Fitch: Credit Risks Key for Russian Leasing Companies' Performance
OREANDA-NEWS. Russian leasing companies are facing pressure from increasing asset quality problems as a result of economic recession and weaker demand for leasing services and leased property, says Fitch Ratings.
The sector remains dominated by state-owned companies (around 75% of sector lease assets) focusing on aircraft and rail leasing, while private autoleasing monoliners and other companies account for 5% and 20% of the market, respectively. The sector did not grow in 2015, and car leasing contracted by 13% (with state subsidies of advance payments helping to avoid a larger reduction). We expect further moderate contraction of the sector in 2016 due to weak economic activity.
In 2015, the reported volume of problem assets (receivables overdue by 30+ days and foreclosed property) in state-owned and most private companies was stable, ranging from 5% to 15% of total lease assets. Problem assets increased to 10% from 4% in the autoleasing segment, but ultimate credit losses were below 2% due to strong asset recoveries.
Asset quality problems in state owned companies are somewhat understated as most of them transferred significant problem exposures into operating leases. Further asset quality problems are probable in 2016 due to the weak environment and falling demand on the secondary market, which could hamper collateral sales.
Some state-owned companies became loss making in 2015 due to further contraction of their already low net interest margins (to an average of around 3%), high credit costs, and low operating efficiency. Private players continued to perform reasonably well (ROAE of 15%-20% on average) despite a sharp increase in funding costs immediately after the Central Bank of Russia (CBR) key rate rise in December 2014, as they generally managed to increase lease rates accordingly. Fitch expects the sector to report improved net interest margins in 2016 due to the moderation of funding costs, although overall profitability will remain pressured by credit risks.
Capitalisation is generally weak at most state companies (equity/assets ratios of 2%-5%) except for the State Transport Leasing Company (25%), but they are supported by parent banks in case of need. Capital ratios are higher (around 30%) at autoleasing monoliners who further reduced leverage through contraction of lease books.
State-owned companies are mainly funded by parent banks. Private players remain reliant on a few bank relationships, although autoleasing monoliners have increased the issuance of bonds, which are attractive for investors due to eligibility for CBR repo or meeting investment requirements (eg for pension funds). Refinancing risk is low for state-owned companies (due to parent support) and for autoleasing monoliners (due to matched assets and liabilities and more liquid collateral), but higher for universal and small companies.
Additional risks stem from the absence of effective regulation and supervision, which is only developing. Currently, the sector is rather non-transparent, with only a few companies preparing IFRS accounts, while local reporting tends to be uninformative. There is no licensing or prudential regulation, while non-prudential regulation (by industry authorities) is weak. Fitch understands that the CBR may become the key regulator for the sector, but the extent of potential new regulations or reforms is not yet clear.
Any changes to the tax regime of leasing companies may also significantly impact the industry, as currently many companies operate primarily to take advantage of tax benefits (including the immediate return of VAT on purchased assets with gradual subsequent repayment from incoming lease payments, and accelerated depreciation for the purposes of property and income taxes).
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