that would disappear if they abandon this business would be the 8 mn allocated.
Above I had said that Grenke is actually a subprime lender but I have to correct myself: it rather looks like that Grenke is a stealth insurance broker that uses the leases only as a sales tools for insurance. This is not a crime and companies like Easyjet work the very same way (they earn more on a sold flight cancellation insurance than on the ticket), but I am not a 100% sure that the clients realize just HOW MUCH Grenke makes on the mandatory insurance.
In my experience, these kind of “add-ons”, especially if they are mandatory, are often not sustainable over long periods of time. There is the famous example of the PPI mortgage insurance in the UK which at the time being has cost UK banks 50 bn GBP in fines so far.
Yes, Grenke’s clients are not private customers but (very) small businesses which enjoy much less protection. But I think following Covid-19, there is some risk that maybe courts and law makers become a little bit more protective on small business owners. This has happened for instance in business interruption insurance where claims had to be paid by insurers that normally would not have been covered due to public pressure.
I also wonder who actually has the legal role of an insurance broker here. In many jurisdictions an insurance broker has some responsibility of making sure that the client gets the best coverage available but I am not sure if this applies here as well, i.e. if the clients have actually the opportunity to look for cheaper insurance (note to myself: Business opportunity ??). I would be highly interested if someone actually knows how this insurance sales process works in practice (disclosures, flow etc.).
I also expect that Perring might come up with a piece on this subject at due time.
Summary:
So far I still feel relatively comfortable as a senior bond holder, but I do think that Grenke has at least two serious fundamental issues:
- It is unclear how much they will be impacted by the coming wave of SMB defaults and if their more aggressive reserving is enough
- A significant part of the profit seem to come from “sneaking” in low value insurance policies, which at some point in time could turn out as unsustainable or even worse
For me, at this stage it is just too hard to get a grip on the valuation of the equity. I do not know enough about the company and have no strong opinions how Covid-19 will play out in 2021.
But even as a bond holder, this is a high maintenance position and I expect that this could be a wild ride.
I will need monitor the situation closely, especially how the non-performing asset situation develops. If I have learned one thing form Silver Chef, then it’s that asset quality and conservative impairments are really key for a strongly growing subprime leasing business.
value and opportunity 
Could you please explain how you arrive on your numbers in the table regarding covering ratio? (Due to consolidation of franchises historic numbers have changed in the meantime) Maybe I may miss something but imho your conclusions are really misleading.
I think what you call Impairment “reserve” is “Wertberichtigungen” – that’s the value by which their lease “Forderungen” have been already considered in their books.
How do you arrive at the numbers for “Total level 2&3”? I simply don’t find this number in the Grenke reports, they are only mentioned with respect to “Wertberichtigungen”. Is this really the right order to think of? I can hardly believe that ~20% of their lease portfolio should be non-performing or stressed.
They state: “Schadenquote” is in the order of 2-3%.
I appreciate reading your blog, but here I am really confused.
dear anonym, this numbers are all from the Grenke reports. And yes in June 2020 a lot of lease assets were stressed.
You might find them misleading, I found these numbers helpful. This is a standard analysis when looking at banks and similar financial companies.
As I have no interest in grenke, I haven’t updated them. They should in principle look better now.
No problem that you did not update them.
I think in the meantime I do understand how you arrive at these numbers.
Just to clarify some terms in IFRS 9: Level 2 assets are whether non-performing nor in arrears. They have faced some kind of “increase in credit risk”. This could also be a simple rating downgrade by an predetermined amount. With regard to coverage these numbers don’t look peculiar at all. Just to set them into context, the average Coverage 1 (only impairments, no collateral) in the European banking sector is 25% as at June 30 2021 (see the risk dashboard of the European Banking Authority).
For the record: The numbers are from the Grenke 6M report 2020 page 27, you might want to look at this before continuing the discussion. As you can see they had impaired ~10% of their level II assets at that point in time.
The interesting point is that they even impaired Level I assets which indeed makes their whole classification hard to understand.
The actual point I tried to make back then is that the coverage ratio deteriorated significantly and I don’t think this was misleading. If the level as such is good or not is hard to judge.
However my current interest in Grenke is very limited.
To make clear: Your numbers seem fine and your conclusions not misleading.
I am not too familiar with IFRS 9, but I have seen level 1 impairments also with other financial companies – so I would assume this is not that peculiar.
I have to say I really was astonished at the quite high ratio of stressed loans level 2 and level 3.
It seems this ratio varies a lot with countries, it is around 7.5 % in Germany, 18 % in France and 31.2 % in Italy.
It is really strange that their risk appetite or more probably their proper risk assessment seem to have been so different between these countries. For me it is hard to understand that economy between eg France and Germany, in particular with respect to SME financing, should be that different. Maybe competitive pressure in SME lending differs considerable in these countries? As far as I remember they have been doing business also in Italy for quite a long time, I think also before financial crises 2008/09, so they should have experienced a downturn in each market. Maybe some macroeconomic parameters different between these countries could influence these numbers a little bit but such effect should really be rather small I would assume
Not sure where you are based, but one should not be surprised that the behavior of debtors is very different across European countries. Italy (and to a certain extent France) are culturally very different from “Nordic” states like Scandinavia or Germany.
With the introduction of IFRS 9 a so called Expected Credit Loss Model was established (as demanded by the G20 after the GFC). This means that also the (performing) assets in Level 1 and 2 have to be impaired by default. This is usually done standardized by statistical metrics (EL = PD x LGD x EAD). The only difference between Level 1 and 2 is, that for Level 1 assets you can use 12 month PD while for Level 2 assets you have to use lifetime PDs (which can make a huge difference). But once again, those assets are not non-performing (e.g. more than 90 days past due or “unlikely to pay”).
Thanks for the clarification.
To add a last point.
IFRS 9 is mandatory since 2018 and what I read until now (I am not that familiar with it) assessment of financial assets seems to really have changed a lot. (“Loans and receivables, including short-term trade receivables. On the other hand, IFRS 9 establishes a new approach for loans and receivables, including trade receivables—an “expected loss” model that focuses on the risk that a loan will default rather than whether a loss has been incurred.”) In your table there is certainly a rather big jump in the numbers between 2017 and 2018; the numbers between 2018 and 2019 are not that considerable different; lets ignore 2020 at the moment due to corona influences.
I would assume the big jump between 2017 and 2018 could also be due to IFRS 9 (?)
I did not really fully understand exact definition of level 2 and 3, my humble understanding was there is also some degree of subjectivity into it – it centers about “expectation”
eg I read:
Problematisch ist der erhebliche Ermessensspielraum, mit dem insbesondere das neue ECL- Modell für die bilanzierenden Kreditinstitute verbunden ist. So legen die Kreditinstitute beispielsweise selbst fest, wann ein signifikanter Anstieg des Kreditrisikos vorliegt. Das IASB hatte hier bewusst auf eine konkrete Vorgabe verzichtet, da Kreditrisiken nach unterschiedlichen Methoden ermittelt werden und eine einheitliche Vorgabe den Unterschieden zwischen den verschiedenen Unternehmen, Branchen und geografischen Regionen nicht gerecht werden kann. Bei der Ermittlung von Kreditrisiken gibt es ebenfalls deutliche Ermessensspielräume, etwa im Rahmen der Modellierung von Risikoparametern und der Auswahl der zugrunde liegenden Inputfaktoren.
The CFO has now left the company!
Mr. Kindermann resigned from the Board of Directors. According to the company, preliminary assessments made in the course of the ongoing audits have been critical of previous internal processes in the compliance organisation and internal auditing department. Hence, Mr. Kindermann has pointed out to the Supervisory Board that it will be necessary to revise the preliminary assessments once the audits have been completed.
COO, not CFO. The findings are in reference to compliance processes, not financial statements. Also, the „Hence“ in the comment above is not the correct translation of the announcement.
Kindermann has resigned although he doesn’t share the preliminary findings and has stated that in his opinion, those preliminary findings will need to be revised.
Nevertheless, a disturbing announcement for shareholders, I guess.
Yes, the wording is somehow “unfortunate”. Maybe it is not such a big deal, but no one knows.
In the past few days, I reduced my Grenke position by ~50% at 93%
Good follow up including the “stealth insurance broker” issue…
https://finanz-szene.de/banking/das-grosse-borgwerth-interview-zur-lage-bei-grenke/
…in combination with yesterday’s “CFO” interview
https://www.finance-magazin.de/finanzabteilung/bilanzierung/grenke-cfo-wehrt-sich-gegen-bilanzkritiker-2067301/
Boum ! GRENKE went up !
Wolfgang Grenke gives an interview with Handelsblatt, in which he says that he has nothing to hide. He insists that Grenke’s business model is value-creating, but does accept that the “complex business model” needs to be explained better. He also says that Joerg Wilhelm may have owned CTP GmbH:
https://www.handelsblatt.com/finanzen/banken-versicherungen/unternehmensgruender-im-interview-wolfgang-grenke-wehrt-sich-nach-shortseller-attacke-ich-habe-nichts-zu-verbergen/26225784.html
A nursery business I am invested in has large printing requirements. Each nursery leases MFDs which cost in excess of Eur 1,000-1,500 per device (retail price online). We “purchased” the equipment through a speciality distributor and it automatically came with a Grenke Lease. The lease agreement quite clearly states that any claims / issues need to be raised against the supplier. I have no idea whether this is standard practise but yes…without realising it, by signing the lease, if the supplier had not delivered anything we would have been on the hook. Would be interesting to look at whether only Grenke does this or whether this is widespread.
I checked the implied interest rate in the lease which is in excess of 30%. No where near as bad as what the Viceroy report said others got stiffed by. But certainly we wont be using the lease on renewal. Obviously, Grenke isn’t reporting those sort of interest rates in the income statement so how does it reconcile? I imagine it is what you mention i.e. the rental payments include a hefty insurance premium which boost the implied interest rate considerably. Our lease agreement just mentions insurance in the footnotes. It says we are obligated to insure the equipment and in the absence of our own insurance, Grenke will add their own insurance to the rental payment. We were never asked whether we had our own insurance and it seems we were upsold their insurance without realising it.
Alternatively, Grenke is actually paying the resellers above market rate for the equipment. This incentivises them to push the leases onto their customers. I’d be surprised if distributors up and down the country would want to run that reputational risk. But the SMB market is opaque. Many SMBs would have checked the maths / agreements. Especially as reputable resellers were pushing the leases. But to be honest, most SMBs would be checking this in future either so I am not sure what changes with “overpriced but not fraudulent” leases.
This means nothing really. Just thought I’d share a little anecdote.
Hi, thanks for the insights. The insurance part is really interesting and confirms what I had been suspecting.
In Anbetracht der Tatsache, dass ein Gegenstand dem Leasinggeber ja über die gesamte Leasinglaufzeit gehört, ist es doch legitim zu verlangen, dass der Gegenstand auch entsprechend versichert wird. Alles andere wäre doch fahrlässig. Die Alternative kann für jedes KMU sein, einfach nicht zu leasen und den Gegenstand direkt zu finanzieren – oder eine solche Investition aufzuschieben, wenn man sie sich nicht leisten kann. Von Zwang kann aus meiner Sicht hier überhaupt keine Rede sein.
Wie angemerkt würde mich interessieren wie die Antragsstrecke von Grenke tatsächlich aussieht.
Zum zweiten Teil der Aussage: Grenke Kunden sind m.E: meistens Kunden die eben nicht die Mittel haben das jeweilige Gut upfront zu finanzieren, sondern auf diese Art der Finanzierung angewiesen sind.
Now that is some “serious” related-party investigation (Alibaba / ANT…)
http://www.deepthroatipo.com/ant-group-co-ltd-yet-another-chinese-communist-financial-deathmobile-forex-grab/
I love this blogger!
Absolutely. Compared to the average Chinese company, Grenke is a real “Waisenknabe”…..
In which customer segment is Grenke working ? I´m in IT management for many years and I´ve never been in touch with them! SME is just too broad. In the Automotive Industy I would consider everything < 1 Mrd. revenue and < 5000 FTE as SME
I would say VSMB (Very small businesses).
Avg. Contract value is 10k, they only have a few clients with 1 mn contract volume
Maybe not the most reliable source, but the German Tabloid Bild has a story of an expected “Default Tsunami” for small business:
https://www.bild.de/bild-plus/geld/wirtschaft/wirtschaft/insolvenzverwalter-warnt-pleite-tsunami-ueberrollt-kleinunternehmen-73050620
@ 007
You can find further information, including a very detailed break down by sector within the Grenke 2019 Offenlegungsbericht.
Grenke is outlining a loss rate of 5.9% of the underlying purchase price within this report. Not sure how to interpret the chart in the annual report showing a rate of roughly 2%.
Thx. That is interesting. I didn’t really know that they had this report.
On the 5.9% vs 2%, the 5.9% is the portfolio loss expectation for the total contract duration (so in general 48 months), while the loss rate is more an one year view as calculated as the ratio of expenses for the settlement of claims and irks proivsion and lease volume
My hat goes off to people like Norman Rentrop for their conviction in Grenke (or maybe it is in support of some of his fund managers who have positions?). I don’t see how a Buffett disciple gets there. Let’s take a step back: after last week’s drop and the coronavirus before that, this business is still trading above book and on 12x earnings. That is not cheap for a financial. You’re not buying a cigar butt, your thesis has to be that you still have faith in management and more significantly, the business’ future growth. This share has for the last several years been propelled almost exclusively by the promise of future growth, a virtue that Wolfgang Grenke has played up. I saw an interview a couple of years ago where, when asked about what kind of growth could be expected in the next 10 years, he essentially said the sky was the limit and dangled the juicy prospect of Grenke’s entry in the US market.
But we have a Board that is unwilling to provide basic plain vanilla disclosure about what is meant to be its engine of this future growth, the franchise system, including the related party element. We have opaque accounts, and as Buffett/Munger has been quoted a saying, if you can’t understand a company’s numbers it is probably because they don’t want you. We have a business model that purports to be a low cost operator in an underbanked segment, but customer reviews appear to suggest quasi-usury and misselling (and given management’s opaque disclosure about business’ fundamentals, I can’t decide if these are exceptions or the rule). And we have a supervisory board that does not have the wherewithal to hold management to account – another tidbit re my earlier comment, Florian Schultz is now chair of the audit committee since May 2019. He has been on the board for 10 years, has no accounting background, and manages the family office of another Baden Baden grandee who, from a google search, appears to be involved in various philanthropic and community undertakings alongside W Grenke. And remember, the ex-PwC guy, Ronnberg, the only qualified person they have, is not even on the audit committee. But the chair (10 yrs tenure) and W Grenke are. Straight out of ‘Financial Shenanigans’ (I like the anecdote about OJ Simpson being on the audit committee of Infinity Broadcasting Corporation).
I really don’t know if this share is going to 0. I doubt it. But given the above, I can’t see how you can be a buyer either.
#jerry,
I wouldn’t phrase it so negatively.
On the plus side one has to admit that they were able to grow for many years and the SME space is very dynamic.If they manage to have enough capital through the crisis, there will be good business opportunities post crisis.
I guess these investors who buy now are positive about the future. And it is definitely smarter to buy now at 30 EUR than a few months ago at 70-80 EUR…..
That’s the great thing about the stock market: Without completely differing opinion it would be quite boring.
mmi
Fair point.
I don’t see though how anyone gets confidence in management’s integrity, which is pretty key for any business but a financial business especially.
For eg, coming back to the CM2 point from below. It is what they cite as their focal KPI and is plastered on their reports and presentations. But it is a meaningless number that cannot be easily compared to any reference point: it is the net present value of new business’ profits, before overhead (SG&A), divided by the carrying value of that new business on the balance sheet. You make the comparison with life insurance, but in EEV reporting, new business contribution includes an allocation of overhead. It is basically what one can expect to flow to the bottom line. Furthermore, the ratio itself is bizarre because it is not an annualised return on capital or yield because the numerator is not an annualised equivalent. So when they cite a ‘contribution margin 2’ of 17% for 2019, it sounds impressive but cannot readily be translated into any indicator of earnings power. All that the numerator in contribution margin 2 (€485m in 2019) represents is that year’s increase in the embedded value of the lease book, which is a nice number to know on the downside, but not that important if you are valuing the business off earnings power and growth, which any equity investor in Grenke implicitly has been because it has been trading at 30x earnings.
I mean, what we really want to know here if we are pricing this thing off growth is what is the true return on capital of that growth? I’m not seeing that anywhere.
One other point on CM2 that speaks to management integrity is its use in company presentations. If you look on slide 17 of the 11 February 2020 annual results presentation, there are two graphs, the first of which shows the build-up of 2019’s CM2 on new business (€485m) and the second of which shows the build-up of that year’s operating income (€397m). These two numbers are juxtaposed and indeed on page 26 of Grenke’s 2019 annual report it says ‘Management focuses in particular on CM2, which corresponds in its calculation to the Consolidated Group’s operating profit’. But it is very misleading to present these two numbers side-by-side in the graph because the operating profit number is an annual number but the CM2 number is for the whole contract. When you look at that slide, unless that is explained to you (and it is not), the visual just leads you to the short circuit conclusion that the annual operating profit on the business they have written that year exceeds their current operating profit.
One additional note the google reviews from Grenke Bank in Germany are actually pretty great. so maybe all people who were happy that they could launder money 😉 or actually Grenke has some great service through the fast way to serve customers
hmm, I only found pretty bad reviews for Grenkeleasing in Germany:
https://de.trustpilot.com/review/grenkeleasing.de
Expensiv unnecessary insurance is mentioned there as well……
The good reviews for Grenke Bank could come from the fact that they offer pretty generous interest rates compared to the local competitors:
https://www.tagesgeldvergleich.net/tagesgeldvergleich/grenke-bank-festgeld.html
Maybe you can share a link ?
Not sure, how to share Google-Rezensionen as it always without an URL link. Basically, if you just google “grenke bank AG” there are 84 Google-Rezensionen.
if I look at Grenke’s https://www.grenke.de/versicherung this is just a normal Sachverischerung. Not sure how many SME buy Sachversicherung, but in the end there is def. enough offers in this area to get an insurance policy separately, if cheaper.
Your blog is really a great pleasure to read. So please keep up the great work!
A few comments from my side. First your comments on the impairments reserve raising slower than the problematic assets. One thing, I do not understand in this context is that the loss rate increased quite a bit from 2019 1.5% to 2.5% in H1 2020, which is even higher than in past, where the peak was at 1.9% (financial crisis). So it seemed to me that expenses for the settlement of claims and risk provision was increased substantially. So I am not sure how this would relate to your impairment increases, which look low.
Second point on the insurance piece. I feel like many SME will already have a content insurance policy (eigene technische Versicherung). Hence, I feel this does not force anybody into a contract and I also do not see that Grenke takes a position of a broker – maybe a MGA. If I buy a TV and buy also an extended warranty with it, I am pretty sure the margin the seller earns is also sky high. In the end it is just also a question, how expenses are allocated. The whole CAC is allocated to the leasing part and not to insurance. Below the comments from Grenke FAQ:
Grenke CH: Für alle Objekte besteht eine Versicherungspflicht. Sollten Sie keine eigene technische Versicherung haben, nimmt GRENKE Ihre Objekte in eine günstige Rahmenversicherung auf. Die Versicherungskosten werden einmal jährlich erhoben und sind vom Kaufpreis des Objektes abhängig.
Grenke Germany: Es besteht grundsätzlich die Pflicht, die Objekte während der Laufzeit der Verträge zu versichern. Sollte eine eigene technische Versicherung nicht bestehen, kann GRENKE gegen Zahlung einer Gebühr die Sachgefahr für die Objekte im Rahmen von GRENKE Protect übernehmen. Bei Schäden an einem Objekt (z.B. durch Überspannung oder Überschwemmung) oder bspw. Diebstahl, wird das Objekt dann auf Kosten von GRENKE repariert oder ein Ersatzobjekt beschafft. Die Gebühr für GRENKE Protect wird einmal jährlich erhoben und ist u.a. vom Kaufpreis der Objekte abhängig. Für Einzelheiten zu den GRENKE-Protect Bedingungen vgl. auch Leasing- oder Mietvertrag.
On your comment on trading above book value and not looking „cheap“ as such, as it trades below embedded value, leasing contract portfolio (incl. equity after taxes) you can generally buy Grenke below run-off costs. Of course, if it would be true that high level of defaults are to come with a depression or if in general the reserving is too low than of course this number is not the right one to look at. In general I am very skeptical of embedded values in life insurance (e.g. Delta Lloyd – David Einhorn), but feel that in leasing it should be more straightforward as terms are much shorter and there are less variables.
thanks for the comment. Yes, the loss ratio increased already but the question is: To what level will it actually increase in the next 6-18 months ? A comparison to the GFC in my opinion is difficult as the current crisis is really unique and hurting SMBs much more than last time.
One other point: Just because you compare Grenke’s insurance with another shitty product (warranty extension) doesn’t make it better.
Finally, it would be interesting to know how many really small businesses have “Technical insurance”. My guess is that almost no one of the really small guys (restaurant, travel agency etc.) has a technical insurance.
On a related point to the opaque accounting are further governance abnormalities (as the two often coexist). Re the supervisory board:
Ljiljana Mitic: Note 9.5 under related parties discloses a consultancy contract with a member of the supervisory board. Looks like amounts have been paid in 3 of the last 4 years, she has been on the board since 2016 I believe and also is an independent consultant professionally in the space (ex-HP for eg). Is it with her? If so, how independent can she be?
Claudia Krcmar : appointed last year following 20 years doing financial control for Grenke! Does not appear to have any C-suite experience apart from that.
Jens Ronnberg: says he was appointed for his audit experience (ex-PWC), but he is not even on the audit committee, let alone chairing it.
Ist die Profitabilität des Service Business wirklich so schlimm bzw. einzigartig bei Grenke?
Die von dir geschätzte Admiral macht auch 50% des UK Ergebnisses mit “Services” bei 100% Marge. Bis es verboten wurde haben sie z.B. von Klageanwälten schön fürs Weiterleiten eine Gebühr abkassiert.
https://citywire.de/news/whiplash-for-admiral-as-government-bans-referral-fees/a522651?section=funds-insider
Guter Nick name !!
Ja, absolut. Admiral 8und auch ander Versicherer) verkauft auch aktiv “ancilliary products” mit hohen Margen und das hat auch Problem gemacht. Es gibt aber einen wichtigen Unterschied: Man muss die nicht kaufen. Ebenso bei Easy Jet und Co: Man wird der Kunde zwar aktiv bearbeitet, es ist aber kein Zwang. Bei den Autos wird auch nicht am Basismodell verdient sondern an der Sonderausstattung.
So wie ich das bei Grenke verstehe gibt es hier aber einen Zwang die Versicherung zu kaufen. Die Frage ist ob ein Kunde an irgendeiner Stelle eine Wahl hat woanders abzuschliessen oder nicht.
Wie gesagt bin ich stark daran interessiert herauszufinden wie genau das abläuft. Vmtl. muss ich mir noch einen Gewerbeschein holen und einen Kopierer leasen 😉
Naja, das Anprangern des Zwangs überzeugt mich nicht. Wenn die Kunden die obligatorische Versicherung (wenn dem überhaupt so ist) nicht mögen, brauchen sie ja nicht leasen und gehen woanders hin. Sie leasen aber doch beim Grenke!
Außerdem:
Außerdem: Wie kommst Du auf sub-prime?
20% Non -performing loan ratio ist jetzt nicht unbedingt prime, oder ?
Jeder hat das Recht auf seine eigene Meinung. In den Fällen die ich kenne war zumindest für Privatkunden der Zwang ein entscheidendes Merkmal für entsprechende Bestrafungen/Entschädigungen etc.
I agree these ancillary revenues are not uncommon but there is a broader point here which is it is next to impossible to get a clear picture of the quality of earnings of this company. The accounting is so opaque. And then you layer on that the sorts of issues that you describe, ie insurance revenue almost equivalent to their reported profit, which could at some point become objectionable to a regulator. Incidentally if you look in Grenke leasing UK accounts on Companies House for the UK business you see that in 2019 they earned £6m in premiums but replaced £100k worth of equipment!
But I come back to the accounting, which is among the most confusing I have ever seen. They vaunt ‘CM2’, for eg, as their preferred management KPI as an indicator I guess of the future profitability of their book but they never provide a simple reconciliation to IFRS. This is a pretty much a mono line business – leasing- and in theory its economics should be incredibly easy to understand. And if the accounting is making it harder, it is hard to understand why Management does not explain it more clearly (eg as CACC does in its shareholder letters).
Good point. The CM2 margin concept reminds me of the “Value of New Business” calculations of life insurers. Pretty useless numbers if you don’t explain in detail how they reconcile.
Als Kunde von Grenke kann man jederzeit mit einer eigenen gültigen Versicherungspolice (Sachversicherung) die von Grenke angebotene Police ablehnen. Es muss nur sichergestellt sein, dass das geleaste Objekt versichert ist.
Was genau für eine Art von Versicherung ist das dann ? Sachversicherung ist nur ein Sammelbegriff und kein konkretes Produkt.
Bei gewerblichen Kunden (Unternehmen) spricht man von Sach- bzw. Inhaltsversicherungen, mit denen Deine Maschinen & Anlagen gegen Sachschäden versichert werden. Vereinfacht ausgedrückt eine Hausratsversicherung (Privatpersonen). Solange diese Grenke nachgewiesen werden – via Versicherungspolice – musst Du bei Grenke keine Extraversicherung abschließen. Jede Leasinggesellschaft verlangt, dass Ihre Leasingobjekte versichert sind; bei welcher Versicherung auch immer. P.S. Großes Lob für den tollen Blog !
Love your work and in-depth pieces! Do you see any risk that, as with some of the Australian hire-lease players like Sliver Chef and Thorn Group, they lose significant business to ‘buy now pay later’ providers such as Afterpay (in Oz) or Klarna out of Sweden?
That’s a good point that you raise. There was a lot of lot of Fintech competition out there pre Covid-19 that offered SME financing as well.
I am not sure though if for instance Klarna is already active in the SME or if they stick to private customers only.
But the whole SME “ecosystem” is changing quickly.