(Updates with new unit’s structure in sixth paragraph.)
Sept. 29 (Bloomberg) -- Siemens AG’s project-financing arm aims to double business in the next five years and mop up extra clients as banks cut lending to fend off Europe’s debt crisis.
Siemens Financial Services, which provides credit for projects such as power plants and hospitals, has beaten financial targets for five consecutive years, making it one of the German engineering company’s most profitable businesses. Assets could exceed 20 billion euros ($27 billion) by 2016 compared with 12.5 billion euros in 2010, said banking head Roland Chalons-Browne.
“If you are having an economic environment where market participants are holding back, that can provide opportunities for us,” Chalons-Browne said in an interview at the division’s Munich headquarters. To reach 20 billion euros in five years, the unit would need to more than double annual asset growth.
Like General Electric Co., having an in-house financing arm for infrastructure customers is giving Siemens a “competitive edge,” the executive said. The European debt crisis has generated as much as 300 billion euros in credit risk for banks in the region, according to the International Monetary Fund, which cut its outlook for global economic growth on Sept. 20.
Power, Medical Financing
SFS provides equity and debt financing for projects including power plants and wind parks and for medical equipment such as magnetic resonance imaging machines for hospitals. It owns stakes in coal and gas power plants, offshore wind parks and an airport. Its largest project is the $1.71 billion, 1,220- megawatt Paiton II coal-fired power plant on Indonesia’s Java island.
Siemens will separate the more standardized leasing and equipment financing within the unit from the more demanding project and structured-finance businesses, which will be organized alongside Siemens’s four sectors, the company said in a statement today.
In addition to its focus on clients in energy, industry and health care, Siemens is creating a fourth sector called infrastructure and cities in an effort to sell products such as mass-transit technology and water treatment facilities to municipalities. The new organization takes effect on Oct. 1.
The activities help Siemens expand business in countries such as India and China, where rural hospitals need financing for smaller-ticket medical equipment, which hospitals in the Western world buy with cash. Even in its German home market, Siemens today sells one in three computed tomography scanners with the help of SFS.
SFS’s equity has been rising along with total assets, to 1.46 billion euros in 2010 from just over 1 billion euros three years earlier. The unit includes a bank, asset-based lending, private equity and project finance activities, equipment financing and leasing activities, and industrial insurance. Employee numbers have also swelled, to about 2,500 from 1,800 five years ago.
Provision of financing helps Siemens secure orders as governments reduce spending. Pretax profit for the company as a whole fell by 47 percent to 1.08 billion euros in the most recent quarter, with financial services contributing 89 million euros. SFS aims for a return on equity after taxes of between 15 percent and 20 percent. The unit’s return was 24.8 percent for the financial year ended Sept. 30.
French Banks’ Cutbacks
Siemens’s expansion in financial services coincides with worries about the wider banking industry. BNP Paribas SA and Societe Generale SA, France’s two largest banks, are trimming about 300 billion euros off their balance sheets as Europe’s debt crisis deepens.
Siemens withdrew short-term deposits from Societe Generale in the first half of July, a person with knowledge of the matter told Bloomberg News this month. The funds may have been transferred to the European Central Bank, the person said. After receiving a banking license in December, Siemens is eligible to deposit funds directly with the ECB.
Having an in-house bank also helped Siemens win a train order in the U.K. this year, as SFS structured the financing of the contract. Past profitability was helped by limited competition, Chalons-Browne said. While some traditional banks are scaling back lending to limit their credit exposure, the need for contractors to provide financing has attracted others to offer a full-scope of services.
“It’s possible through what’s happening in the financial markets that there might be some incremental opportunities,” Chalons-Browne said. “During a period of growth, returns might slightly come down from today’s level, as the mix of projects financed changes.”
--Editors: Andrew Noel, Tom Lavell
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