China banks’ NPL-backed note sales surge as stress builds up

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Sales of such asset-backed securities reached 6.2 billion yuan (US$890 million) between January and June, the highest for the period since Beijing resumed a trial program for the product in 2016.

SHANGHAI (July 13): Chinese commercial banks issued a record first-half amount of bond-like securities backed by soured loans this year, as a virus-induced economic slowdown brought on a fresh wave of financial stress.

Sales of such asset-backed securities reached 6.2 billion yuan (US$890 million) between January and June, the highest for the period since Beijing resumed a trial program for the product in 2016, according to data from Shanghai-based Heyi Fintech, an information provider that focuses on the sector.

The issuance boom of the structured notes, which essentially use cash-generating assets from loans to leases and credit card debt as collateral, comes as a reminder of the growing pressure on China’s banking sector, following the worst economic contraction in decades.

“There is a delay in recognition of bad assets, as banks have been offering firms with preferential policies including extension in repayment of principal and interest,” Wang Xiaoyu, director of structured finance at China Chengxin International Credit Rating, said. “So commercial banks’ incentives to issue ABS backed by non-performing loans will remain strong in the second half year, as they’ll continue to face big risks from bad assets.”

Regulators have been promoting the NPL-backed securities as a way to free up lenders’ balance sheets and effectively pass on the risk to investors. Chinese lenders have sold about 110 such
securities with a combined value of 65 billion yuan since 2016, data from Heyi Fintech showed.

Beijing kicked off a broader pilot project of asset-backed securitisation in 2005 but suspended it, following the onset of the global financial crisis. It resumed the program for some types of ABS in 2012 but didn’t end its ban on NPL-backed deals until four years ago.

Chinese commercial banks’ NPL ratio nudged up 0.05 percentage point to 1.91% at the end of March, even as lenders deferred payments on and rolled over 1.5 trillion yuan in loans.

Beijing has since allowed banks to take a more lenient approach on how they classify bad debt.