Banks mining cash from their computer gear

IBM buying up equipment, leasing it back to financial institutions

In another sign of a tight economy, even those that have the money are getting creative with their IT resources in order to find a little financial wiggle room.

In another sign of a tight economy, even those that have the money are getting creative with their IT resources in order to find a little financial wiggle room.

Amid the credit crisis some banks are taking their fixed IT assets — mostly hardware – and clearing them off their balance sheets to free up dollars to help improve their positions, according to IBM Global Financing (IGF), the company's financing division.

Here is how it works.

Banks, pushed by the mortgage implosion to clean up their balance sheets and raise equity, are selling their IT computer equipment to IBM, which is then leasing the gear back to them on a monthly basis. Banks are finding the process a quick way to get at cash wrapped up in their computer hardware.

While experts say such a program is not a financial panacea, it can be effective as part of an overall plan

IBM calls it Sale Leaseback, and while it is not a new service, the idea is getting a workout from the financial services industry, according to IBM and analysts.

IGF competes in the leasing business with the likes of HP Financial and CIT Group, which also backs Dell Financing and Microsoft Financing.

IBM says its Sales Leaseback business in 2008 has grown by three times what it was in 2007, an unprecedented level of expansion. The company, however, does not break out those figures, but says revenue was near $500 million for the first half of 2008. Gross profit for IGF in 2007 was nearly $2.2 billion.

Earlier this year, according to IBM officials, the company bought $200,000 worth of gear from a top-five bank and is now leasing it back to the institution. IBM declined to name the bank, but said it is currently negotiating a Sale Leaseback with another top bank for $400,000 worth of hardware.

"Their equipment doesn't change on the [data center] floor, but we come in and pay cash for the equipment, the equipment comes off their balance sheets, and now we own it and we write a lease," says Dan Ransdell, general manager for client financing with IGF. "It generates cash for the bank, and it gets their existing assets on a technology refresh cycle."

IBM says leasing reduces upfront expenses, allows for low monthly payments, provides budgeting flexibility and helps avoid product obsolescence.

But leasing isn't for everyone and takes some thorough cost analysis to discover if it has long-term benefits.

Today, however, experts say finding cash is the driving force behind leaseback.

"If the reporting line for the IT group goes up to the CFO, the CFO in most financial institutions today is looking to raise capital or cash," says Rod Nelsestuen, research director in the TowerGroup's financial strategies and IT investments cross-industry group.

Nelsestuen says he is seeing interest increase in leasing options, but he sees the trend as short term and driven by specific condition, although, he says leasing presents long-term value in some cases.

"By selling their platforms now, they get the cash upfront," says Nelsestuen, but he says that doesn't mean companies don't pay the entire price of the hardware over time.

"There is no free lunch," he says.

"If you are the CIO you might say 'I can come up with a lower cost of ownership by owning the hardware.' I’m not saying everyone will, but by maintaining ownership the CIO can say I can upgrade parts and pieces and, therefore, I can provide a lower cost of ownership over say five or seven years rather that four or three in a lease," says Nelsestuen.

IBM agrees that current economic conditions have fueled creative thinking within banks, but Ransdell says there are other factors that are pushing financial institutions toward lease options.

He says establishing a technology refresh cycle makes sense for those who stay current with technology, and he says IBM can ensure environmentally friendly disposal of hardware, an issue that is being mandated by legislation in some areas.

In fact, IBM factors into lease rates its opportunities in secondary markets for used computer parts or materials, according to Fred Clarke, manage of communications for IBM Global Financing.

The company says less than 1% of the components from hardware it handles via leasing finds its way into landfills.

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