Fitch Downgrades Eko Faktoring to 'BBB(tur)'; Outlook Negative
OREANDA-NEWS. Fitch Ratings has downgraded Turkey-based Eko Faktoring A.S.'s (Eko) National Long-term Rating to 'BBB(tur)' from 'BBB+(tur)'. The Outlook is Negative.
KEY RATING DRIVERS
The downgrade primarily reflects significant deterioration in Eko's asset quality, which has led to weaker performance over the last 18 months. It also reflects increased uncertainty about the sustainability of Eko's business model under the company's revised strategy and potentially greater pressure on liquidity. At the same time, the rating takes into account Eko's still moderate leverage and the solid cash generation of its short-term receivables book.
Eko's impaired receivables (overdue by 90+ days) were high at 19% of total receivables at end-1Q16 (end-2014: 11%), following a general worsening across the granular portfolio. A tough operating environment in the last 18 months has resulted in greater pressure on Eko's high-risk SME and micro-commercial customer base. As a result, the stock of impaired receivables at end-2015 was up 49% yoy with the impairment origination rate rising to 6% from 4% over the same period. Earnings have also suffered as loan impairment charges amounted to a high 146% of pre-impairment profit at end-2015, resulting in a net loss.
Factoring companies in Turkey, Eko operates with a short-term balance sheet and the average maturity of receivables was 120 days at end-1Q16. Consequently, problems in the receivables portfolio manifest themselves considerably more rapidly than at banks where loans are longer-term and repayments more gradual. Eko's attempts to seek recourse on their problem exposures from a large number of debtors have also been negatively affected by the worsening economic environment, leading to limited recovery prospects.
Net of provisions, Fitch calculates that overdue receivables amounted to a moderate 11% of equity at end-1Q16, up from 2% at end-2014. Eko plans to sell a large amount of their non-performing receivables in the near term, which should help reduce the impaired receivables ratio, although this will remain at a high level.
Eko has outlined a restructuring plan, which entails a shift in their target customer base towards larger SME and commercial companies to improve credit quality and tighter underwriting standards. Eko has also embarked on a cost-cutting programme by reducing the number of branches and personnel. However, cost efficiency ratios remain weak, which Fitch believes will take time to converge with peer and sector averages.
The negative trends in Eko's performance are partially mitigated by a comfortable capital position. Eko is under-leveraged relative to peers and has a significant capital buffer to absorb further losses. Eko's debt/equity ratio has remained flat since 2014 at a low 3.3x, notwithstanding a smaller equity base due to losses. The equity-to-assets ratio remained high at 23% at end-1Q16, which is significantly above the low minimum gearing ratio set by the regulator of 3%.
Liquidity is supported by the short-term maturities of Eko's receivables, longer funding maturities than at peers, a fairly high share of unsecured bond funding and a significant amount of unused credit lines from banks. As is the case for peers, liquidity is vulnerable due to reliance on wholesale funding and a short-term balance sheet. The deterioration in Eko's asset quality could also undermine funding access given a reduced stock of performing receivables that could serve as collateral.
The rating could be downgraded further if asset quality continues to deteriorate and the restructuring does not result in a sustainable improvement in the bank's performance. A material increase in leverage or a liquidity squeeze would also be negative.
Significant improvements in asset quality and performance could lead to the Outlook being revised to Stable.