Table of Contents:
SUMMARY OPINION 1
OVERVIEW OF THE LEGISLATION 2 OVERVIEW OF THE TURKISH NON-
BANK FINANCING SECTOR 3
APPENDIX 1 5
MOODY’S RELATED RESEARCH 5
FRANKFURT +49.69.70730.700 Arif Bekiroglu +49.69.70730.773 Assistant Vice President – Analyst
Carola Schuler +49.69.70730.766 Managing Director – Banking
Turkish Finance Companies: New legislation on Financial Leasing, Factoring and Financing Institutions Is Credit Positive
On 13 December 2012, Turkey’s Banking Regulation and Supervision Agency (BRSA) passed legislation affecting financial leasing, factoring and financing institutions. In our view, this legislation is credit positive for the Turkish financial sector because it builds on existing legislation1
to provide a stronger legal framework and as it increases the effectiveness of the sector’s surveillance and supervision. This should result in the healthy development of a sector at the early stages of its evolution and should support growth in the Turkish economy as demand for financial services intermediation evolves. Specifically, the legislation is credit positive because it:
» Provides revenue diversification and growth opportunities for leasing companies and small and medium-sized enterprises (SMEs) in Turkey;
» Enhances international cooperation and clarifies the legal framework under which these companies will be coordinated. This should lead to new, longer-term capital flowing into the system;
» Introduces minimum capital limits and transparent shareholding structures, which improves the sector’s institutionalisation;
» Clarifies the legal framework for disputes and delinquencies and introduces fines for non-compliance with regulation.
We note that the current ratings of Turkish finance companies currently incorporate the trends and expectations we present in this report.
The law follows the existing Financial Leasing Act from 1985 and the Decree Law on borrowing money from 1983.
Overview of the legislation
Legislation should diversify revenue and provide growth opportunities to the economy Foremost, the BRSA’s legislation now permits financial leasing companies to finance operating leases, but also sanctions the financing of sub-leases, software leases, sales and lease-backs. Moreover,
provisions have been included to facilitate the financing of air and sea vehicles, though these are costly assets that require specialised management skills and strong balance sheets; as a result, developments on this front are only likely to be gradual. Overall, these changes should improve leasing companies’
revenue diversification and growth, and should provide new financing opportunities for domestic companies, especially SMEs that are a major (and growing) part of the Turkish economy. Since 2009, the economy has grown by 22%, with an estimated 2012 GDP of $786.5 billion. We project further growth of 3.8% in 2013 and 4% in 2014.
Regulation now aligned with international standards
The new legislation has also aligned the definition of financial leasing, factoring and financing transactions with international standards. It also clarifies the legal framework under which these financing companies will operate in a coordinated and consistent fashion, while the scope of factoring transactions is to be re-regulated in line with international practices. We believe that this will increase the sector’s attractiveness to foreign investors that are looking for diversification opportunities in the Turkish financial sector. This should result in new, longer-term capital and product expertise inflows into the system.
Minimum capital levels, transparent shareholding and a centralised billing system improve institutionalisation and operational transparency
Additional highlights include a requirement for financing firms to have minimum paid-in capital of TRY20 million ($11.4 million), which aims to ensure a certain level of institutionalisation. It also requires shareholding structures to be transparent and easily understood for supervisory purposes and outlines the minimum recruitments for shareholders and managers in relation to their professional and credit track records. The legislation also outlines limits on related-party credits and guarantees given to individual shareholders, which are restricted to the firm’s core operational activities and cannot exceed 10% of paid-in capital. Total related-party credits and guarantees cannot exceed 20% of capital, although the BRSA has the right to reduce this limit to 5% and increase it to 25%.
The centralised billing system2
aims to ensure that receivables are based only on the sale of goods and services in factoring transactions financed by companies and to prevent the usage of multiple billing.
In addition, we believe that it will provide further insight to the evolution of the indebtedness of the SME sector, as their funding needs are more readily assessed.
Legal and regulatory framework has been strengthened
The legislation provides additional clarity with regard to the legal framework followed in disputes and procedure to be followed in recovery collection from delinquencies. This includes fines in cases of non- compliance with regulation, which should contribute to the transparency of the system and improve its institutionalisation.
The information on the receivables (including the details of the receipts they are in possession of) from factoring firms’ and banks’ will be collected centrally.
The BRSA remains the main supervisory body of the sector and already receives quarterly reports from finance companies in standard format. Overall, the regulatory framework is not as advanced as it is for banks, due to its small share of overall financial intermediation which is only at the early stages of its development. However, the market-leading finance companies are typically bank-owned captives and are therefore – together with their parents – subject to the Basel II regulatory, capital and supervisory framework. In our view, such bank-owned and bank-managed finance companies bring a level of discipline and stability in risk taking and risk management during the sector’s evolution from infancy.
Overview of the Turkish non-bank financing sector
As of September 2012, the Turkish banking system’s total assets were TRY1.4 billion ($754 million), with total credits of TRY775 million ($437 million).3
The total assets and receivable portfolios outstanding were TRY20 million and TRY17 million for financial leasing companies, TRY16 million and TRY15 million for factoring companies and TRY11 million and TRY10 million for consumer financing firms, respectively (see Figure 1). The sector is still in its infancy with total outstanding receivables equivalent to just 3% of Turkey’s GDP.
Evolution of Total Assets of Financing Companies in Turkey
Currently, the system’s non-bank financing sectors are highly fragmented (31 financial leasing companies, 78 factoring companies and 13 financing firms), whereby the leading companies are typically captive subsidiaries of larger domestic banks. According to BRSA data, as of Q3 2012, the system average leverage was sound at 4.4x for leasing companies, and 4.5x for factoring firms, and high at 12.4x for consumer finance companies.