ŞEKER Finansal Kiralama A.Ş. And Its Subsidiary

Transcription

1 Corporate Credit & Issue Rating New Update : Leasing Publishing Date: 31/5/218 Senior Chief Analyst Gökhan İYİGÜN gokhan.iyigun@jcrer.com.tr RATINGS International National Long Short Foreign Currency BBB- A-3 Local Currency BBB- A-3 Outlook FC Stable Stable LC Stable Stable Issue Rating BBB- A-3 Local Rating BBB+ (Trk) A-2 (Trk) Outlook Positive Stable BBB+ A-2 Issue Rating (Trk) (Trk) Sponsor Support 2 - Stand-Alone AB - Sovereign* Foreign Currency BBB- - Local Currency BBB- - Outlook FC Stable - LC Stable - *Affirmed by JCR on November 1, ,83 1,4 13,87 1,91 12,38 1,2 213 Growth Rate (%) Market Share (%) 1,23 6,13,8 6,94 1,5 1,4 ROAE (%) 13,86 1,95 17,51 11,2 ROAA (%) 1,49 Equity/Assets (%) 13,72 14, ,34 NPL (%) 17, ,89 12, ,38,97 6,12,74 11,48 11, ŞEKER Finansal Kiralama A.Ş. And Its Subsidiary Company Overview F i n a n c i a l D a t a 1Q * 216* 215* 214* 213* Total Assets ( USD) 147,998 15,16 142, , , ,97 Total Assets ( TRY) 584, ,847 53,56 428,481 4, ,592 Equity ( TRY) 68,247 64,984 64,912 61,462 54,956 49,365 Net Profit ( TRY) 3,69 5,265 6,864 6,86 5,59 5,248 Market Share (%) ROAA (%) ROAE (%) Equity/Assets (%) NPL (%) Growth Rate (%) * Audited consolidated financial statements Şeker Finansal Kiralama A.Ş. (Şeker Leasing, the Company), offering leasing services for investment support of domestic and international assets and capital goods needed by Small and Medium Size Enterprises (SMEs), was founded in 1997 and has been publicly traded since 24 (with a 12.1% free float including 8.59% repurchased shares of its capital of TL 45mn as of 1Q218). The Company, one of the four leasing companies listed on the Borsa Istanbul (BIST), performs its activities via its headquarters and regional offices in Ankara, Izmir and Gaziantep as well as in the widespread branch network of Şekerbank T.A.Ş. (the Bank). The Company employed a staff force of 36 people as of 1Q218. The main shareholder of Şeker Leasing with a 54.13% stake is Şekerbank T.A.Ş. (assigned a longterm national rating of AA-(Trk) and a long-term international rating of BBB- by JCR Eurasia Rating on September 27, 217), a mid-scale commercial bank in Turkey. Şekerbank T.A.Ş. Personel Munzam Sosyal Güvenlik ve Yardımlaşma Sandıgı Vakfı (Voluntary Pension Fund) is the ultimate majority shareholder of the Company. The Company has a subsidiary named Sekar Oto Filo Yönetim Hizmetleri ve Ticaret A.Ş. as of the report date. Strengths Reputable and robust capital structure Diversified and long term weighted borrowing structure, positively differentiating the Company from the shortterm sector composition The level of provisions in total income, decreasing below sector averages first time in the review period Improved asset quality Improved and above sector average interest margin and decreased FX position Benefits of being a bank affiliate company High compliance to corporate governance practices Constraints Below sector average equity level, common characteristic of bank related companies Deceasing market share regarding asset size in line with the Company s cautious management strategy Diminished income and pre-tax profit figures resulting in deteriorated profitability indicators Increasing interest and foreign exchange rates environment, potentially tightening the net interest margin Volatilities imposed on non-bank FIs asset and net income growth by several incentives such as Credit Guarantee Fund (CGF) Copyright 27 by JCR Eurasia Rating. 19 Mayıs Mah., 19 Mayıs Cad., Nova Baran Plaza No:4 Kat: 12 Şişli-İSTANBUL Telephone: +9(212) Fax: +9 (212) Reproduction is prohibited except by permission. All rights reserved. All information has been obtained from sources JCR Eurasia Rating believes to be reliable. However, JCR Eurasia Rating does not guarantee the truth, accuracy and adequacy of this information. JCR Eurasia Rating ratings are objective and independent opinions as to the creditworthiness of a security and issuer and not to be considered a recommendation to buy, hold or sell any security or to issue a loan. This rating report has been composed within the methodologies registered with and certified by the SPK (CMB-Capital Markets Board of Turkey), BDDK (BRSA-Banking Regulation and Supervision Agency) and internationally accepted rating principles and guidelines but is not covered by NRSRO regulations.

2 1. Rating Rationale The Turkish Leasing has operated under regulations and supervision of the Banking Regulation and Supervision Agency (BRSA) since 26. The Financial Leasing, Factoring and Financing Companies Act (Law No. 6361) and the regulation regarding organization and operating principals of financial leasing, factoring and financing companies came into force came into force on December 13, 212 and April 24, 213, respectively, both contributed positively to the sector trough improved product range, increased ability to represent and efficiency-enhanced processes. According to BRSA statistics updated May 15, 218, the total asset size of the Turkish Leasing was TRY 61.36bn and involved 25 leasing companies, four of which were listed on Borsa Istanbul (BIST) as of 1Q218. The Company s consolidated independent audit reports prepared in conformity with BRSA regulations, BRSA s year-end and first quarter 218 sectoral data updated on February 16 and May 15, 218, respectively, JCR Eurasia Rating s own studies and records, information and clarifications provided by the Company and non-financial figures constitute the major basis of Şeker Leasing s ratings. The Company s balance sheet composition, asset quality, risk management practices, business profile, liquidity management, history in the sector, profitability figures, revenues, debt structure, growth rates, off-balance sheet commitments, and the financial and non-financial positions of the main shareholders were taken into consideration while determining the risk assessment of the long-term international local currency and foreign currency ratings as well as national ratings. Additionally, the long and shortterm notes attached for the local and foreign currency dominated debt instrument issuance has been assigned as the same as the Company's Long and Short Term National Local Ratings and country ceiling level, respectively, as there are no additional legal and/or financial collateral guarantees for the repayment of the possible bond/bono to be issued by Şeker Leasing. But, they do not cover any structured finance instruments. Fundamental rating considerations are as below; Reputable and Robust Shareholding Structure and Benefits of Being a Bank Affiliate Company Şekerbank, a mid-scale commercial bank with paid capital, solo asset size and net profit figures of TRY 1,158mn, TRY 31.35bn and TRY mn as of FYE217, respectively, held the majority stake (54.13%) of the Company shares over the years. Şekerbank T.A.Ş. Personel Munzam Sosyal Güvenlik ve Yardımlaşma Vakfı, majority shareholder of the Şekerbank T.A.Ş. with a 35.44% stake, is the following (15.89) and ultimate majority shareholder of the Company. Accordingly, the Company uses its benefits regarding market recognition, customer base and access network. Diversified and Long Term Weighted Borrowing Structure The short-term weighted borrowing structure is a settled characteristic of the sector over the years with the ratio of short term borrowings to total assets ranging between 7.64% and 66.86% over the review period. The stated ratio of the Company exercised below sector average values and ranged between 29.66% and 44.61% in the same period and stabilized at approximately 4%s over the last two years. Funding needs met through debt instrument issuances since 212 differentiated the Company from the sector by turning its borrowing structure into a long-term weighted dispersion, diversified the funding sources and contributed positively to its funding structure and risk level. Decreased Level of Provisions in Total Income The Company ratio of provisions to total income displayed a noteworthy improvement and decreased below the sector average for the first time over the review period. A 42.86% decrease in provisions from TRY 9.8mn to TRY 5.6mn led to stated decrease in the ratio despite a 22.77% decrease in total income and contributed positively to the Company s profit generation capacity. Improved Asset Quality A 6.47% decrease in overdue loans through cash collections (TRY 2.21mn) and write-off (TRY 11.49mn) together with a (3.93%) increase in gross receivables resulted in a decrease in the Company s NPL ratio from 12.67% to 11.4% as of FYE217, contributing positively to the asset quality. Moreover, the Company realized a TRY 8.26mn collection from overdue loans through sale of mortgaged real estate in the first quarter of 218, contributing positively to future figures regarding profitability and asset quality. Improved and Above Average Interest Margin and Decreased FX Position While the sector s average interest margin decreased, the Company s interest margin increased in the last year due to a higher increase in interest rate the Company applied to its earning assets than the increase in interest rate for costly liabilities, thanks to continuing debt instrument issuances in a period where market interest rates tend to rise, leading AND ITS SUBSIDIARY 2

3 to Company interest margin (2.44%) surpassing again sector average (2.1%) as of FYE217. The Company materialized TRY 5.54mn FX gain, TRY 64k gain on derivative instruments and TRY 3.97mn pretax profit as of FYE217 (FYE216: TRY 16.75mn FX gain, TRY 211k loss on derivatives, TRY 6.96mn pre-tax profit). Although the previous years volatility potential generating effects of gains on FX position on pre-tax profit decreased, it still maintained its above pre-tax level and continued its volatility generating effect on pre-tax profit. High Compliance to Corporate Governance Principles The Company is one of the few leasing companies listed on the BIST. Consequently, the corporate governance compliance level of the Company is relatively high compared to general sector practices, particularly in the following: presence of two independent members on the Board, establishment of all committees required by the principles (audit, corporate governance and early detection of risk), existence of an effective shareholders relation unit, and comprehensive website. These factors contribute to the Company s transparency level in the sequel to the risk perception of investors for the Company. Below Equity Level The Company s standard ratio decreased to 11.48% from 12.89% in 217 due to a higher increase in total assets (12.38%) than in equity (.11%). Moreover, it maintained its below sector pattern as previous years and stood at 11.48% against the 14.8% sector figure as of FYE217. But it should be noted that the comparatively low standard ratio inherits in all bank affiliated financial institutions due to their operating model with comparatively low equity level derived from their ease of access to relatively low-cost funding sources via their shareholding structure. The share buyback program which was launched in October 216, the dividend payment realized in 217 and the decreased yearend net profit figure were the main factors of decreasing equity level in the last two years. Additionally, with the board decision dated , it was decided to increase the Company's paid-in capital by TRY 5mn with cash to be paid by Şekerbank. Downtrend in Market Share The Company and its subsidiary had a total asset size of TRY mn, corresponding to a.97% market share as of FYE217. Within the consideration of the solo based Company figure, the market share regarding asset size stood at.88%. While the sector s asset growth stayed almost at the same level of 19%s, the Company s asset growth decelerated from 17.51% to 12.38% in 217, suppressing its market share. The consolidated asset size of the Company realized a 14.17% YoY growth and amounted to TRY mn as of 1Q218, corresponding to a.95% market share. Diminished Income and Pre-tax Profit Figures The Company s total income and pre-tax profit decreased by 22.77% to TRY 28.97mn and 42.95% to TRY 3.97mn, respectively, as of FYE217. A 22.6% decrease in other income from operations, particularly a 66.92% decrease in gains from FX position, was the main factor of the decreased total income. As a result of the volatility potential on profitability indicators created by the rising levels of other income from operations in total income in the previous years together with a 4.19% increase in financial expenses resulted in diminished pre-tax profit and deteriorated profitability indicators despite the 29% increase in interest income and 42.86% decrease in provisions. On the other hand, it shoul be noted that the Company generated TRY 3.7mn net profit as of 1Q218, corresponding to 58.3% of 217 year-end figure. Impact of Macro-Based Government Incentives Including Credit Guarantee Fund backed Loans on the Non-Bank Financial s Several incentive packages have been initiated so as to tackle economic headwinds in economy, most prominent of which is the CGF backed loans underwritten by the banking sector, exceeding TRY 22bn. While the Fund backed loans provided a much-needed relief to the corporates and supported the loan book and profitability growth of the banks, the non-bank financial sector s growth acceleration has been somewhat tampered with the influx of additional banking loans. However, given the resource-based constraints on the banks, the expansion of the aforementioned loans is deemed unlikely, potentially helping non-bank financial sectors recover their momentum. Increasing Interest and Foreign Exchange Rates Environment The risk of maturity mismatch mainly derived from the relatively long maturity structure of leasing transactions is the common characteristics of the sector, leading to higher liquidity and interest rate risk exposures compared to other financial sectors. Additionally, a significant part of the sector's transaction volume is realized in foreign currency, leading to foreign currency risk exposure. The Company AND ITS SUBSIDIARY 3

4 realized steady improvements in its maturity mismatch through long-term foreign currency denominated borrowings, corresponding to approximately 82% of total borrowings, particularly the EUR corresponding to 68% of total, both relieving liquidity management through longterm weighted borrowing structure in contrast to the general composition of the sector and diminishing market risk exposures. With respect to the above-mentioned factors, JCR Eurasia Rating has affirmed the Long Term International Foreign Currency and Local Currency Ratings as BBB-, the same as that of the Sovereign Ratings of the Republic of Turkey, and the Long Term National Local Ratings as BBB+ (Trk) in JCR Eurasia Rating s notation system, which denotes a satisfactory investment grade. 2. Outlook JCR Eurasia Rating has assigned a Positive outlook on the National Long Term Rating perspectives of Şeker Leasing within the considerations of long-term weighted borrowing structure unlike the sector composition achieved through continuing debt instrument issuances relieving liquidity management, improved asset quality through collections from overdue loans and write-off of bad debts, 218 first-quarter profit figure exceeding half of the 217 year-end figure, improved profit generation capacity through above sector interest margin and decreased provisions level, board decision regarding TRY 5mn paid capital increase in cash, high collection capability of overdue loans through mortgages at sales phase together with TRY 8.26mn collection in first quarter of 218 generating potential of positive contribution to future profitability and asset quality, new management approach that cares about bank synergy and possible positive contributions of improvement studies on system infrastructure and revised organizational structure with the addition of asset management, risk monitoring & receivable management and treasury & financial institutions units to risk monitoring and management, reporting and funding processes in future periods. Additionally, JCR Eurasia Rating has affirmed Stable outlooks on the international long and short term local currency rating perspectives of Şeker Leasing, respectively, which are the sovereign ratings outlooks of the Republic of Turkey. The main driving forces that can call forth a revision in the short-term regarding the current outlook status include Company related issues affecting asset quality, liability profile and profitability, along with Turkey s sovereign rating which is highly responsive to domestic and foreign political and economic uncertainties, tensions and developments. 3. Sponsor Support and Stand-Alone Assessment Sponsor support grades and their risk identifications and estimations reflect the financial and non-financial state and expected support of the Company s major controlling shareholder, Şekerbank T.A.Ş., and the sector s support level by public authorities. It is reasoned that Şeker Leasing s main shareholder, as a mid-scale commercial bank in Turkey with a domestic network of 273 branches as of 1Q218, has the adequate power, experience and equipment to provide financial and efficient operational support as and when required. In this regard, together with the sector s support level falling behind the banking sector despite the improvements made through recent legislative regulations and implementations, JCR Eurasia Rating has affirmed the Sponsor Support Grade of 2 reflecting the financial and non-financial states and expected support by the shareholders. The Stand-Alone Grade has been constituted with respect to the Company s asset size and quality, equity structure, market shares, growth rates, risk management practices, operating history, track records and the development of existing risks in the markets and business environment. Within this context, the Stand Alone Grade of the Company has been affirmed as AB in JCR Eurasia Rating s notation system, with the opinion that Şeker Leasing has the level of strong experience and facilities to manage the incurred risks on its balance sheet without any assistance from its shareholders provided that it improves its market efficiency and pre-tax profit generation capacity. 4. Company Profile a) History & Activities The Company was founded in 1997 to provide leasing services and has been publicly traded since 24 under the code of SEKFK. The Company had a 12.1% free float of AND ITS SUBSIDIARY 4

5 its capital of TRY 45mn as of 1Q218, of which 8.59% of its shares were repurchased by the Company within the context of regulations regarding liquidity provider as of August 19, 216. The Company has been subject to the Financial Leasing, Factoring and Financing Companies Law since December 212 and conducts its activities within the framework of the provisions of the related Regulation dated April 24, 213. The Company carries out its leasing services via the widespread branches of Şekerbank, its headquarters and regional offices in Ankara, İzmir, and Gaziantep. b) Organization & Employees The organizational chart of the Company has been changed with the board decision dated January 8, 218. Accordingly, the Company s organizational chart covers five main units (credits, marketing & sales, treasury & financial institutions, legal affairs, financial & administrative affairs) reporting directly to the general directorate and fifteen subunits, six of which (operation & insurance, accounting, financial control, budget & planning, IT, human resources, administrative affairs) report to the financial and administrative affairs directorate, three (credit allocation, asset management, risk monitoring & receivables management) to the credits directorate and six (headquarter, three regional directorates, vendor & sales improvement, corporate communications and digital platforms) to the marketing and sales directorate. General directorate and audit committee report directly to the Board. As in the previous year, Şeker Leasing s Board of Directors was composed of 7 members, including one executive and two independent members. The Audit, Corporate Governance and Early Detection of Risk & Credit committees have been established under the authority of the Board. In line with the related regulations, the Investor Relations Unit operates under the Corporate Governance Committee. The actual labor force of the Company and its subsidiary was 36 as of 1Q218. As of October 9, 217, Mr. Burak Latif LATİFOĞLU was appointed as general manager. Dr. Hasan Basri GÖKTAN Canan AYDINOL Board Members Chairman, Managing Director Vice Chairman Mehmet YAVUZ Yusuf TUNA Osman GÖKTAN Orhan KARAKAŞ Burak Latif LATİFOĞLU Independent Member Independent Member Member Member Member / General Manager c) Shareholders, Subsidiaries & Affiliates The following table provides the Company s shareholder structure and paid-capital amount over the last three years. Both the paid capital amount and the stakes of majority shareholders have not changed since 213. Şekerbank T.A.Ş., with paid capital, solo asset size and net profit FYE217 figures of TRY 1,158mn, TRY 31.35bn and TRY mn, respectively, held the majority stake of the Company shares over the years. Şeker Finanasal Kiralama A.Ş. Shareholders Structure (%) April 2, Şekerbank T.A.Ş Şekerbank T.A.S. Personel Munzam Sosyal Güvenlik ve Yardımlaşma Vakfı Şekerbank T.A.S. Personeli Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı Şeker Yatırım Menkul Değerler A.Ş Public * TOTAL Paid Capital (TRY/) 45, 45, 45, 45, (*): Repurchased shares (8.59%) are show n in the "Public" section ŞekerBank was established in 1953 as Pancar Kooperatifleri Bankası A.Ş. and changed its trade name to Şekerbank in The bank is a medium-scale bank operating in retail and private banking as well as corporate, commercial and small business banking through its 273 domestic branches as of 1Q218. Bank shares have been publicly traded since 1997 with a free float rate of 34.19%. The Company has a subsidiary with a 99% stake, Sekar Oto Kiralama Turizm Kargo Taşımacılık Hizmeti ve Tic. Ltd.Şti. (Sekar) offering long term car rental services primarily to Şekerbank T.A.Ş. and its subsidiaries and affiliates until mid-217. With the board decision dated , it was decided to increase the Company's paid-in capital by TRY 5mn with cash to be paid by Şekerbank. Within the context of regulations regarding liquidity provider, the Company acquired 8.59% of its shares and the Company s free float rate was 3.51% as of April 2, AND ITS SUBSIDIARY 5

6 218. Following the implementation of share-buyback program, the cumulative performance of the Company shares average prices increased sharply and exceeded the performances of average BIST 3 and BIST 1 Indexes. Accordingly, the Company s market value, which was continuously below the book value until 216, exceeded the book value particularly after the share-buyback program and increased to average price of approximately 2.5 in the first quarter of 218. Moreover, the Company realized its first dividend payment on April 7, 217 with a net cash dividend ratio of 8.5% Q12 3Q12 1Q13 3Q13 Average Price-Şeker Leasing Average Index BIST 3 Average Index BIST 1 Cumulative Performance (%) 1Q14 3Q14 1Q15 d) Corporate Governance As Şeker Leasing is a publicly traded company, its compliance level with Corporate Governance Principles is comparatively high. The Company s Board of Directors is composed of 7 members and covers 2 independent members. All committees (audit, corporate governance, and early detection of risk) required under corporate governance regulations have been established under the authority of the Board. Moreover, the Company has established an Investor Relations Unit reporting directly to the Board. The Company s web site provides sufficient information and disclosed documentation in terms of transparency, such as the shareholder structure, audit reports, annual reports, articles of association, general assembly meeting documents, disclosure policy, mission/vision, code of ethics, trade register documents and newspaper, internal directives, privileged shares and prospectuses and circulars related to bond issues. On the other hand, although the Company s remuneration policy regarding board members 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 and executive managers, the dividend policy, and the board members and executive managers CVs were included in the disclosed annual reports, it has not been established directly on the Company s web site. Company shares are traded on the BIST and there is no limitation on share transfers. On the other hand, some of the Company shares have privileges written into the articles of association, such as the right to nominate the majority of the board. Within the context of social responsibility, the Company contributes to social responsibility projects carried out in the Group along with a need of greater contribution to the community through educational, charitable, cultural, social and sporting events. e) The Company Strategy The Company aims a balanced growth through improving its asset quality and customer portfolio mostly composed of SME s which holds an important place in the sector through using distribution channels of Şekerbank and increasing synergy with the bank along with a prudential and efficient lending policy. Moreover, improvement in the system infrastructure that would lead efficiency increase in risk management and reporting processes, diversifying funding sources and reducing funding costs, maintaining high collateral level and operating volume growth parallel to the stabilization of economic activity and indicators are the other main issues on which the Company has placed emphasis. 5. Overview & Operational Environment As of FYE217, the total asset size and equity of the Turkish Leasing, containing 25 companies of various sizes and ranking 18th in the global market in terms of turn-over, amounted to TRY 58.12bn (USD 15.41bn) and TRY 8.6bn (USD 2.28bn), respectively (1Q218: 61.36bn and TRY 8.92bn, respectively). The Turkish Leasing, providing mid and long-term investment financing services, operates essentially as a complement to the Turkish Banking and conducts its activities in supervision and control of the Banking Regulation and Supervision Agency (BRSA). THE KEY INDICATORS OF TURKISH FINANCIAL LEASING SECTOR AND ITS SUBSIDIARY 6

7 (.) Asset Size- TRY 58,124 48,353 4,524 32,438 28,353 2,26 18,64 Asset Size- USD 15,41 13,74 13,917 13,941 13,39 11,397 9,849 Equity- TRY 8,64 7,757 6,838 6,23 5,275 4,614 4,177 P/L-TRY ROAA % ROAE % NPL Ratio% Equity / T. Sources Recent regulations have resulted in an expanded sector with the introduction of new products that positively affects transaction volume. Regulations improved the corporate structure, quality and standardization of financial reporting, transparency and competitiveness within the leasing sector. In addition, the growing volume and operational advantages have resulted in increasing global interest towards the Turkish leasing market. Leasing activities in Turkey began under the regulation and supervision of the Undersecretariat of the Treasury in 1983 and the first leasing company was established in The BRSA became the sector s regulator and supervisor following the Banking Law which has been entered into force in late 25. According to data provided by BRSA, 25 leasing companies, all with headquarters located in Istanbul, were active in the Turkish Leasing as of FYE217. Similar to global practices, the Turkish Leasing operates as a complementary to the Banking. The Turkish Leasing holds a quite small share of the overall financial system of Turkey. Since 26 the permission of 6 leasing companies have been cancelled due to mergers, withdrawal from the sector and the inability to adapt to BRSA regulations. The sector exhibited a rapid growth until 28 and its growth decelerated following the stated year in which the new tax regulations have been realised. The sector s market penetration rate, which is defined as the share of total leases excluding immovable assets among fixed capital investments, is quite low in Turkey. While the leasing rate of total fixed capital investments stands at approximately 15-2% in industrialized countries, it stands at 5-6% in Turkey, reflecting ample room for future improvements. Factors such as the recent increase in Sell & Leaseback transactions achieved by significant tax exemptions related to the Sell & Leaseback transactions on the financing of commercial properties, the participation banks' activity in the leasing sector and the commissioning of operational leasing will contribute to the increase in the penetration rate in the sector. Leasing is an ultimate assistance and financing tool for companies to achieve efficient and cost-controlled operations by leasing production instruments instead of purchasing. It stands as a financing method which gives operating rights of a property to lessee while the lessor preserves ownership rights. Leasing transaction is the transfer of ownership rights between two parties for a limited period of time in return for a clearly stated rental price. This method allows companies to gain essential financial advantages and use their capital efficiently. As of FYE217, total asset size of leasing companies in Turkey was TRY 58.12bn and total equity was TRY 8.6bn. The sector presented a positive growth until 28 before declining by 14.23% due to new tax regulations in 29. Following 29, the sector continued to grow. Between 24 and 217 the sector had a cumulative asset growth rate of 768% Cumulative Turkish Leasin Asset Growth Rate 14,64% 155,8% 119,42% 135,6%177,67%22,39% 48,9% -9,7% 384,15% 323,18% 54,83% 621,69% 767,52% Both the decrease from 18% to 1% in the value-added tax (VAT) rate on construction equipment and the increase in heavy construction projects (bridge, highway and subway) have supported the growth of the Leasing. The Leasing to be reach a higher trading volume will have a positive impact on SMEs having high growth potential and highly competitive sectors. Tax regulations, particularly changes in VAT rates, are the most influential factor on companies leasing decisions. An additional factor behind growth in the sector was the implementation of the Sell & Leaseback concept as a part of leasing methods. Both the above stated issues contributed positively to growth of the leasing sector since 215. AND ITS SUBSIDIARY 7

8 In terms of cost value of financial leasing contracts, the most concentrated sectors of the leasing market are Manufacturing (48,56%) and Services (43,66%). In the manufacturing sector, the Electrical Gas and Water Resources sector ranks first, the second is the Textile and Textile Products Industry, and the third is the Metal Industry and Processed Materials Manufacturing sector. In the services sector, the first is construction sector, second is Wholesale and Retail Trade, and the third is the Transportation, Storage and Communications sector. ( TRY) Financial Leasing Contract Value- al Distribution Rent Receivables Agriculture 113, , ,521 14,555 Production 2,691,231 3,157,116 3,134,839 3,745,559 Financial Intermediation 177,123 33,59 214,295 37,481 Services 2,572,29 2,838,481 3,57,917 3,341,963 Consumer Housing Finance 133,398 28,46 151,287 31,15 Other 17,71 7,633 22,3 9,25 Total 5,75,44 6,51,442 6,712,889 7,665,913 Share % Financial Leasing Contract Value- al Distribution Rent Receivables Agriculture 2.% 1.87% 1.97% 1.83% Production 47.17% 48.56% 46.7% 48.86% Financial Intermediation 3.1%.52% 3.19%.49% Services 45.8% 43.66% 45.55% 43.6% Consumer Housing Finance 2.34% 4.31% 2.25% 4.5% Other.31% 1.9%.33% 1.18% Total 1.% 1.% 1.% 1.% Leasing receivables constituted the highest portion of the sector assets with a share of 91.93% while short term credits constituted the highest part of the resources at a rate of 65%. The concentration of short term bank loans among resources is a noteworthy indicator of the sector s difficulties in the creation of resource diversity. Total sector equity was 14.8% of total resources. The level of expansion in equity was slower than the upward trend of total asset growth in 217. In terms contracts, the sectoral distribution mainly includes machinery and equipment, real estate, and construction machines. The total share of these three areas was 63.71% in 217. The non performing receivables ratio of the sector stood at 5.53% as of FYE217, approximately twofold of the Banking. The ratio of non performing receivables to total equity was 35.49%, increasing the risk perception of the sector in terms of diminishing asset quality. Although the financial leasing sector's profitability indicators for 216 were mostly below those in the banking sector, profitability indicator of ROAA of the Leasing was higher than of the Banking in 217. While ROAA and ROAE of the Banking were 2.5% and 18.61%, respectively, they were 2.56% and 14.26% for the leasing sector, respectively, in the same period. In addition, the sector s interest coverage ratio and net or gross profit margin ratios were also lower than those of the Banking. However, the Leasing s equity to total assets ratio (17.38%) was higher compared to the Banking s 11.2% in 217. Asset and transaction volume concentration rates are quite high amongst the 25 leasing companies. Asset and transaction volume concentration is mostly composed of companies which contain banks in their shareholder structure. Bank subsidiary leasing companies make up the top 1 and 85% of the leasing sector in terms of asset size. This concentration leads to a more parallel banking and leasing activities compared to other countries an oligopolistic market. As a result, a credit contraction in the banking sector will inevitably have an adverse effect on the leasing industry. The fact that large leasing companies in the sector are subsidiaries of the bank generally creates advantages such as increasing the funding capacity of the sector and providing a cost advantage to the users together with creating unfair competition due to the use of customer networks. On the other hand, developments in the external value of the TRY and obtaining long-term funding have become important criteria for the growth of the sector due to the fact that a significant part of the sector's transaction volume is realized in foreign currency. Participation banks have recently begun to offer leasing services, titled icara, that contribute to the growth and expansion of the sector. The increase in public and private sector construction investments is favorable to the leasing AND ITS SUBSIDIARY 8

9 sector. As a matter of fact, business and construction machines are increasing leasing demand and transaction volume considerably and this tendency is still going on. However, the construction industry can be fragile with the economic conjuncture, making the growth of the leasing industry also fragile. Construction and Real Estate in Turkey constitutes half of the overall leasing activities. The fact that the leasing sector is limited to the sectors that move together with the economic conjuncture like construction increases the risk of sustainability. However, Leasing continues its efforts to achieve a wider transaction volume through competitive SMEs and sectors. Investments in renewal and capacity upgrading at macro level, investments in energy and energy efficiency, use of leasing in public investments and the ongoing weight of business and construction machines will be important criteria in 218 in terms of growth of the leasing sector. The recent decline in real estate transactions and the increase in machinery-equipment transactions are positive trends in terms of productivity. The improvement in the investment environment in 217, the increase in household consumption expenditures, the recovery in consumer and real sector confidence positively affected the leasing sector. In particular, increases in private sector machinery investments have contributed positively to the development of the industry. In addition, tax advantages, facilitation of collateral systems, reduction of allowance rates have also supported the sector development. 6. Financial Foundation Leasing The Share of Activities % Car Rental Total Amount (TRY ) P/L ,253 6,841 5,59 Asset , ,481 4,677 Liabilities , ,19 345,721 The Company and its subsidiary had a total asset size of TRY mn, corresponding to a.97% market share as of FYE217. Within the consideration of the solo based Company figure, the market share regarding asset size stood at.88%. While the sector s asset growth stayed almost at the same level of 19%s, the Company s asset growth decelerated from 17.51% to 12.38% in 217, suppressing its market share. The consolidated asset size of the Company realized a 14.17% YoY growth and amounted to TRY mn as of 1Q218, corresponding to a.95% market share. 4,56 42,83 213,52 14, Annual Asset Growth Rates % 24,77 6, ,3 17, ,84 12, Accordingly, the Company s five-year cumulative asset growth stood at the below sector figure (186.89%) of 12.76% as of FYE217 due to below sector growth figures over the last four years a) Financial Indicators & Performance i. Indices relating to size The table below shows the percent dispersion of the activities of Şeker Leasing and its consolidated subsidiary (Sekar) in terms of assets, liabilities and profit/loss. The Contribution of car rental activities increased to above 1% levels in all categories due to both higher growths in assets and liabilities and improved net profit against deteriorated leasing figure. The stated increased contribution of subsidiary (Sekar) derived from its expanding operations including not only the intra-group but the also non-group transactions exceeding the intra-group activity volume. 4,56 42, Cumulative Asset Growth Rates % 139,39 1,67 6,83 8,42 53,54 43, ,89 12, AND ITS SUBSIDIARY 9

10 Accordingly, the Company s market share regarding asset size displayed a decreasing trend due to the above stated below sector average growths over the last four years and stood at.97% as of FYE217 and.95% as of 1Q218, the lowest figures over the last five years. 1,4 213 Lower increase of.11% in equity than 17.88% in borrowings together with decreases in payables and noncostly liabilities resulted in an increase in borrowings level and decreases in the levels of other resources. The Company s equity level in its resource distribution decreased from 14.34% in 215 to 11.48% in 217. While the share buy-back program that was launched in October 216 was the main factor of equity level decrease in 216, a TRY 5.2mn dividend payment in 217 was for the last year. ii. Market Share % 1, , ,4 216 Trend Line, Equity Non-Costly Liabilities Financial Borrowing Payables 12,38,86 82,91 3, ,72 1,15 82,59 2, Resource Distribution % 14,34,76 82,37 2, ,89 1,84 79,51 5, ,48,5 83,4 4, Indices relating to profitability 1,5 1,2,9,6,3 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Both the Company and sector profitability ratios ROAA and ROAE deteriorated in the last year and the Company ratios continued to stay below the sector averages. Although the Company s gross operating profit stayed approximately at the same level of previous year figure and the provisions for impaired receivables and operating expenses decreased by 42.86% and 5.54%, respectively, the decreased other revenues from operations and the mitigating effect of deferred taxes led to a 42.95% decrease in pre-tax profit against increases of 14.74% and 2.79% in average total assets and equity, respectively, resulting in deterioration in the Company s profitability ratios ROAA and ROAE. 13,87 11,4 1, ,69 6,13 2,19, ,32 13,86 2,73 1,95 15,48 11,2 1,49 2,56 14,22 6,12 2,19,74 While the sector s average interest margin decreased, the Company s interest margin increased in the last year due to a higher increase in interest rate the Company applied to its earning assets than the increase in interest rate for costly liabilities, thanks to continuing debt instrument issuances in a period where market interest rates tend to rise, leading to Company interest margin (2.44%) surpassing again sector average (2.1%) as of FYE217. Accordingly, although the Company s operating volume decreased from TRY mn to TRY mn, its lease income increased from TRY 4.16mn to 51.81mn in the last year. 11,4 6,56 3, ,47 ROAA % ROAA % SECTOR ROAE % ROAE % SECTOR Interest Rate for Costly Liabilities (avg.) % Interest Rate for Earning Assets (avg.) % Interest Margin % Margin % 11,46 7,76 3,69 2, ,29 7,16 3,13 2, ,87 7,68 2,45 2, ,64 9,2 2,44 2,1 217 The trend lines representing the shares of the two main revenue streams, the net interest and commission income and the other income from operations, that make up the Company s total revenue, exhibited an almost equal pattern AND ITS SUBSIDIARY 1

11 with the previous year figures. Other income from operations which was mainly composed of gains on FX positions, fixed assets sales profit, income from provisions no longer required, legal proceedings income and others generated 78.96% of the Company s total income and continued to generate volatility potential on future total income level. 59,33 36, Net Interest and Commission Net Other Income from Operations 52,81 46, Total Income Distribution % 66,25 32, ,24 21, ,96 21,4 217 Both the Company and sector ratios of financial expenses to net interest and commission income deteriorated in the last year. On the other hand, the Company figure exhibited a continuously above sector pattern over the review period and increased from 79.3% to 87.51% as of FYE217 suppressing the profit generation capacity. Both the financial expenses and gross lease income increased and net commission income decreased in the last year. On the other hand, a higher increase (4.19%) in financial expenses than in gross lease income (3.57%) and a 71.16% decrease in service income culminated in an increase in the Company ratio of financial expenses to net interest and commission income Operating expenses to total income ratio of the Company continued its above sector standing and increased to 66.95% as of FYE217 and suppressed the profit generation capacity, despite the operating expenses decreased by 5.54% from TRY 2.53mn to TRY 19.39mn. A higher decrease (22.77%) in total income than in operating expenses resulted in the stated deterioration in the Company ratio. A 22.6% decrease in other income from operations, particularly a 66.92% decrease in gains from FX position, was the main factor of the decreased total income and deteriorated Company ratio. 39,42 21, Accordingly, the pre-tax profit generation capacity of the Company s total income exhibited a continuously below sector average pattern over the review period and decreased to 13.72% as of FYE217. Increased financial expenses and a lower decrease in operating expenses than decrease in total income culminated in a decrease in the Company s pre-tax profit generation capacity. 43,81 22, Total Operating Expenses/Total Income % 35,3 2, ,74 19, ,95 21, Pre-Tax Profit/Total Income % 6 57,44 43,96 Financial Expenses/Interest and Net Commission % 87,51 79,3 66,94 68,76 59,39 53,63 54,46 5, ,93 27, ,2 11, ,19 22, ,53 18, ,77 13, The Company materialized TRY 5.54mn FX gain, TRY 64k gain on derivative instruments and TRY 3.97mn pretax profit as of FYE217 (FYE216: TRY 16.75mn FX gain, TRY 211k loss on derivatives, TRY 6.96mn pre-tax profit). Although the previous years volatility potential AND ITS SUBSIDIARY 11

12 generating effects of gains on FX position on pre-tax profit decreased, it still maintained its above pre-tax level and continued its volatility generating effect on pre-tax profit. 285,25% FX Gain (Loss), net / Profit Before Tax Derivative Instruments Gain (Loss), net / Profit Before Tax -9,63% ,5% -5,65% 215 b) Asset quality 24,57% -3,3% ,49% 15,2% 217 The Company s consolidated total assets size increased by 12.38% (FYE216: 17.51%) and amounted to TRY mn as of FYE217 (FYE216: TRY 53.51mn). Earning and non-earning assets had dispersion of 8.78% and 19.22%, respectively. The earning assets weighted dispersion, the common characteristic of the sector, contributed positively to the Company s asset quality despite its below sector (96.52%) position. Loans and receivables with a 79.15% share in total assets was the main component of the earning assets. As in the previous year, the property and equipment item, which was increased by 85.95% in 217 mainly due to vehicle fleet purchase to subsidiary Sekar stemming from its expanding operations, was the main factor of the increase in non-earning assets. Accordingly, it should be noted that the vehicle purchase is within the scope of the main activity of the subsidiary Sekar, and when it is included in earning assets the ratio would be 85.83%. Other Assets Banks and Other Earnings Assets Loans and Receivables 7,53% 1,34% 9,63% 11,6% 2,7% 13,98% 19,22% 8,75% 1,85% 1,63% 91,13% ,3% 214 Asset Distribution 8,18% ,17% ,15% % 9% 8% 7% 6% 5% 4% 3% 2% 1% % Both the Company and sector average figures improved in the last year. The Company s NPL ratio displayed a steadily above sector average pattern over the review period. A 6.47% decrease in overdue loans through cash collections (TRY 2.21mn) and write-off (TRY 11.49mn) together with a (3.93%) increase in gross receivables resulted in a decrease in the Company s NPL ratio from 12.67% to 11.4% as of FYE217, contributing positively to the asset quality. Moreover, the Company realized a TRY 8.26mn collection from overdue loans through sale of mortgaged real estate in the first quarter of 218, contributing positively to future figures regarding profitability and asset quality. 1, ,82 14, ,71 17, NPL % 6,3 12, ,24 11, ,53 2, 18, 16, 14, 12, 1, 8, 6, 4, 2,, The Company s provisioning policy is based on the related BRSA regulations. The above sector average standing of the Company ratio of 67.28% as of FYE217 partially balanced the adverse effect of above sector NPL on asset quality. Approximately, 93% of the doubtful receivables have been collateralized via mortgages (6.14%) and leasing equipment (93.86%). 53,35 48, Loss Reserves / Impaired Receivables % 72,62 67,28 63,55 63,19 61,86 6,71 59,79 51, , 7, 6, 5, 4, 3, 2, 1,, The Company s impaired receivables level by equity standing above the sector averages over the review period improved and stood at below equity in the last two years, diminishing the adverse effect on asset quality and risk level. A 6.47% decrease in overdue loans and a slight increase of.11% in equity improved the stated ratio. AND ITS SUBSIDIARY 12

13 Moreover, it is envisaged by the Company that the stated ratio will continue to improve in the upcoming periods through collections from impaired receivables. Provisions / Total Income (%) 7 78,7 Impaired Receivables / Equity % 11,42 1,6 91,8 85,9 14, 12, 1, 8, 21,3 19,94 28,91 25,6 43,9 33,58 4,84 2,21 26,13 23,71 27,95 19, ,16 34,78 33,99 37,68 35,49 6, 4, , , c) Funding & Adequacy of Capital The commodities subject to leasing transactions form the basic guarantee of the leasing companies undertaken risk. Additionally, the Company obtain sufficient collateral where appropriate. The Company s collateral-to-total receivables ratio displayed an above reference values and ranged between % and 373% over the review period, ensuring full coverage and diminishing the adverse effects of the above sector NPL ratio on asset quality. Surety bonds (57.38), pledges (26.93%), mortgages (15.16%) and guarantee letters (.53%) constitute the Company s collateral portfolio of TRY 1.81bn as of FYE217. Additionally, the Company foresees 8-9% collection ability considering the current collaterals of doubtful receivables. 241, , Collaterals / Total Receivables % 248, , , 217 The Company ratio of provisions to total income displayed a noteworthy improvement and decreased below the sector average for the first time over the review period. A 42.86% decrease in provisions from TRY 9.8mn to TRY 5.6mn despite a 22.77% decrease in total income led to above stated decrease in the ratio and contributed positively to the Company s profit generation capacity The BRSA regulation related to the leasing companies equity level states that the standard ratio (equity to total assets) of them should be at least 3%. The Company s standard ratio decreased to 11.48% from 12.89% in 217 due to a higher increase in total assets (12.38%) than in equity (.11%). Additionally, it maintained its below sector pattern as previous years and stood at 11.48% against the 14.8% sector figure as of FYE217. But it should be noted that the comparatively low standard ratio inherits in all bank related non-bank financial institutions due to their operating model with comparatively low equity level derived from their ease of access to relatively low-cost funding sources via their shareholding structure. 15,82 12,82 3, ,38 9,38 3, 213 Standard Ratio (Equity / Total Assets) % Free Equity / Total Assets Ratio % Realized Equity / Total Assets Ratio % 13,72 1,72 3, ,34 11,34 3, ,89 9,89 3, ,48 8,48 3, 217 As stated above, the comparatively low equity level, in other words a comparatively high leverage ratio, and relatively broad funding opportunities at favorable costs are the common characteristics of the bank related nonbanking financial institutions differentiating them from other sector players. Accordingly, the Company figure stood at sector averages over the review period. Both the AND ITS SUBSIDIARY 13