Since the 2016 launch of asset-backed securities (ABS) market for non-performing loans (NPL) in China, the space has not taken off as expected to provide another way for the country to clear up its growing pile of bad loans. Issuance of non-performing asset BAS has declined annually, with mostly large state-owned banks major issuers and little private market participation.
As of October, Chinese banks have issued 55 non-performing asset ABS products with underlying assets worth RMB37.72 billion (US$5.47 billion), which is less than 80% of the issuance size during the pilot period when NPL ABS was first launched, according to Chinese data provider Wind.
In 2016, the People’s Bank of China approved China’s six largest banks to issue asset-back securities with NPLs as underlying assets in a pilot program for a total of RMB50 billion (US$7.26 billion).
But since then, scale of non-performing asset ABS has declined annually. In 2016, a total 14 ABS products worth of RMB15.61 billion (US$2.27 billion) were issued. In 2017, 19 products with underlying assets of RMB12.96 billion (US$1.88 billion) were issued, representing a 16.97% drop. As of October 22 this year, a total of 22 products worth RMB9.15 billion (US$1.33 billion), according to Chinese media.
Large-scale issuance of non-performing asset ABS is concentrated in large state-owned banks. Among the 55 products, 10 had issuance size larger than RMB1 billion (US$145 million), all issued by the larger banks including Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, China Construction Bank and Bank of Communications. ICBC is the largest issuer, with 12 products totaling RMB15.43 billion, followed by China Construction Bank with 7 products totaling RMB6.7 billion.
Scale of individual products issued by joint-stock banks and city commercial banks were less than RMB1 billion, and many between RMB100 million to RMB200 million.
Non-performing assets are not ideal underlying assets for ABS, Yang Rui, a researcher at Hengfeng Bank told Chinese media. He said the underlying assets are expected to generate predictable and stable cash flows, but it is difficult for non-performing assets to meet such criteria. Only some recent NPLs with considerable recoverable values could be chosen as better underlying assets, which limits the size of the issuance of ABS.
High issuance cost is another issue. The underlying NPLs often consist different types of loans, such as credit card loans and consumer loans from various regions. The issuance of ABS requires credit rating agency to review such loans on a case-by-case basis, increasing the issuance cost for banks.
Currently, ABS with NPLs as underlying assets are traded in China’s inter-bank bond market, where high-yield bond investors are the majority participants. But for ABS assets, the investors community is rather limited with mostly China’s big four asset management companies (AMCs) and some local AMCs. Therefore, banks have less incentive to issue non-performing Asset ABS.