OREANDA-NEWS. October 06, 2015.   Fitch Ratings has affirmed the National Long-term ratings of Lider Faktoring A.S. (Lider) at 'A(tur)', Eko Faktoring A.S. (Eko) at 'BBB+(tur)'and Optima Faktoring Hizmeteleri A.S. (Optima) at 'BBB(tur)'. The Outlook on all the ratings is Stable.

KEY RATING DRIVERS
NATIONAL RATINGS
The National ratings of Lider, Eko and Optima reflect limited franchises within the Turkish factoring sector where they collectively control less than 5% of total sector assets. The sector is becoming increasingly competitive as bank-owned factoring subsidiaries look to penetrate the market. The ratings also reflect monoline business models, with recourse factoring making up nearly all of the companies' revenues. This results in earnings sensitivity to volatile economic cycles in Turkey. The ratings also factor in potential instability of the companies' balance sheet ratios given the generally short-term nature of their assets and liabilities, as well as the wholesale-funding reliant debt structures.

The factoring sector remains small in Turkey, making up only 1.2% of total banking sector assets. However, factoring services are growing rapidly, with total receivables having more than doubled since 2010. Impaired receivables to gross receivables (4.8%) are higher than the banking sector average (2.9%), which reflects the generally riskier customer base of factoring companies. The companies that are opting for factoring credit are usually unbanked micro-enterprises and SMEs that require liquidity in order to cover a range of cash, tax and working capital needs.

Performance at the three companies deteriorated in 1H15 in line with the sector, pushing Lider and Eko down to breakeven and Optima to single digit returns on equity. Margins are under pressure, following trends in the broader economy but also from growing competition in the factoring sector. In addition, impairment charges are on the rise as the economic environment has deteriorated in the face of political uncertainty surrounding general elections in Turkey and slowing growth. Fitch forecasts Turkey's GDP growth to moderate to 2.8% in 2015.

Lider's higher rating reflects its somewhat more established franchise. It controls around 3% of sector assets. Management is experienced and has a track record of adjusting to changing economic conditions. Risk appetite is generally more conservative at Lider compared with peers as it targets the middle range of the SME segment in Turkey. This is reflected in its better asset quality and lower margins. Impaired receivables represented a low 3% of total receivables at end-1H15, below the peer and sector average. However, Lider's rating is constrained by increasing leverage, with debt-to-equity reaching 7.2x at end-1H15, reflecting rapid growth in recent years. Its funding profile is relatively diversified, with related-party funding from the Credit Suisse Group AG (A/Stable) accounting for 26% of its non-equity funding at end-1Q15 and local market bonds for a further 23%,

Eko's National Long-term rating reflects its modest, albeit growing, franchise. Funding maturities at Eko are generally longer than the sector average, supported by local bond market issuances with an average maturity of 21 months. This enables Eko to maintain positive gaps between assets and liabilities and supports liquidity management. Eko's rating also reflects a comfortable capital position with debt-to-equity of 3.3x at 1H15, providing some room for continued growth. However, Eko's rating also reflects a riskier customer base, with a bias towards the lower end of micro-enterprises and SMEs, which negatively affects asset quality, but boosts margins. Impaired receivables continued to rise in 1H15 and hit 13.5% of total receivables, significantly above peers. NPL origination reached 7% on an annualised basis.

Optima, the smallest of the rated peers, has a very limited franchise and targets small and high risk/high return SME customers, which supports profitability. Optima's debt-to-equity ratio reached 6.2x by end-1H15 due to rapid growth of receivables and dividend payments in 1H15. Management expects growth to slow in 2H15 and thus the company's gearing to be restored to below 6x. The bulk of Optima's non-equity funding related to bilateral bank lines (79%), or to banks' captive factoring subs (21%) at end-1H15. Plans to tap debt markets by end-2015 should help provide some funding diversification. Unlike its peers, Optima has managed to keep NPL origination stable at a low 2.2% (1H15, annualised) but Fitch expects it to increase in 2H15-2016 reflecting a tougher environment.

RATING SENSITIVITIES
The ratings of all three factoring companies are sensitive to a material weakening in asset quality and leverage ratios. Given their small absolute sizes, we believe the independent factoring companies are more vulnerable to asset quality deterioration than their bank-owned peers, which could lead to liquidity pressures and affect asset and liability management.

Lider's rating could be downgraded if leverage ratios continue to increase and/or its company profile is weakened, which Fitch does not currently anticipate. Lider's upside rating potential is limited given its already high rating in the context of its business profile.

Eko's rating could be downgraded if asset quality continues to deteriorate and leverage materially increases. In contrast, Eko's rating could be upgraded if asset quality improves materially and sustainably.

Optima's rating could face downward pressure if its capital adequacy ratio weakens and leverage continues to rise. Upward rating potential is unlikely given Optima's weaker franchise.