China's new securitization growth momentum has carried through into 2021. S&P Global Ratings expects the strong economic recovery to support ongoing growth in new issuance. The favorable economic conditions also underpin the steady performance of asset-backed securities (ABS) and residential-mortgage-backed securities (RMBS).

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Yield Trend

Auto loan ABS coupons remained stable as growth of money supply leveled off

• The Chinese government reaffirmed its goal to pursue a prudent monetary policy. Money supply and total social financing growth will be generally in line with nominal economic growth this year.
• Such guidance is reflected in the money supply growth. Growth of broad M2, a measurement of the money supply, fluctuated within a narrow range of 9.4%-10.1% in the first quarter (1Q) of 2021. Steady liquidity supply anchored the market interest rate, as the six-month Shanghai Interbank Offered rate was 2.75%-2.85% during the quarter.
• Coupons on the most senior tranches of auto loan ABS mainly remained at the 4Q 2020 level. Some repeat issuances offered less than 3% coupon rates for March issuance though.

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New Issuance Trends

Momentum continued

• New securitization issuance volume reached Chinese renminbi (RMB) 602.7 billion (US$93 billion) in 1Q 2021, an increase of 38% year over year (yoy). We believe strong economic recovery supported the ongoing growth in new issuance.
• The increase can be largely attributed to the strength of RMBS issuance, with a yoy growth of 183%.
• Another factor leading to the growth was the continued significant issuance of corporate-related ABS, including supply chain ABS and trade receivables. This mostly reflected activity via schemes managed by China Securities Regulatory Commission and China's National Association of Financial Market Institutional Investors. The issuance volume under both regulatory regimes reached RMB380.4 billion (US$59 billion), an increase of 20% yoy.
• Auto loan ABS issuance exhibited a significant 33% yoy growth. However, we believe this has to do with seasonality. We still expect flat-to-modest growth in auto loan ABS in 2021.
• For centrally regulated consumer loan ABS, which draws increasing attention from offshore investors, the issuance volume was RMB4.5 billion, falling by 43% yoy. Retail sales gradually resuming to the pre-COVID-19 trend and revival in real private consumption could support the broad consumer ABS issuance this year.

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Auto Loan ABS Issuance

Issuance was buoyant alongside a pick-up in auto sales

• Total issuance of RMB61.6 billion by captive auto finance companies (AFCs) across 10 transactions translates to 33% yoy growth in 1Q 2021. The ongoing pick-up in auto sales since the second half of 2020 has fueled auto loan ABS issuance growth.
• The auto loan ABS market was buoyed by issuance from frequent originators. Some local AFCs also made repeat issuances and attempted to tap offshore investors.
• In light of the increasing importance of environmental, social and governance (ESG), a greater number of EV models are likely to launch in China in the next 12 months, boosting auto loans that will finance the purchase. However, we do not anticipate EV-backed auto loans to account for a meaningful portion of the securitized pool across transactions during this period.
• More leasing companies will explore the feasibility of tapping offshore investors, although this trend is still at its early stage.

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RMBS Issuance

Momentum may slow down despite an active first quarter

• In 1Q 2021, 17 RMBS transactions totaling RMB135.3 billion were issued, a yoy increase of 183% in terms of issue size.
• The significant growth was partly due to the low base in 1Q 2020 in which the issuance amount dropped by nearly 30% yoy.
• The active issuance in 1Q 2021 was supported not only by major bank sponsors but also by small to midsized banks.
• The increasing issuance reflects the need for loan book management. Over the next two to four years, banks have to comply with the tightening regulations that took effect in January 2021 on their exposure to the real estate sector.
• Despite an active 1Q 2021, RMBS issuance may lose steam. Regulators' view on the property market and property price movement are critical and will affect issuance this year.

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Auto Loan ABS Performance

Delinquency rates remained stable

• Delinquency rates remained stable in the 1Q 2021 as economic recovery has been positive.
• The weighted average M2 (31-60 days past due) and M3 (61-90 days past due) ratios for all outstanding auto loan ABS transactions have been largely flat, at 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 remained at 0.04% and 0.02% in March.
• We observed a spike in M1 ratio (1-30 days past due) in January and February, which was attributable to the operational practice of some AFCs, and we had seen a similar spike back in October 2020. In our view, there has been no significant change in the credit quality of the underlying pools. The ratio fell back into the normal range of below 1% in March.

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The cumulative default rate stayed low

• The cumulative default rates were largely similar to that in 4Q 2020 and overall stayed low.
• For 2019 and 2020 vintages, the rate increased marginally by 4 basis points (bps)-5 bps at the end of 1Q, attributed to the broadly stable collateral performance.
• We expect the economic recovery and favorable pool attributes such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor to underpin the steady performance of auto loan ABS.

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RMBS Performance

Rated RMBS pools post stable performance

• For our rated RMBS transactions, the delinquencies of M1 ratio stayed low at around 0.24% at the end of 1Q 2021.
• The M2 and M3 ratios remained below 0.1%.
• The M4+ ratio (90+ days past due) has been relatively flat and maintained under 0.5% as our rated transactions became more seasoned over time.
• We assessed the time required to work out the defaulted loans in one of our rated 2018 RMBS transactions. The observation is still limited because there are less than 30 defaulted loans being fully repaid according to the trust reports. Based on the very small sample pool from the trust reports, we estimate the time required from overdue to fully recovered to be 18-24 months. We expect the time required for workout to gradually increase as the transaction becomes more seasoned. It might still be a while before we see such figures plateau.

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Slight increase in cumulative default rates

• The increase in the cumulative default rate of most of the vintages was minimal at 3bps-7bps as of the end of 1Q 2021.
• The cumulative default rate of most of the vintages stayed below 0.7%.
• We believe the asset performance will remain stable, given steady economic recovery and tightened government policies in real estate and mortgage lending.

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Prepayment remained constant during 1Q

• The constant prepayment rate (CPR) for bank-issued RMBS transactions was 11%-13% in 1Q 2021.
• We expect the CPR to fluctuate between 8% and 12% in the next 12 months.

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Consumer Loan ABS Performance

Delinquencies held steady in 1Q

• Given the unsecured nature of consumer loans, the asset performance of consumer loan ABS per Credit Assets Scheme (CAS) tends to be more volatile than that of auto loan ABS and RMBS.
• The M2 ratio of the consumer loan ABS we tracked stayed at around 1% in 1Q 2021, much higher than the less than 0.2% most of time for auto loan ABS and RMBS.
• The M3 ratio was also closely tracking the trend of M2 ratio, hovering at 1%.
• We expect the collateral performance of consumer loan ABS would be largely stable. 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.

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New Issuances In 1Q 2021

• Bavarian Sky China 2021-1 Retail Auto Mortgage Loan Securitization, Jan. 15, 2021
• Generation 2021-1 Retail Auto Mortgage Loan Securitization, March 9, 2021
• Fuyuan 2021-1 Retail Auto Mortgage Loan Securitization, March 19, 2021
• Autopia China 2021-1 Retail Auto Mortgage Loan Securitization, March 24, 2021

Rating Actions In 1Q 2021

• Autopia 2020-1 Class B Notes Upgraded To 'AAA (sf)'; Rating On Class A1 And A2 Notes Affirmed At 'AAA (sf)', Feb. 10, 2021

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