China Banks:NPL securitisation has kick-started

BOC and CMB kick-start new round of NBS issuances

    BOC and CMB published on 19 May the issuance documents for their NPLbackedABS (NBS), marking the relaunch of NPL securitisation in Chinasince 2008 (Fig 1).

    The scale of the first NBS issuance is tiny, with BOC issuing RMB301mn inNBS (vs RMB136bn in NPLs by 1Q16) and CMB issuing RMB233mn in NBS(vs RMB53bn in NPLs by 1Q16). Reuters reported on 25 February thatICBC, CCB, ABC, BOC, Bocom and CMB have been approved by regulatorsto issue NBS, with the total quota set at RMB50bn. We believe other banksmay also start their NBS issuances in the coming months.

    Underlying asset mix: BOC’s concentrated corporate loans vs CMB’sdiversified credit card loans

    BOC’s NBS underlying asset pool primarily consists of substandardcorporate NPLs in Shandong province. The expected collection rate is 34%,while NBS is at 24% of face value of the underlying loans or 71% of theexpected collection amount.

    CMB’s NBS underlying asset pool is purely credit card loans across China,with 53% of the loans classified as loss, 32% as doubtful and the remaining15% as substandard NPLs. The expected collection rate is 14%, while NBSis at 15% of face value of the underlying loans or 78% of the expectedcollection amount.

    We see RMB100bn NBSs in 2016F, c.4% of estimated NPL book by end-2016

    As per CBRC, China’s substandard loans have reached RMB651bn (up 36%y-y) and doubtful loans were another RMB579bn (up 48% y-y) by 1Q16 (Fig2). These two types of loans accounted for 88% of the NPL balance in Chinain 1Q16. Despite of CMB’s case, we expect banks would mainly includesubstandard and doubtful NPLs in the underlying asset pool as they have ahigher chance of collection vs loss category NPLs. We expect NBS issuancecould touch RMB100bn in 2016, representing c.4% of the RMB2.3trn NPLbalance by end-2016 based on our estimates.

    That said, NBS would only be a supplementary, not a primary source of NPLdisposals for banks, subjected to the eligibility of the underlying assets andthe quotas from the regulators, in our view.

    Yield likely higher than the 5.7% p.a. yield on average for ABS issuedin the past

    Of the c.RMB1trn ABS issued from 2013 to 2015 (Fig 3), the yields rangefrom 5.0% to 6.5% p.a. for tenors ranging from 1 year to 5 years. The yieldfor these NBS could be higher than the 5.7% average yield of the RMB1trnABS issued between 2013 and 2015, on higher risks involved in the NPLcollection, we think.