April 20, 2017 / 3:22 PM / 3 months ago

Fitch Rates ALJ Finansman A.S. 'A(tur)'; Outlook Stable

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(The following statement was released by the rating agency) LONDON, April 20 (Fitch) Fitch Ratings has assigned ALJ Finansman A.S. (ALJF) a National Long-Term Rating of 'A(tur)'. The Outlook is Stable. KEY RATING DRIVERS ALJF's rating benefits from the company's established business model, moderate risk appetite, acceptable asset quality and comfortable liquidity position. At the same time, the rating is constrained by its narrow and concentrated franchise, appetite for higher leverage (management threshold is 9x) and modest profitability. ALJF is an autofinancing company in Turkey focused on financing the Toyota brand, which is distributed in Turkey by its sister company. ALJF has a diversified customer base, with 71% of loans granted to individuals and 16% to SMEs. ALJF is part of the diversified Abdul Latif Jameel, a holding company owned by the Jameel family. The holding company is domiciled in Saudi Arabia and maintains a well-established car dealership network, offering Toyota vehicles, particularly in the Gulf region. It is also Toyota's sole distributor in Turkey. ALJF's market share in autofinancing was a modest 2.1% in 2016 and it is naturally limited by Toyota sales in Turkey (around 5% in 2016). However, the company is well positioned within its narrow niche, as ALJF finances 75% of all Toyota cars subject to autofinancing. ALJF reports very low levels of impaired loans (1.4% of gross loans at end-2016). Asset quality is underpinned by high down payments (38%). The low probability of default (1.6% in 2016) indicates risk-averse underwriting. Good liquidity of the collateral and strong collection practices result in a further decrease in the final credit loss (0.3% of gross loans 2016). ALJF controls market risk by: (i) broadly matching assets and liabilities by tenor; and (ii) maintaining a flat balance sheet, open currency position. Virtually all loans and borrowings were at fixed rates at end-2016. The balance sheet (on both sides) was 93% dominated in Turkish lira. ALJF demonstrated below-sector average profitability in 2013-2016. However, the trend is positive, reflecting improving cost-to-income and widening margins, with ROE reaching 6% and ROA 1% in 2016. We expect a further improvement in profitability, thanks to better efficiency amid improving scale. However, potential improvements will be sensitive to a material hike in the cost of risk and limited by competitive pressure on margins. ALJF's growth rate exceeds its capital generation, therefore increasing leverage. Debt-to-equity was a moderate 5.2x at end-2016, but management forecasts leverage to rise to around 8x. In our view, leverage at around 8x would compromise ALJF's resistance to external shocks and potential asset quality deterioration. While the anticipated leverage is commensurate with ALJF's current rating, it limits upside potential. Typically for Turkish NBFIs, ALJF's core funding source is from domestic banks. Bank funding is relatively diversified, with funding lines from around 10 banks. Additionally, ALJF has proven access to the local capital market, via the issuance of local bonds. Assets and funding are amortising, balanced by tenors and currencies (predominantly lira), thus mitigating rollover risk. ALJF manages liquidity tightly with only a small liquidity buffer, but the short duration of assets, predictable cash generation and the absence of repayment spikes largely mitigate liquidity risk. RATING SENSITIVITIES A significant rise in leverage above levels planned by management (debt-to-equity above 8x) may trigger a downgrade, as would a marked erosion of its franchise or performance, due to greater competition, or a sharp deterioration in asset quality. Continued franchise strengthening and healthy business growth, a longer record of robust asset quality (namely in the used car segment), better funding diversification, and the maintenance of reasonable leverage would be credit positive. Primary Analyst Aslan Tavitov Director +44 20 3530 1788 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Aurelien Mourgues Analyst +44 20 3530 1855 Committee Chairperson Christian Kuendig Senior Director +44 20 3530 1399 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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