Securitization of China's non-performing loans will grow in 2017

China's nascent non-performing loan (NPL) securitization market will grow in 2017, underpinned by the increasing volume of NPLs in the banking sector, according to Moody’s Investor Service.

In 2016, eight asset backed securitization (ABS) deals backed by NPLs were issued by Chinese banks. These deals, which had a total volume of eight  billion renminbi, were the first NPL ABS in China since the country’s securitization market re-opened in 2012.

The volume of NPLs held by Chinese banks has increased significantly since 2015 and totaled RMB1.49 trillion as of  September 30.

The eight NPL ABS issued in 2016 were backed by a variety of NPLs, including corporate loans, credit card receivables, small-to- medium enterprise loans and residential mortgage loans. Both secured and unsecured loans were securitized.

In 2017, Moody’s expects corporate NPLs to be the main type of assets backing NPL ABS, though deals backed by other types of NPLs will also be issued. While corporate financial leverage remains high and continues to rise, banks in China face constraints in terms of their ability to reduce their risk exposures to corporates, because of concerns that it would trigger defaults and negatively affect the real economy.

In this context, reducing NPLs through securitization would be one alternative for banks to reduce their exposures and diversify their funding sources at the same time. China's State Council has also endorsed the securitization of both NPLs and performing assets as part of a plan announced in October to reduce corporate debt. 

Corporate NPL ABS issued in 2017 will likely include a relatively small number of loans, giving them a high portfolio concentration risk, as was the case with such deals issued in 2016. The underlying NPLs will consist of both unsecured and secured loans.

NPL ABS backed by consumer loans, such as credit card receivables and residential mortgage loans, will also continue to be issued in 2017. The underlying NPLs will consist of both unsecured and secured loans. Unlike corporate NPL securitizations, consumer NPL ABS will include a much higher number of underlying loans