In Face of Cash Squeeze, Bank IT Depts. Turn to Creative Leasing

Business is picking up for Armonk, N.Y.-based IBM Global Financing's Sale Leaseback service, claims Dan Ransdell, general manager of client financing. The service, which allows banks to sell existing IT equipment to IBM so that IBM can lease it back to them, is designed to free up cash at financial institutions. Given the current belt-tightening in the industry, Ransdell says many banks are looking at Sale Leaseback as a viable operating model for their IT shops.

"Many of our major [bank customers] already lease with us," he relates. "What we have that they don't is the back-end capability to resell used equipment. We can refurbish it and recycle it. So this allows us to be aggressive with our leasing."

IBM is taking this a step further with its Sale Leaseback service. "We wanted to find a way to help banks get assets off their balance sheets," he says. "We will buy your existing equipment and get it off your books."

Ransdell says the transaction is seamless at the operating level. In other words, the banks' equipment, although now owned by IBM, remains in place on the customer's floor. The bank simply tells IBM how long it plans to keep the equipment and IBM draws up a lease for that period.

Ransdell also says many banks are entertaining the idea of Sale Leaseback as they look to upgrade their services. Rather than buying the upgrade on their own, IBM will finance it and take over the ownership. "This basically takes the equipment off the bank's balance sheet and frees up cash. It's like outsourcing your equipment, but you still own the people," he comments.

Rodney Nelsestuen research director, financial strategies and IT investments, with Needham, Mass.-based TowerGroup, sees Sale Leaseback as a growing trend among banks given the economic situation. According to IBM figures, in the financial sector alone, IBM Global Financing's lease and loan volumes for IBM hardware was up 31 percent 1H 2008 with $1 billion in new leases and loans signed, compared to the same period in 2007. During this same time, sale leasebacks to financial institutions showed a three-fold increase, says IBM.

"This will be a trend as financial institutions look for liquidity," Nelsestuen comments. "This is one way to raise some cash." However, he warns, "Whether you lease or buy, you still pay the whole bill in the end."

What Sale Leaseback is really doing is freeing up cash for FIs and creating some much needed liquidity for them, says Nelsestuen. He notes, however, that whether a bank decides to use this model depends in part on who the IT department reports. If IT reports to a cash-conscious CFO, a bank is more likely to invite such as service, versus an IT department that reports to a CIO, who might have his own ideas about spending and saving money with equipment.

IBM's Ransdell agrees, saying he often sees CFOs "getting" the concept more often than CIOs.

Nelsestuen also says it is vital that banks read over the lease terms carefully to see just how flexible they are. "Does it allow for upgrades? Are you able to upgrade just parts of a piece of equipment? Do you have to upgrade to the existing vendors' solutions only or can you go to a different vendor?"

Ransdell says the lease terms are quite flexible. "They can end early, you can opt to buy the equipment or not. We try to facilitate the technology refresh and not hold the bank hostage with a financial instrument."

Banks can use Sale Leaseback with any hardware or software equipment from any company, adds Ransdell.

But according to TowerGroup's Nelsestuen, whether the bank buys or leases, they're breaking even in the end. "It's all a matter of cash flow and liquidity," he says.