Chinese banks will soon embark on the path of managing its bad loans with securitization, as Bank of China and China Merchants Bank revealed plans to issue asset-backed securities (ABS) next week.
The issuance will be the first such deal since 2008, as Chinese regulators are increasingly promoting the ABS market as a way to help lenders manage ballooning non-performing loans.
The non-performing loan total in China’s banking sector jumped about 51% year-on-year to RMB1.27 trillion at the end of 2015, and to RMB1.39 trillion at the end of March, according to official statistics.
In February, China granted six large banks, including Industrial and Commercial Bank of China Ltd., China Construction Bank Corp, Agricultural Bank of China Ltd. and Bank of Communications Co, total quotas of RMB50 billion to issue ABS with non-performing loans as underlying assets.
Bank of China and China Merchants Bank plan to issue their respective ABS valued at RMB301 million and RMB233 million in the national inter-bank market on May 26.
Bank of China’s ABS has 78% structured as priority tranche A with an AAA credit rating carrying a fixed interest rate. The rest lower tranche carries no interest. The ABS matures on March 26, 2021.
The asset pool of the ABS consists 72 loans from 42 borrowers in Shandong province with outstanding unpaid loan and interest total of RMB1.254 billion. The estimated recovery total is around RMB422 million.
Borrowers are in twenty industries including wholesale, financial services, transportation, machinery, manufacturing and chemicals.
China Merchants Bank’s ABS has 80.69% in priority tranche with an AAA credit rating carrying a fixed interest rate. The remaining tranche pays no interest. The ABS matures on May 26, 2020.
The asset pool includes over 60,000 bad credit card loans with outstanding unpaid loan and interest of RMB2 billion. The recovery is expected to be around RMB297 million.
The credit card holders are mainly located in Shenzhen, Shanghai, Guangzhou. China Merchants Bank has outsourced debt collection to outside firms.
Both Bank of China and China Merchants Bank maintain an around 5% stake of their ABS.