August 13 (SeeNews) - Fitch Ratings said it has affirmed the 'A-(tur)' national long-term rating of Turkish factoring services provider Kapital Faktoring A.S.
The outlook for the rating of the company is stable, the global ratings agency said in a statement earlier this week.
Fitch also said in the statement:
"KEY RATING DRIVERS
The rating of Kapital reflects strong capitalisation, robust profitability, adequate liquidity and a resilient business model. The volatile operating environment remains a constraining factor in terms of business origination and asset-quality pressures.
The Stable Outlooks reflects Fitch's expectation that Kapital's credit strength relative to domestic peers' will remain resilient in the currently challenging operating environment.
Kapital is the largest independent factoring company in Turkey, accounting for almost 4% of the sector's assets. The sector is dominated by bank-owned factoring companies, but Kapital was the largest factoring company by equity (11.6% of the sector's equity base at end-2019) and by net profit (15.4% of the sector net profit in 2019).
The company has a long record of sound financial metrics and has retained a resilient franchise with Turkish SMEs. Since the onset of the coronavirus pandemic Kapital reduced its risk appetite with the receivables portfolio shrinking by almost 30% during 1H20 (most of the reduction was in 2Q20). This is a tested strategy employed during the previous crisis in 2018 when Kapital's portfolio contracted 35%. We expect a moderate increase in new business in 2H20 but for the portfolio to still shrink by about 30% year-on-year in 2020.
Kapital has witnessed only modest credit losses during previous crises. We estimate that impaired receivables generation has not exceeded 2% for the past decade, supported by the short-term nature of its portfolio and by an immaterial foreign-currency business and low single-name concentrations. The impaired receivables ratio was 3.5% at end-2019. It increased to 4.8% by end-1H20 but this was mostly due to the shrinkage of its portfolio. Impaired receivables are fully provisioned for.
Capitalisation and leverage is a key strength of Kapital. The company was almost debt-free at end-1H20, while peak leverage was modest at 2.2 x debt/tangible equity at end-2017. The company has low appetite for leverage and unprofitable growth. We expect leverage to remain low given the company's risk-averse strategy and modest prospects for growth.
Kapital's profitability is partly a function of historically low leverage, but modest credit losses and strong efficiency with five-year average cost/income ratio at a solid 10% have contributed to robust bottom-line profits with pre-tax income/average assets at an annualised 11.4% for 1H20. We expect lower business volumes and credit risks to pressure profitability in 2H20-1H21, but the company should remain adequately profitable given its low debt and modest fixed costs.
In the near-term the company's short-term balance sheet and virtually no debt at end-1H20 mitigate liquidity and refinancing risks. Kapital maintains significant credit lines and guarantees with a diversified pool of local banks and has proven access to funding, particularly during the previous crises.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade: - Improvement in the operating environment, sustained growth of scale and decrease in business volatility coupled with continuing sound financial performance. Factors that could, individually or collectively, lead to negative rating action/downgrade: Higher risk appetite as reflected in relaxed underwriting standards, e.g. material exposures to foreign-currency business, high concentrations or factoring without recourse, or a tolerance for higher leverage."