Rating of the largest Factors, 2007

Development at the expense of growth

Marina Chernysheva

The factoring market growth in 2007 has slowed down - not due to liquidity problems, but because factors encroached on more complicated clients' segments. .

In 2006-2007 Russian factors were joined by about 20 companies and banks - active offerors of factoring services. But the market volume during the previous year increased by mere 84%1 and reached 20.2 bln US dollars (516.4 bln rubles) - in 2006 the factor turnover was doubled. Why has the market decelerated and what is going next? According to Expert RA, the credit crunch did not influence the Russian factoring dynamics in any way. Growth deceleration is related to factor active development of new segments, where you need to create demand for factoring services in the first place. But it will not take long to get the results: in 2009 the market growth would again near 200%.

Dangerous claim

To see how the credit crunch influences the factoring market development, Expert RA tested the factoring seasonality in 2007 and the market acceleration in the first and second half of the year. The assessment was based on amount of claims transferred to 13 factors - regular participants of the Agency's studies ² (see table 1).

According to the analysis, the August 2007 crisis neither slowed down characteristic acceleration for the second half of the year nor leveled traditional seasonality effect. So the market slow-down in 2007 is not a credit crunch consequence. The crisis positive and negative features balanced each other.

On the one hand, factoring services have increased in demand among companies with difficult access to bank credits in the crisis time. Despite the crisis, or even due to it, factors in 2007 and the beginning of 2008 managed to strike efficient deals to attract financing. Eurocommerz made an effective deal to securitize factoring assets. The company neutralized part of their risks and obtained cheaper funding for securities of higher credit quality. How come the deal was successfully pulled through in the crisis time, when investors were very cautious about re-packing risks? "Investors burned their hands with mortgage operations, and our deal came from a totally different market. The mechanism is the same, but the asset is totally different, having nothing in common with mortgage risks, - says Grigory Karpovsky, Eurocommerz president. - We managed to construct an efficient mechanism of funding - securitization being a good example of it. We hope the factoring market to continue its stride, despite the ongoing world liquidity crisis".

Diagram 1. Share of regions goes up in a number of clients and in volumes of transferred receivables

Source: Factors questionnaires, Expert RA calculations

On the flip-side the credit crunch affects factors as well. "In September 2007 numerous large financial institutions, regardless of their form - banks or non-bank organizations - started suppressing their liquidity by limiting credits and making client appraisal tougher", - says Grigory Karpovsky. Refusal to finance may mean liquidity problems for the factor and worsened financial state of the client itself. "Factors set tougher limits, thus liquidity crisis contributed to improved quality of factoring portfolios", - says Dmitry Piatakov, Trust general director. That is why factors often stop financing out of simple caution - not because they have liquidity problems.

Slow down at a difficult route

The market deceleration is first of all explained by complicity with demand in new clients' segments. Factors try to avoid competition, quite felt in Moscow, by going to regions (see diagram 1). In 2007 factoring showed fast growing in the Central, North-West, Volga and Southern federal districts.

It is noteworthy that the three participants, dominant at any regional market, are also in top-5 of the main ranking³ (see table 3). The leaders make active steps to develop the market and attract companies from new segments to factoring services. Regional clients have more problems with promoting factoring, than in the capital. Statistics on debtors are absent and business of companies is not always transparent. There are personnel problems, too: the labor market in the regions is less saturated with qualified specialists, then in Moscow. You need serious investments just to promote factoring as it is. And so far efforts to attract regional clients are far from being fruitful. In the majority of regions the share of served companies is notably above the share of funds transferred by those companies.

In the regions factors deal with SME more and more. Factoring services, mostly unknown to an average Russian manager in a small company, are hard to promote. Increased share of mid-sized companies among factoring clients in 2007 was not followed by changed structural proportions of funds, transferred to factors (see diagram 2). A share of small companies goes down by a number of clients, but goes up by volumes of debts, transferred by them.

Stable supply determines demand

In 2007 the market players tended to be divided into two specific groups. The first group embraces mostly experienced factors with factoring being their main occupation or one of the most important areas of their business. These players are interested in developing new demand for factoring services. The second group consists mostly of "novices", whose marketing policy provides for speedy conquering of a significant market share - also by reducing prices for factoring services.

Diagram 2. A number of small clients among Factor clientele goes down, but their share of transferred funds to Factors goes up

Source: Factors questionnaires, Expert RA calculations

In the near future the market will grow at the expense of the first group companies, ready to invest into the market development together with investing into implementation of their own market strategies. The factoring market in 2008 will equal to 36 bln dollars, considering all the difficulties faced by its players.

Price competition is more urgent for "young" factors - reduced rates in the absence of better quality, speed and technology of servicing help them to build up their portfolios. "True, there were cases, when our clients received more lucrative price proposals for factoring services, - says Viktor Nosov, Promsviazbank department of factoring operations, - but in the long run clients came back to us, since all 5.5 years of our presence at the factoring market we have stuck to one principle: money is given at most 24 hours after the necessary documents came to the bank". To be successful at the market, a factoring company should be able to secure consistent financing and quality of service, not just offering small rates. "If a client gets the taste of factoring financing, he is ready to sign big contracts and plan its activity for years to come. If financing suddenly stumbles making a client violate the contract conditions, his losses would be incomparable with one or two percents of extra payment for the guarantee of avoiding such situations", - explains Liudmila Nesterova, Stroikredit Factoring general director.

Diagram 3. In 2007 Eurocommerz and Promsviazbank increased their turnover market share. MFK Trust joined the top-5	Diagram 4. Top-5 control over 70% of consolidated portfolios of the Russian Factors	Diagram 5. Top-5 share of clients is growing
Source: Factors questionnaires, Expert RA calculations

Factors of success

According to the factoring market players, three important components secure loyalty of clients and, consequently, success at the market: (1) quality IT-support; (2) efficient and factoring-customized risk-management; (3) professional staff managers (see table 2). In 2007 Russian factors served over 3 mln of supply operations. To conduct many operations on a daily basis, the factor IT-system should comply with serious demands. Presently companies and banks make grand investments into creating or purchasing new software. But sometimes valid factoring IT-platform features are not taken into consideration. "The market players are deluded as to what IT-program should do to protect them from risks. Nowadays numerous IT-companies offer factoring solutions for banks. There are bank-based technologies to protect from delayed payment risks: automatic zeroing of limits if an overdue payment exceeds certain amount of days; different reports on structuring and distributing limits; an express-analysis of financial status of a client or sometimes a debtor. So, as to protection from fraud, such IT-solutions are worthless", - says Аnton Musatov, NFK Bank board deputy chairman.

One of the most important tasks for an IT-system is to trace possible risks - not only credit ones, but rather risks of fraud. A typical fraud case is a transfer of false bills to a factor without debtors knowing about it. Under such circumstances payment for a debtor is made directly by a supplier or through third parties on the pretext of repayments or offsets. Similarly, a factor may receive bills for supplies to non-existent debtors - or debtors not involved in any economic activity but necessary for the above fraudulent schemes. Another type of fraud: use of front debtors (probably, affiliated with or motivated by a client) and bills for non-existent supplies. Sometimes clients try to get financing (from a factor) for already paid bills or transfer a bill already financed by another factor. These are the most popular types of fraud. But there are others, not generalized yet. "If we see a fraudulent attempt, we respond immediately and in most cases say good bye to such clients", - says Аleksander Morozov, Petrocommerz Bank factoring department.

In 2007 bank-factors received the CB recommendations to make factoring reserves with regress same as without regress - for a debtor. The need to re-assess factoring portfolios slowed down increase of turnover in bank-factors in 2007. But the new approach would enable banks to set limits on the basis of credit risk assessment at its real source.

According to the CB demands, in case of a debtor delayed payment banks should immediately increase the amount of reserves, even if a contract permits to a factor regress to a client. So far many banks, in order to avoid the need to form extra reserves, insured credit risks for non-regress factoring in insurance companies. There is no point to insure debtor's non-payment risk, if you can use the regress right to supplier. Therefore banks would have to reserve funds in case of each debtor's overdue payment. The solution is to set a separate factoring company independent of the regulator. But can it be that the decision to move factoring business out of banks would cause factors to deny insurers' services? "I never had to deal with a factor, that, after "leaving" the regulator and no longer needing to gather sufficient reserves, immediately said "no" to insurers' services, - says Мikhail Karyakin, Capital Strakhovanie, department of insuring credit and special risks. - Factors without a banking license also set reserves based on a factoring portfolio - therefore it would be wrong to say that the Bank of Russia regulating norms of reserves constitute the main reason for a factor to insure one's portfolio. It is confirmed by the fact that among our clients there are banks and specialized factoring companies without any banking licenses".

Staff is another important component of success at the factoring market. It is not too difficult to find an experienced factoring specialist in Moscow, but in the regions the situation looks different. "Financial services to corporate clients always call for high qualifications of those involved", - says Mr. Piatakov in relation to importance of human factor.

Factors with all the above components at hand ready to invest them into further development may succeed and stay at the top of the factoring market for a long time.

Irina Velieva and Pavel Samiev contributed to the article

¹ The growth is shown in dollar equivalent. The market growth in rubles was just 174%. The acceleration difference in US dollars and rubles is attributed to reduced dollar average rate from 27.14 rubles in 2006 to 25.55 rubles in 2007.
² ZAO FK Eurocommerz, OAO Promsviazbank, ZAO Bank NFK, OAO Bank Pertocommerz, OAO Nomos-Bank, OAO TransCreditFactoring, ZAO UniCredit Bank (ZAO International Moscow Bank), ZAO BSZHV, OAO SISTEMA Factor (OAO KB SISTEMA), OAO KB Rosprombank, OAO Bank Kazansky, ZAO AKIB Tserikh, OAO AKB Viatka-Bank
³ Ural FO is an exception - OAO SKB-Bank, the 15-th in general report, is among the three leaders by volume of transferred demands.