Credit Opinion:
Ekspo Faktoring A.S.
Global Credit Research - 20 Jan 2014Istanbul, Turkey
Ratings
Category Moody's Rating
Outlook Stable
Corporate Family Rating Ba3
Issuer Rating Ba3
NSR Issuer Rating -Dom Curr Baa1.tr
Contacts
Analyst Phone
Arif Bekiroglu/Frankfurt am Main 49.69.707.30.700 Irakli Pipia/London 44.20.7772.5454 Carola Schuler/Frankfurt am Main 49.69.707.30.700
Key Indicators
Ekspo Faktoring A.S. (Unconsolidated Financials)[1]
[2]12-12 [2]12-11 [2]12-10 [2]12-09 [2]12-08 Avg.
Total managed assets (TRY thousand) 237,722.6240,818.4223,994.5152,649.2119,631.4[3]18.7
Total managed assets (USD thousand) 133,200.3127,511.6145,545.5101,837.4 77,506.6[3]14.5
Pretax Preprovision profits / Average Managed Assets (%)
7.1 6.2 7.7 14.9 17.0[4]10.6
Net Income / Average Managed Assets (%) 4.8 4.5 6.2 12.3 12.7 [4]8.1
ROE (%) 16.1 15.0 16.9 27.4 29.0[4]20.9
Short Term Debt / Total Debt (%) 66.9 88.1 86.2 99.0 91.6[4]86.4
Tangible Common Equity (Finance) / Tangible Managed Assets (%)
32.0 27.7 33.2 41.0 49.5[4]36.7
Effective Leverage 2.1 2.6 2.0 1.3 1.0[4]1.8
Problem Loans / Gross Loans (Finance) (%) 2.7 1.7 1.3 2.2 3.5[4]2.3
Problem Loans / (Shareholders' Equity + Loan Loss Reserve)
(Finance) (%)
8.1 5.8 3.9 5.1 6.3[4]5.8
Net Charge-Offs / Gross Loans (%) -- -- -0.2 -0.6 -0.7[4]-0.5
Source: Moody's
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation
Opinion
SUMMARY RATING RATIONALE
We assign local- and foreign-currency issuer ratings of Ba3 and a corporate family rating (CFR) of Ba3 to Ekspo Faktoring A.S. (Ekspo). The Ba3 ratings are supported by the company's robust profitability, strong capitalisation and asset quality metrics, and its sound business model. The ratings are constrained by the company's modest size, its high reliance on domestic short-term bank funding and the nascent stage of Turkey's small factoring
sector as well as the uncertainty regarding the long-term sustainability of profits at current margins. We note that the company's risk management, corporate governance practices and liquidity management are adequate for its size and operations and continue to improve.
The Ba3 issuer ratings do not incorporate any probability of shareholder or systemic support and are the same as Ekspo's Baseline Credit Assessment (BCA).
Rating Drivers
- Franchise and product offerings are small, albeit evolving
- Good revenue generation, but pressure is building from moderate domestic economic activity and upward funding cost
- Strong capitalisation provides solid loss-absorption capacity and supports franchise growth - Good asset quality compares favourably with sector average
- The company's risk profile is constrained by borrowers' moderate credit quality, the evolving nature of the sector and high growth, but risk management remains prudent
- Reliance on short-term bank funding is on an improving trend; partially offset by strong equity and shorter asset maturities
Rating Outlook
The outlook on all of Ekspo's ratings is stable.
What Could Change the Rating - Up
Upward rating pressure could materialise on occurrence of the following events: (1) continuing diversification and strengthening of the funding profile; (2) further strengthening and improvement of the franchise; and (3) further institutionalisation of corporate governance practices.
What Could Change the Rating - Down
Downward rating pressure could materialise if (1) there is evidence of increasing risk appetite; (2) credit risk in Turkey generates losses that put solvency at risk and jeopardises the company's current business model; (3) financial leverage increases significantly without simultaneously raising matched funding; or (4) the franchise weakens.
DETAILED RATING CONSIDERATIONS
FRANCHISE AND PRODUCT OFFERINGS ARE SMALL, ALBEIT EVOLVING
Ekspo is a small, professionally run operator and is ranked 10th out of a total of 70 factoring firms listed under the Turkish Factoring Association. As of Q3 2013 unaudited BRSA financials, Ekspo's total balance sheet size was at TRY242 million (US$119 million) with total factoring receivables at TRY237 million (US$117 million). It has
established a stable market presence, with market share (in total assets) of 1.2% which is largely in line with levels reported in previous years. Most of the larger competitors in the industry tend to be subsidiaries of Turkish commercial banks, whereby the largest market share of a firm is approximately at 10% of total assets.
The company's core customer base is composed of mid-size Turkish companies with existing bank facilities to which it extends shortterm finance secured by postdated cheques and assignments. As a monoline business -with a strict focus on corporate and commercial customer base, as opposed to a more diversified banking loan book - Ekspo's earnings stability is constrained, thereby limiting its overall franchise value. Ekspo continues to diversify its product range by offering guarantee schemes for Turkish importers of products from Korea, USA, UK. Canada and China. This diversification has been achieved through a pioneering collaboration with Korea
Eximbank in 2012, followed by collaboration with Export-Import Bank of the United States (Ex-Im Bank, the US Department of Agriculture, UK Export Finance, EDC and Bank of China. In Q1 2013, the Black Sea Trade and Development Bank entered its first business partnership in the factoring sector by providing a revolving trade finance facility to Ekspo.
stated commitment to ensure execution is in line with its strategy. The company's business model is founded on a number of core competencies, including rapid decision-making, a good understanding of its customer base and good control of operating expenses. These strengths support the sustainability of the company's franchise. The franchise value assessment also takes into account the uncertainty surrounding the factoring industry as well as its continuous evolution. The main drivers of the structure of the Turkish factoring industry are market liquidity, the strategies of bank-affiliated competitors and the evolving macroeconomic environment.
GOOD REVENUE GENERATION, BUT PRESSURE BUILDING FROM REDUCED DOMESTIC ECONOMIC ACTIVITY AND DECREASING LOCAL CURRENCY MARGINS
As of Q3 2013, Ekspo reported year-to-date pre-provisioning income of TRY10 million (US$5million, down 23%) and net income of TRY7 million (US$3.5 million down 30%). Per Q3 2013 financials, we estimate the Ekspo's estimated annualized net interest margin was 7.4% in (2012: 8.2%, 2011: 7.2%) after an extraordinary peak of 13.7% reported in 2009 which was a year of recession and higher risk aversion. Ekspo's recurring earning power (pre-provision income as a percentage of average total assets) was 5.8%% (2012: 7.4%; 2011: 6.2%; 2010: 7.9%; 2009:14.9%).
Ekspo is relatively sensitive to local currency rate trends, as the company funds 30% of its assets using equity. As a result, despite the relatively flat receivables portfolio the contraction in profits and margins in Q3 2013 was the reversal of the recovery observed in 2012 (and now more in line with 2011) was mainly due to lower overnight lending rates of the Central Bank of Turkey (CBT) leading the market to re-price local-currency lending rates. Between Q3 2012 and Q2 2013, the CBT has reduced overnight lending rates by 5.5% and since then only increased it by 1.25%.
Over the next 12-18 months, Ekspo's profitability will depend on the changing dynamics in the factoring industry as well as the development of interest rates and related cost of funding. In the next 12 months, (1) elevated competitive dynamics in the sector, due to more moderate economic growth expected in 2014 compared with high growth of 2010 and 2011 could pressures margins; (2) further expected upward increase in funding cost, could translate to some credit deterioration depending on the degree and pace of an increase in interest rates and the counterbalancing effects of continued economic growth. In general, we view the receivables portfolio of modest credit quality with high potential for earnings volatility. However, as receivables that are partially funded by equity, we acknowledge that the upward interest rate environment should also gradually provide margin expansion opportunities if credit portfolio is effectively managed. Ekspo is a lean operator, continuing to report a low cost-to-income ratio of around 32% at year-end 2012, reflecting the current structure that features one head office and no branches.
STRONG CAPITALISATION PROVIDES SOLID LOSS-ABSORPTION CAPACITY AND SUPPORTS FRANCHISE GROWTH
For the Q3 2013 the company reported strong capitalisation-to-total assets ratio of 33% in line with 2012 (2011: 28%, 2010: 33%) which matched the duration gap of the funding profile. The shareholder equity was reported at TRY80 million (2012: TRY76 million); the 5% increase was due to retained earnings.
The company report financial leverage at two times equity, and equity constitutes mainly "paid-in" capital and other core capital components. Ekspo has set an internal maximum leverage limit of five times equity, which would require a better matched duration gap of the funding profile with no liquidity gaps exceeding the total amount of capital at any point in time in order to be both sustainable for the company and commensurate with the rating level. We regard Ekspo's leverage ratio as a comfortable buffer for unexpected losses, which compares favourably with the domestic factoring sector average of around four times and regulatory limit of 30 times, and provides a sound capital base for franchise growth over the next 12 months.
GOOD ASSET QUALITY COMPARES FAVOURABLY WITH SECTOR AVERAGE
Ekspo's non-performing loans (NPLs) ratio was at 3.8% in Q3 2013 (2012: 2.8%, 2011: 1.7%and 2010: 1.32%), compared with a sector average of 4.5% up from 4.7% that was reported in 2012, respectively. Overall, Ekspo's moderate asset quality indicators are slightly elevated compared to its historical good average. This deterioration was due to the much slower credit against the background of a considerable slowdown in the operating
environment in 2012 compared to 2010 and 2011.
Higher rate of increase in Ekspo's NPL ratio compared to sectors was underpinned by (1) year-to-date NPL increase of 36% vs. twice that of the sector primarily due to the two relatively larger ticket items compared to total
credit pool underlying importance of having a granular credit receivable portfolio, and (2) the company's more cautious growth strategy adapted in Q3 2013 and 2012 in the face of significant economic slowdown in Turkey (GDP growth was down from 8.8% in 2011) resulting in a flat portfolio growth versus 13% reported by the sector during (2012: 15%) for the sector.
Due to expected increase in funding cost which should also dampen the debt servicing capability of the borrowers, we expect some further increase in the non-performing loans. However, the problem loan levels should remain moderate, due to seasoned nature of the portfolio compared to sector's and Ekspo's provisioning capacity due the moderate GDP growth (projected by 3.7% in 2014). Furthermore, Ekpspo has a solid capital cushion against providing comfortable capital buffer.
The stronger asset quality reported in 2010 was attributable to the strong (47%) growth in 2010 (denominator effect), and the strong collections at the time of robust economic activity in Turkey following 2009. We note the risk that such high rates credit growth could disguise future asset quality problems; we find view favourably the short-term nature of the factoring receivables as it enables Ekspo to more readily monitor the performance of its credit portfolio more readily. The NPLs are 100% provisioned, and, according to the company, the factoring receivables portfolio is collateralised by approximately 1.9 times primarily in the form of cheques to which, however, we attribute no risk mitigant.
HIGH RELIANCE ON SHORT-TERM BANK FUNDING IS ON AN IMPROVING TREND; PARTIALLY OFFSET BY STRONG EQUITY AND SHORTER ASSET MATURITIES
Ekspo's liquidity profile is constrained by its very high reliance on short-term bank funding and its low degree of liquid assets. As of Q3 2013, the firm's receivables are financed by the short-term funding due to the approaching maturity of the domestic long-term bond issuance at TRY50 million (US$26.5 million) that had two-year maturity (due July 2014) The issuance at the time contributed to the diversification and extension of the maturity profile of its funding base. The proceeds funded credits to small and medium-sized companies and proceeds from the July issuance were used for financing cotton imports of Turkish industrial companies. The primary risk with the current short-term funding profile is that it can become scarce or expensive in cases of company-specific credit events and/or systemic liquidity crises.
Ekspo manages its liquidity and interest rate risks through (1) a clause in its credit contracts enabling the company to recall or adjust the rates of the extended loans after giving written notice; (2) maintaining numerous bank lines; and (3) a high level of capital. Overall, we maintain a cautious view on Ekspo's short-term funding, notwithstanding a number of mitigating factors such as relatively diversified borrowings (a consortium of 31 banks), unutilised banking lines (utilisation rate currently at 31%), established bank relationships, high capitalisation and the short-term nature of its assets.
RISK PROFILE IS CONSTRAINED BY BORROWERS' MODERATE CREDIT QUALITY, THE EVOLVING NATURE OF THE SECTOR AND HIGH GROWTH, BUT RISK MANAGEMENT REMAINS PRUDENT Ekspo employs good credit risk management policies and qualitative and quantitative risk rating models which ensure a deeper analysis of credit and counterparty risk. We note that accurate assessment of the company's credit risk appetite is constrained by the limited historical probability of default and loss given default dataset, due to (1) the nascent stage of Turkey's factoring sector; and (2) the company's relatively short track recordfast evolving risk profile due to the evolving nature of the sector and small customer base. As a result, the benefits of such risk assessment and management tools can only be realised over time.
Ekspo carries a significant level of receivables portfolio concentration to borrowers of moderate credit quality within the Turkish operating environment. However, these risks are largely mitigated by the short maturity (averaging 60 days) of Ekspo's exposure to these borrowers, effective monitoring and prudent selection and granularity of receivables. As of Q3 2013, the concentration in factoring receivables by industry group was 25% in textiles( up from 16% in YE2012) and 11% in construction which are prone to economic volatility. Due to Ekspo's moderate leverage, the largest industry concentration represents 72% up from 50% reported in 2012 (reversal of the improvement from 63% reported 2011) of the firm's equity.
Ekspo's corporate governance practices are adequate, but the company will need to institutionalise principles and practices, and incorporate a set of principles to govern the firm's protection of creditor interests as it grows further. The appointment of two independent board members in 2011 is a positive development in this regard. The firm's management team is experienced and is headed by Murat Tumay, the son of the founder Gurbuz Tumay. The small size of the management team and the need for personal engagement of the family owners in running the business represents an element of "key-man" risk.
Ekspo adopted IFRS for the first time in 2006. This has enhanced the comparability of their financial reporting by providing standardised accounting practices and ratios. The quality of financial disclosure remains weaker than that of Turkish commercial banks and constrains our overall assessments of Ekspo's financial transparency. The Banking Regulation and Supervision Agency (BRSA) remains the main supervisory body of the sector and already receives quarterly reports from finance companies in standard format. However, the regulatory framework for banks than for finance companies, due to this sector's small share of overall financial intermediation which is only at the early stages of development. 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 confer a level of discipline and stability in risk taking and risk management during the sector's evolution.
According to the Q3 2013 BRSA consolidated report, Ekspo's net balance-sheet short FX position was reported at low 1% of capital.
National Scale Rating
The Baa1.tr National Scale Rating (NSR) is derived directly from the Ba3 local currency issuer rating. The Ba3 issuer rating reflects the company's overall default risk, whereas the NSRs rank Turkish issuers relative to each other and not relative to overall default risks. National scale ratings isolate systemic risks: they do not address loss expectations associated with systemic events that could affect all issuers, even those that receive the highest ratings on the national scale.
Corporate Family Rating
The CFRs incorporate the affected finance companies' standalone credit profiles, as well as any parental or affiliate support. In contrast to issuer ratings, which represent our opinion of credit risk equivalent to the
companies' senior-unsecured debt obligations, the CFRs represent the rating agency's opinion of the companies' consolidated credit risk, equivalent to the weighted average of all debt classes within the companies' capital structure. Ekspo's debt structure consists of senior-unsecured obligations, hence the similar seniority between the credit risk indicated by its issuer rating and by its CFR.
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