Key Takeaways
- Total securitization issuance in China grew strongly in 2020, with new issuance jumping 23% to a fresh high of RMB2.9 trillion (about US$433 billion).
- In the fourth quarter (4Q), RMBS issuance increased among repeat originators while auto ABS issuance remained stable.
- Except for a short-lived deterioration, performance has been stable across asset classes in a turbulent year amid the COVID-19 pandemic.
S&P Global Ratings expects another bumper year for China securitization. Issuance hit new highs in 2020. The market was buoyed by a rebounding economy and steady asset performance in the second half of a pandemic-struck year. The issuance momentum is likely to carry through into 2021. That said, regulatory dynamics and the path of economic recovery will influence what comes ahead.
Chart 1
Regulatory Update
Tight caps in the property sector will affect RMBS issuance
- Regulators are further tightening their grip on banks' exposure to the real estate sector. In our view, limits on mortgage loans and how mortgage loans backing residential mortgage-backed securities (RMBS) are to be reported for regulatory purposes will affect RMBS issuance.
- The ratio of outstanding property loans to total loans will be capped at 12.5%-40% and that for outstanding mortgages will be restricted to 7.5%-32.5%, depending on where the banks are within five categories based on asset scale.
- On Dec. 31, 2020, The People's Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly announced requirements for domestic banks to comply with ceilings on their property loans over the next two to four years. The new regulation, effective from Jan. 1, 2021, will cap real estate loans and personal housing loans for banks.
Potential regulatory change in online micro-lending business will likely constrain ABS issuance
- On Nov. 2, 2020, PBOC and CBIRC jointly announced the "Draft Interim Internet Micro-lending Governance Rules".
- These online micro lenders typically offer small, unsecured loans and are not permitted to take deposits. Their licenses were initially granted by local financial bureaus under relatively lax regulations compared with those for banks. The new regulations aim to constrain leverage for such lenders, and prevent excessive consumer borrowing.
- The proposed rules would constrain cross-provincial lending; limit maximum loan amounts; require a minimum 30% capital contribution to joint borrowing; restrict leverage including use of ABS instruments; and impose minimal capital requirements on the internet small loan companies.
- In our view, the rule change, if implemented, would not only affect loan origination for the more than 200 licensed internet lenders in China, but also limit sponsors' ability to use asset-backed securities (ABS) to finance loan growth.
Yield Trend
Auto loan ABS coupons went back to the pre-COVID level
- Due to a surge in credit defaults, market liquidity significantly tightened in October and November. The six-month Shanghai interbank offered rate trended upward and peaked at 3.18% on Nov. 30, 2020, the highest level since January 2019.
- To calm the market and maintain sufficient liquidity, PBOC injected over Chinese renminbi (RMB) 2.45 trillion (equivalent to US$375 billion) via four batches of one-year medium-term lending facility (MLF) loans in Q4. Following the MLF injection, the market rate slid to below 3% in December.
- PBOC announced in January 2021 that it will adopt flexible and targeted monetary policies throughout the year to support China's continued economic recovery, signaling stable money and liquidity supply for the year.
- Coupons on the most senior tranches of auto loan ABS still closely tracked the market rate, climbing to above 3.5% in November and then returning to 3.2% in mid-December.
Chart 2
New Issuance Trends
Overall issuance set new records in 2020
- New securitization issuance volume jumped 23% to RMB2.9 trillion (US$433 billion) in 2020 despite the economic shock wrought by COVID-19.
- Growth in new issuance continued into 4Q. New securities worth RMB1.2 trillion were issued, accounting for about 40% of the annual issuance volume.
- The increase is mainly attributed to the ongoing pick-up in RMBS, with more than 30 new transactions coming to the market in the last quarter of the year.
- Another factor leading to the growth in 2020 was the strong issuance of corporate-related ABS, including trade receivables and corporate loan-backed securities, mostly reflecting activity via schemes managed by China Securities Regulatory Commission and China's National Association of Financial Market Institutional Investors.
- Centrally regulated consumer loan ABS slumped 20% in 2020 to RMB18 billion. This was likely in part due to weaker consumption demand. We forecast real consumption growth of 9% in 2021. This would support the broad consumer ABS segment.
- Credit card ABS issuance resumed in 4Q, with two new transactions amounting to RMB19 billion. The issuance in this segment appears opportunistic and could be a swing factor in 2021.
Chart 3
Chart 4
Chart 5
Auto Loan ABS Issuance
Largely flat year-on-year despite the decline in annual auto sales
- Captive auto finance companies (AFCs) issued RMB49.3 billion across 12 transactions in 4Q 2020.
- Despite the decline in auto sales amid COVID-19, total annual issuance amounted to RMB194 billion, falling only marginally by 1.3% compared to that in 2019.
- Most of the frequent originators issued at least two deals throughout the year, supporting auto loan ABS issuance.
- We have seen increasing adoption of revolving structure in 2020, partly driven by funding efficiency and bank investors' needs. As the operations of AFCs have become more sophisticated and their loan books grow, we expect more will show interest and capability in issuing securities with revolving structure. That said, such a structure could be subject to regulatory scrutiny.
Chart 6
RMBS Issuance
Ended strong in 4Q, but still below issuance in 2019
- In 4Q, 31 RMBS transactions totaling RMB244.3 billion were issued.
- The significant increase in the final quarter was fueled by repeat issuances from the top-two deal sponsors, China Construction Bank Corp. and Industrial and Commercial Bank of China Ltd. Each brought seven new transactions to the market.
- Strong momentum in 4Q may also have to do with seasonality, meaning originators needed to complete their annual issuance target by the year end.
- Issuance in 4Q accounted for almost 60% of the annual RMBS issuance. That said, annual issuance was still 21% lower than that in 2019.
- A number of small to midsized banks made their debuts in 4Q, reflecting greater interest among banks to use RMBS to manage their loan books.
- RMBS activity will likely recover in 2021. Regulators' views on the property market and property price movements are key to mortgage loan origination and RMBS issuance in the next few quarters.
Chart 7
Auto Loan ABS Performance
Delinquency rates remained stable
- Delinquency rates remained stable in the last quarter of 2020 as economic recovery accelerated.
- A jump in the M1 ratio (1-30 days past due) was mainly due to a non-credit issue associated with a certain AFC. The ratio fell back into the normal range of below 1% in December.
- The weighted average M2 (31-60 days past due) and M3 (61-90 days past due) ratios for all outstanding auto loan ABS transactions fell slightly, to 0.09% and 0.05%, respectively.
- The auto transactions we rate maintained low delinquencies. The weighted average M2 and M3 ratios of these rated transactions have been largely flat, at 0.04% and 0.02% in December.
Chart 8
Steady performance, with the cumulative default rate staying low
- The cumulative default rates were largely similar to that in 3Q and overall remained low.
- For 2018 and 2019 vintages, the rate increased marginally by 2 and 7 basis points (bps) respectively at the end of 4Q, attributed to the broadly stable collateral performance.
- We expect the trend to continue thanks to the economic recovery and favorable portfolio characteristics such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor.
Chart 9
RMBS Performance
Rated RMBS pools post stable performance
- Delinquencies of 1-30 days stayed largely the same as that in 3Q. For our rated RMBS transactions, the M1 ratio remained around 0.25% in 4Q.
- The M2 and M3 ratios remained below 0.1%.
- The M4+ ratio (90+ days past due) has inched up, reaching 0.51% in 4Q, given it takes time to work out severe delinquent and defaulted mortgage loans.
Chart 10
Cumulative default rates hold steady in 2020 despite the COVID hardship
- The increase in the cumulative default rate of most of the vintages was minimal at 2bps-6bps as of the end of 4Q.
- The cumulative default rate of most of the vintages stayed below 0.6%.
- Despite the pandemic, the cumulative default rates only rose slightly by 10bps-25bps during the year compared to those in 2019. That said, the relatively higher M4+ ratio could mean that those severe delinquent loans would gradually fall into the default bucket and increase the default rate.
- We believe asset performance will remain stable, given steady economic recovery and restrictive government policies in real estate and mortgage lending.
Chart 11
Prepayment remained constant during 4Q
- The constant prepayment rate (CPR) for bank-issued RMBS transactions remained at around 12% in 4Q.
- We expect the CPR to fluctuate between 8% and 12% in the medium term.
Chart 12
Consumer Loan ABS Performance
Stabilized after the COVID-19 volatility in 2Q
- Given the unsecured nature of consumer loans, the asset performance of consumer loan ABS per Credit Asset Securitization Scheme tends to be more volatile than that of auto loan ABS and RMBS.
- The M2 ratio (31-60 days past due) of the consumer loan ABS we tracked has hovered between 1% and 2% since the middle of 2019, much higher than the less than 0.2% most of time for auto loan ABS and RMBS.
- The M2 ratio came to a peak in 2Q, similar to what we have seen in other asset classes under the COVID shock.
- The M3 ratio (61-90 days past due) gradually improved as the impact of COVID-19 faded, falling below 1% in 4Q 2020.
- Some originators might have placed greater emphasis on asset quality over asset growth. We believe such a strategy transformation helps the collateral performance of consumer loan ABS in the long term.
Chart 13
New Issuances In 2020
- Bavarian Sky China 2020-1, Feb. 13, 2020
- Rongteng 2020-1 Retail Auto Loan Securitization, March 12, 2020
- Generation 2020-1 Retail Auto Mortgage Loan Securitization, March 13, 2020
- Autopia China 2020-1 Retail Auto Mortgage Loan Securitization Trust, March 17, 2020
- Silver Arrow China 2020-1 Retail Auto Loan Asset Backed Notes Trust, March 24, 2020
- Driver China ten Trust, March 27, 2020
- Bavarian Sky China Leasing 2020-1 Trust, April 17, 2020
- Generation 2020-2 Retail Auto Mortgage Loan Securitization, May 19, 2020
- VINZ 2020-1 Retail Auto Loan Asset-Backed Securities, June 19, 2020
- Jianyuan 2020-2 Residential Mortgage Backed Securities, June 24, 2020
- Bavarian Sky China 2020-2, July 10, 2020
- Generation 2020-3 Retail Auto Mortgage Loan Securitization, Aug. 25, 2020
- Silver Arrow China 2020-2 Retail Auto Loan Asset Backed Notes Trust, Sept. 11, 2020
- VINZ 2020-2 Retail Auto Loan Asset-Backed Securities, Oct. 23, 2020
- Zhaoyin HeJia 2020-5 Residential Mortgage Backed Securitization Trust, Oct. 29, 2020
- Autopia China 2020-2 Retail Auto Mortgage Loan Securitization Trust, Nov. 5, 2020
- Driver China eleven Trust, Nov. 26, 2020
- VINZ 2020-3 Retail Auto Loan Asset-Backed Securities, Nov. 27, 2020
- Jianyuan 2020-12 Residential Mortgage Backed Securities, Nov. 27, 2020
- Generation 2020-4 Retail Auto Mortgage Loan Securitization, Dec. 9, 2020
Rating Actions In 2020
- Ratings On 14 Classes Of Notes Across Five Jianyuan RMBS Transactions Affirmed, Dec. 23, 2020
Related Research
- China Consumer Products And Retail: Opportunity Knocks, Jan. 26, 2021
- Economic Research: The Missing Factor In China's Remarkable Recovery, Jan. 18, 2021
- China Structured Finance Outlook 2021: Expect Another Record Year, Jan. 13, 2021
- China's New Curbs On Real Estate Loans To Flatten Sales, Jan. 5, 2021
- Industry Top Trends 2021 Global Autos: A Bumpy Road To Recovery From COVID-19, Dec. 10, 2020
- Asia-Pacific Credit Outlook 2021: Comebacks, Setbacks, And Divergent Tracks, Dec. 7, 2020
- China's Suspension Of Ant Group IPO Another Sign Of Tightening Fintech Regulations, Nov. 17, 2020
- A Primer On China's Residential Mortgage Backed Securities Market, June 24, 2020
This report does not constitute a rating action.
| Primary Credit Analyst: | KY Stephanie Wong, Hong Kong (852) 2533-3529; ky.stephanie.wong@spglobal.com |
| Secondary Contacts: | Jerry Fang, Hong Kong + 852 2533 3518; jerry.fang@spglobal.com |
| Yilin Lou, Hong Kong; yilin.lou@spglobal.com | |
| Research Assistant: | Carol Hu, Hong Kong |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.