Chinese regulators opened the door to the securitisation of non-performing loans last year, giving six of the country’s biggest banks a chance to move struggling loans off their balance sheets.
The country’s banking regulator, the China Banking Regulatory Commission, is now poised to give the market an even bigger push.
The CBRC will this year open up the market to 12 banks, doubling the number of institutions with permission to sell NPL securitisations, according to a senior banker at one of the state-owned banks given permission to sell a deal last year. This figure could not be confirmed elsewhere, but other bankers confirmed an expansion was likely.
The growth of the market is more crucial than might be obvious from a cursory glance at the numbers. The non-performing loan ratio of Chinese commercial banks rose to 1.76% by the end of September, according to Moody’s, which cited official data — but some analysts argue the real figure is multiple times that. In May, CLSA's Frances Cheung said the real number was between 15% and 19%.
Almost as importantly, Chinese banks have few other options when it comes to shifting non-performing loans off their balance sheets.
Foreign distressed debt funds are largely off the table. These funds were once major buyers of non-performing loans in China, but this source of demand is now seen as politically odious, said a securitisation head in Hong Kong.
Chinese asset management companies are another obvious source of demand, but the fact they would buy only huge amounts in bulk may give them more power than banks are willing to accept. In a December report, PwC analysts said there was anecdotal evidence that most such deals failed as banks and asset managers failed to agree on a price.
“Fundamentally, there is no better way to extract value [from these loans],” said a China-focused securitisation banker.
But although the expansion of NPL securitisation is good for the banking sector, it will force investors to be more proactive about asset quality.
Originating banks were “very careful” when selecting non-performing loans to be securitised last year, aware that the market needed to start strong, according to the China-focused banker. But as the market expands, the natural temptation will be for Chinese banks to move some of their lower quality non-performing loans into securitisation vehicles, bankers said.
Bank of China kick-started the market in May 2016, selling a Rmb300 million ($43.7 million) deal. Agricultural Bank of China, Bank of Communications, China Construction Bank, China Merchants Bank and Industrial and Commercial Bank of China followed suit. Between them, these banks sold 11 deals last year, worth a total of Rmb13.26 billion between them.