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Loan securitization proves positive for Chinese banks
By Katie Chen |
June 15, 2012, Friday
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Print Edition
Print Edition
NEWS sources have reported that the People's Bank of China, China's Ministry of Finance, and the China Banking Regulatory Commission jointly issued in late May a "Notice on Further Expanding the Credit Asset Securitization Pilot Programs." The notice essentially enables banks to once again issue asset-backed securities since the regulator suspended a similar program during the financial crisis in 2008. The total size of the pilot programs is widely reported to be 50 billion yuan (US$7.9 bilion) based on the State Council's previous approval. This development is credit positive for Chinese banks as it reopens a channel for banks to diversify their funding source, frees up capital to support growth, provides a tool for banks to adjust their loan portfolio, and improves transparency on bank asset quality.
Securitization allows banks to unload assets from their balance sheets, thus easing the pressure on their liquidity and capital. We expect this to benefit in particular joint stock commercial banks with loan-to-deposit ratios close to the regulatory requirement of 75 percent and weaker capital positions if regulators approved them to securitize. These banks include China Merchants Bank, Shenzhen Development Bank, and China Everbright Bank.
Securitization also allows banks to adjust the maturity profile and loan mix of their loan portfolio. Banks can shorten their average loan tenor by securitizing their long-term loans, thereby reducing tenor mismatches between their assets and liabilities. Banks can remove from their book loans that do not fit their strategies, but continue to support these loans by acting as intermediaries and receiving fee income in the securitization process.
Regulators will require that trustees of the securitized assets publicly disclose the performance of the underlying asset pools periodically, which will bring more transparency to the banks' credit underwriting and the quality of similar assets in bank portfolios. The issuers also need to obtain monitored ratings from two domestic rating agencies when applying for issuance, which will provide third-party oversight over the securitization.
Although the notice revives what regulators suspended four years ago, this latest pilot program differs from its two predecessors in several aspects, including the following:
The pilot program targets assets more tied in with the priorities the government outlined in its 12th Five-Year Plan, including major infrastructure loans, rural loans, small and medium-size enterprise loans, and loans to local government financing vehicles. We expect banks with high exposure to these loans to participate in the pilot program, including China Construction Bank for infrastructure loans, Agricultural Bank of China for rural loans, and China Development Bank for LGFV loans.
Non-bank institutions
The program expands the potential investor base to non-bank institutions, including insurance companies, mutual funds, and social security funds. Although this expansion is positive from a liquidity perspective, it also warns of bigger potential risks from ill-designed products, justifying the new program's added safety measures.
The program implies only a partial transfer of risks from banks. The regulators require issuers to retain at least 5 percent of the lowest tranche of issuance. This tranche will be the first to absorb losses from underlying assets. Also, banks may try to securitize loans with better documentations and stronger quality to satisfy due diligence and regulatory oversight, leaving loans with higher risks on their books
The program implies stronger regulatory oversight and reflects authorities' caution regarding securitization in view of the lessons learned from the financial crisis. Aside from the minimum retention and oversight from two rating agencies, the program excludes complicated structures like re-securitization or synthetic securitization, which reflect the authorities' effort to prevent banks from issuing products with hidden risks.
The article was extracted from "Moody's Weekly Credit Outlook" issued on June 11.
Securitization allows banks to unload assets from their balance sheets, thus easing the pressure on their liquidity and capital. We expect this to benefit in particular joint stock commercial banks with loan-to-deposit ratios close to the regulatory requirement of 75 percent and weaker capital positions if regulators approved them to securitize. These banks include China Merchants Bank, Shenzhen Development Bank, and China Everbright Bank.
Securitization also allows banks to adjust the maturity profile and loan mix of their loan portfolio. Banks can shorten their average loan tenor by securitizing their long-term loans, thereby reducing tenor mismatches between their assets and liabilities. Banks can remove from their book loans that do not fit their strategies, but continue to support these loans by acting as intermediaries and receiving fee income in the securitization process.
Regulators will require that trustees of the securitized assets publicly disclose the performance of the underlying asset pools periodically, which will bring more transparency to the banks' credit underwriting and the quality of similar assets in bank portfolios. The issuers also need to obtain monitored ratings from two domestic rating agencies when applying for issuance, which will provide third-party oversight over the securitization.
Although the notice revives what regulators suspended four years ago, this latest pilot program differs from its two predecessors in several aspects, including the following:
The pilot program targets assets more tied in with the priorities the government outlined in its 12th Five-Year Plan, including major infrastructure loans, rural loans, small and medium-size enterprise loans, and loans to local government financing vehicles. We expect banks with high exposure to these loans to participate in the pilot program, including China Construction Bank for infrastructure loans, Agricultural Bank of China for rural loans, and China Development Bank for LGFV loans.
Non-bank institutions
The program expands the potential investor base to non-bank institutions, including insurance companies, mutual funds, and social security funds. Although this expansion is positive from a liquidity perspective, it also warns of bigger potential risks from ill-designed products, justifying the new program's added safety measures.
The program implies only a partial transfer of risks from banks. The regulators require issuers to retain at least 5 percent of the lowest tranche of issuance. This tranche will be the first to absorb losses from underlying assets. Also, banks may try to securitize loans with better documentations and stronger quality to satisfy due diligence and regulatory oversight, leaving loans with higher risks on their books
The program implies stronger regulatory oversight and reflects authorities' caution regarding securitization in view of the lessons learned from the financial crisis. Aside from the minimum retention and oversight from two rating agencies, the program excludes complicated structures like re-securitization or synthetic securitization, which reflect the authorities' effort to prevent banks from issuing products with hidden risks.
The article was extracted from "Moody's Weekly Credit Outlook" issued on June 11.
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