- New securitization issuance decreased by 10% year on year to Chinese renminbi (RMB) 1,334 billion (US$182.8 billion) in the first three quarters of 2023.
- Issuance trends by asset type varied. We expect issuance of consumer finance asset-backed securities (ABS) to gain momentum due to favorable industry and regulatory dynamics. Issuance of auto loan ABS remained weak while residential mortgage-backed securities (RMBS) remained stalled.
- We estimate structured finance issuance in 2023 at RMB1.85 trillion, representing an 8% drop. The forecast is based on our economic outlook, issuance seasonality, and actual amount of issuance in the first half of 2023.
- A recent cut in mortgage rates led to lower interest income on RMBS transactions that we rate, and a one-off spike in prepayment, though this did not lead to any rating impact.
China's securitization issuance has been lackluster in the first three quarters of 2023 amid a slowing recovery of the overall economy and the weak property sector. New securitization issuance decreased by 10% year on year in the three quarters of 2023 to RMB1,334 billion (US$182.8 billion). We expect annual issuance volumes to decline by 8% during 2023.
S&P Global Ratings believes delinquency trends are gradually stabilizing in the third quarter of 2023. While the delinquency ratios in RMBS increased, it was likely in large part due to a significant drop of the underlying pool balance because of a one-off high prepayment in September (please refer to "RMBS Performance" section for more details). Nevertheless, we believe the ratings on the auto ABS and RMBS transactions that we rate will remain stable as China's economy continues to recover.
In July, S&P Global Ratings assigned a 'AAA (sf)' rating to the first consumer loan ABS transaction from China. We have also published a Credit FAQ to address investors' questions on this asset class and our rating process and methodology (see "What's Behind The First 'AAA (sf)' Rating Assigned To Chinese Consumer Finance ABS?", published Aug. 24, 2023). We expect to expand our observations on the consumer loan ABS sector based on both publicly available information and our rated transaction in future publications.
Liquidity remains stable amid monetary loosening
People's Bank of China (PBOC) announced a 10 basis point (bps) reduction to the one-year loan prime rate (LPR) in August 2023, lowering it to 3.45% from 3.55% in June 2023. This is the second cut to the one-year LPR in the year. Five-year LPR remained at 4.2%, the same level as that in June 2023. In March 2023, the central bank cut the required reserve ratio for financial institutions.
The six-month Shanghai Interbank Offered rate (SHIBOR) exhibited a V-shaped rebound during the third quarter, bottoming at about 2.1% in August, and it has increased by nearly 30 bps since then. As of Sept. 30, 2023, the rate was 2.36%, compared with 2.24% at the end of June. We believe this key rate has bottomed out.
Coupons on the most senior tranches of auto loan ABS trended down to 1.96%-2.6% during the third quarter of 2023 from 2.2%-2.7% in the second quarter of 2023. We believe the coupons are likely bottoming out as well, tracking the SHIBOR's trajectory.
Chinese regulators issued notice to lower mortgage rates
PBOC and National Administration of Financial Regulation (NAFR) issued a notice to Chinese mortgage originators in August 2023 to lower interest rates on first-home mortgages.
The notice became effective in late September 2023. Most of the banks implemented blanket mortgage rate adjustments on first-home mortgages. The rates could potentially reach the national floor, which stands at 20 basis points (bps) below the five-year LPR, the benchmark lending rate for most mortgages for loans extended after May 14, 2022. Loans extended on or before that date are set at the LPR. According to PBOC, as of Oct. 1, 2023, mortgage interest rates have been lowered for 98.5% of eligible first-home mortgages. This has lowered the weighted-average mortgage interest rate by 73 basis points.
New Issuance Trends
Weak issuance trend persists
New securitization issuance decreased by 10% year on year in the three quarters of 2023 to RMB1,334 billion (US$182.8 billion). RMBS issuance remained stalled against the backdrop of an L-shaped recovery in the Chinese property market. Issuance slowed for auto loan ABS and corporate risk-related asset classes, such as supply chain ABS. Some sectors such as consumer ABS under the credit asset securitization scheme maintained good momentum.
We expect total issuance volume for 2023 to decrease by 8% to RMB1.85 trillion. This is based on our economic outlook, issuance seasonality, and the actual issuance amount during the first half of 2023.
Positive momentum in some asset classes in 3Q
In terms of issuance venue, issuance under the National Association of Financial Market Institutional Investors (NAFMII) scheme dropped 40%, while the issuance under the China Securities Regulatory Commission (CSRC) scheme increased by 2% year on year during the first three quarters of 2023. Credit ABS managed by NAFR and the PBOC also recorded a decline of around 8%. Based on our observation, leasing and factoring companies remained active in ABS issuances in the exchange market for fund raising.
Auto loan ABS issuance saw a 19% yearly decline in the first three quarters of 2023 mainly because of slow growth in auto sales and loan origination for certain auto finance companies. However, compared with the first half of 2023, auto loan ABS saw a more active third quarter with 12 issuances totaling RMB51.7 billion.
There was no RMBS issuance in the first three quarters, remaining stalled since February 2022.
We have seen robust growth of some specific sectors under the credit ABS scheme, which includes consumer loan ABS and micro and small enterprise (MSE) loan ABS. Partly because of the more favorable regulatory dynamic, issuances in these asset classes will likely maintain momentum, or potentially accelerate, across different regulatory regimes.
Consumer loan ABS issuance under the credit ABS scheme maintained strong momentum from the second half of 2022. Issuance in this sector grew by 70% year on year in the first three quarters of 2023, supported by both repeated issuance as well as debut transactions. We forecast robust issuance momentum will persist in the next few quarters, considering the policy support in consumption and consumption-related financing activities, regular issuance from repeated issuers, and growing investor interest in this asset class.
Issuance in MSE loan ABS under the credit ABS scheme increased by 8.5% in the first three quarters of 2023, maintaining strong momentum since the second half of 2022. Total issuance amounted to RMB33.3 billion, which accounted for about 14% of the total securitization issuance under the credit ABS scheme in the first three quarters.
Auto ABS Issuance
Slow auto sales and loan originations drag auto ABS issuance
Auto ABS issuance volume decreased by 19% year on year in the first three quarters of 2023 to RMB140 billion. Captive auto finance companies issued 29 transactions during the period, down from 35 transactions over the same period of 2022. Slow growth in auto sales and loan origination for certain auto finance companies likely contributed to the decrease. Having said that, we have seen increased issuances just in the third quarter, with a total of 12 issuances amounting to RMB51.7 billion. This compares favorably against the 17 issuances totaling RMB88.5 billion during the first two quarters of 2023.
Robust momentum in green auto ABS issuance continued, with eight transactions totaling RMB31.6 billion settled in the first three quarters of 2023. Green issuance accounted for 28% of the total number of auto ABS transactions in the first three quarters. Issuers' enthusiasm toward this sector is likely due to rising electric vehicle (EV) loans on the back of more EV deliveries over the next year or two.
In the first three quarters of 2023, three originators issued their debut green auto ABS, increasing the number of green issuers to nine. We anticipate more first-time originators will come to the market because the number of participants at present is relatively limited. During 2022, five originators issued green auto ABS among roughly 20 repeated sponsors.
Muted issuance and limited visibility on resumption
RMBS issuance has remained stalled since February 2022. Issuance momentum will depend on the pace of a recovery in China's property market, Chinese banks' mortgage origination volumes, and the regulatory stance on mortgage growth and RMBS issuance.
We expect China's property sales to track an extended L-shaped recovery with sales to drop 10%-15% in 2023 and 5% in 2024. As the "extended L-shaped" recovery plays out, China property sales will continue to diverge between higher- and lower-tier cities, in our view. (See "China Property Watch: A Slow, Sequential Recovery In 2024", published Oct. 16, 2023). Rounds of policy support aimed at the upper-tier cities will see these markets stabilize first; lower-tier cities are still contending with excess supply and weak demand.
Recent relaxations on mortgages will support sales volumes in the four first-tier cities: Guangzhou, Shenzhen, Shanghai, and Beijing. Demand remains depressed in lower-tier cities. Developers will further discount residential prices to boost sales. We expect sales in lower-tier cities to drop 9% in 2024.
Auto Loan ABS Performance
Stable performance across delinquency buckets
In terms of all auto loan ABS outstanding, the weighted-average M2 ratio (31-60 days in arrears) remained at 0.12% in September 2023, which is the same level as in June 2023. The weighted-average M3 ratio (61-90 days past due) saw a slight decrease to 0.07% in September 2023 from 0.08% in June. M4+ ratio, showing loans more than 90 days in arrears, showed a slight decrease to 0.22% for the third quarter of 2023, from 0.26% as of June 2023. Although the M4+ ratio is still high compared with the pre-pandemic level, the overall level of delinquency rates is showing some signs of stabilization from late 2022.
For the auto ABS transactions that we rate, we observed a stabilizing delinquency trend across different delinquency buckets. M2 and M3 ratios were 0.08% and 0.04% in September 2023, compared with 0.08% and 0.05% in June 2023. The M4+ ratios decreased further to 0.12% in September 2023 from 0.2% in June 2023.
Some of our rated transactions have distinct pool attributes. For example, vehicles backing the loans that are not from carmakers associated with originators. Higher credit enhancement mitigates the increased credit risk.
We expect the credit quality supporting the auto ABS transactions that we rate to remain solid in 2023 as China's economic recovery continues.
Cumulative default rates remained low
Cumulative default rates as of end-September 2023 remained largely stable, and overall stayed below 0.5% for 2016 and later vintages.
Comparing default performance across annual vintages, the 2021 vintage saw a similar trajectory as that in 2020, and collateral performance for both vintages outperformed other earlier vintages. The rate increased by 7bps for the 2021 vintage in the third quarter of 2023, while 2020 or earlier vintages recorded minimal or no change.
Performance of auto loan ABS that we rate will likely remain stable because of favorable pool attributes, such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor.
Surge in delinquency ratios for rated transactions in part driven by one-off impact
For RMBS transactions that we rate, the delinquency ratios saw an increase across all buckets in the third quarter of 2023.
- The M1 ratio (1-30 days past due) increased to 0.53% in September 2023 from 0.37% in June 2023.
- The M2 ratio increased to 0.20% in September 2023 from 0.12% in June 2023.
- The M3 ratio increased to 0.11% in September 2023 from 0.06% in June 2023.
- The M4+ ratio increased to 2.34% in September 2023 from 1.21% in June 2023.
The rise in the delinquency ratios of our rated transactions could be partly driven by the one-off significant drop in the underlying pool balance. The PBOC and NAFR announced guidance on mortgage rates in August 2023. This led Chinese mortgage originators to lower mortgage interest rates in September 2023. Some of the more seasoned transactions were fully paid down after a one-off high prepayment because of borrowers' refinancing activities. This has reduced the total outstanding loan balance, which can drive up the delinquency ratios because of a smaller base.
The lower mortgage rate has no rating impact on our rated transactions. In fact, we saw an increase in excess spreads on most of the rated transactions despite the lower interest income because of the mortgage rate cut. This is because the weighted-average coupon rates (based on asset balance) decreased as the senior notes are repaid and while overcollateralization on the notes increased. These factors helped alleviate the credit impact from lower mortgage interest income. We have assessed the impact of excess spread or negative carry under various prepayment scenarios, but our rating does not serve as a measure of early repayment risk.
In order to better gauge and track the change in credit enhancement in percentage terms as transactions amortize, we have adopted an asset coverage ratio to monitor RMBS that we rate (see chart 11). The ratio measures the number of times current collateral (excluding assets in severe delinquency) could cover the outstanding balance of rated notes.
Since RMBS transactions usually have the lowest credit enhancement level as a percentage at closing, inclusion of a new transaction will cause the ratio to dip at the month of addition.
In general, as transactions continue to repay rated notes, the asset coverage ratios tend to trend upward over time. This indicates a steady build-up in credit enhancement and therefore more cushion to withstand potential deterioration of the underlying pools.
Cumulative default rates continued to trend up
Cumulative default rates of most vintages saw an uptick between 1bps and 7bps in the third quarter of 2023. Future asset performance of RMBS will hinge on property price movements, regulatory stance, and the strength of China's economic recovery.
We note cumulative default rates remained relatively high for some transactions from the 2020 vintage. This is partly due to the default of some large size mortgages and the effects of COVID-19. These transactions were not rated by us and it is unclear if their asset quality will stabilize.
Prepayment rates spiked because of regulators' mortgage rate guidance and borrowers opting for refinancing
The constant prepayment rate (CPR) for bank-issued RMBS transactions was 62% as of Sept. 30, 2023, which is a sharp spike from the 13% as of end-June 2023. This prepayment rate level is largely driven by the one-off mortgage rate cut and borrowers opting for refinancing in response. We believe the high prepayment rate is a one-off. The future prepayment rate will largely depend on the interest rate level and the likely returns on wealth management products (WMP). A declining trend on the expected WMP return incentivizes prepayment as the investment yield may barely cover mortgage interest.
Consumer Loan ABS Performance
Consumer loan delinquency rates remain volatile amid a slowing recovery
Due to increased interest in consumer-related asset classes, we have made observations based upon public yet limited transaction performance data from consumer loan ABS issued under the credit asset scheme.
In July 2023, S&P Global Ratings assigned a 'AAA (sf)' rating to the first consumer loan ABS transaction from China. We will expand our observations on the rated consumer loan ABS sector in upcoming publications.
In this report like before, some consumer loan ABS issued by top-tier consumer finance companies and banks are selected. All the selected transactions were settled in the era of COVID-19, during which mobility controls and social distance measures posed challenges related to loan repayment, servicing, and collection. All the selected transactions have been fully redeemed.
Most of the M3 ratios showed an increasing trend in the first three quarters of 2023 (see chart 14), compared with a flat movement in auto loan ABS during the same period. This could be a result of lingering effects after COVID and the slowing of China's economic recovery.
We do not rate these transactions and have no knowledge about the expectation of the performance trend and the structural mitigants. However, these observed performances are a good indication of the level of volatility in this asset sector under economic stress.
New Issuances In The First Three Quarters Of 2023
- Generation 2023-3 Retail Auto Mortgage Loan Securitization, Sept. 19, 2023
- Silver Arrow China 2023-2 Retail Auto Loan Asset Backed Notes Trust, Sept. 12, 2023
- Anyihua 2023 Phase III Personal Consumption Loan Asset Backed Securities, July 28, 2023
- Fuyuan 2023-2 Retail Auto Mortgage Loan Securitization Trust, July 18, 2023
- Ruize Tianchi 2023 Phase I Retail Auto Mortgage Loan Securitization Trust, July 13, 2023
- Generation 2023-2 Retail Auto Mortgage Loan Securitization, June 9, 2023
- Silver Arrow China 2023-1 Retail Auto Loan Asset Backed Notes Trust, March 14, 2023
- Generation 2023-1 Retail Auto Mortgage Loan Securitization, March 10, 2023
- Xin Rong 2023-1 Retail Auto Mortgage Loan Securitization, Feb. 24, 2023
Rating Actions In The First Three Quarters Of 2023
- Jianyuan 2021-8 Residential Mortgage Backed Securities Class B Notes Upgraded To 'AAA (sf)'; Class A-2 And A-3 Affirmed, June 26, 2023
- Xin Rong 2021-3 Class A2 Notes Upgraded To 'AAA (sf)', June 19, 2023
- River Funding No. 4, Ltd. Class 1 Notes Rating Affirmed At 'AA- (sf)', April 17, 2023
- China Growth Could Fall Below 3% If The Property Crisis Worsens, Oct. 24, 2023
- China Retail: Tighter Belts, Broader Defenses, Oct. 17, 2023
- China Property Watch: A Slow, Sequential Recovery In 2024, Oct. 16, 2023
- How We Rate China Leasing Securitizations, Oct. 12, 2023
- China Auto: Soft Demand Heightens Competition, Oct. 10, 2023
- China Mortgage Rate Cuts Will Help Home Buyers And Won't Hurt Rated RMBS, Oct. 10, 2023
- Economic Outlook Asia-Pacific Q4 2023: Resilient Growth Amid China Slowdown, Sept. 25, 2023
- What's Behind The First 'AAA (sf)' Rating Assigned To Chinese Consumer Finance ABS?, Aug. 24, 2023
- China Securitization Performance Watch 2Q 2023: Issuance Continues At A Slow Pace, Aug. 11, 2023
- China Ratings Affirmed At 'A+/A-1'; Outlook Stable, June 28, 2023
- Economic Outlook Asia-Pacific Q3 2023: Domestic Demand, Inflation Relief Support Asia's Outlook, June 26, 2023
- A Primer On China's Consumer Loan ABS Market, June 9, 2023
- China Property Watch: Peripheral Pain, May 22, 2023
- A Primer On China's MSE Loan ABS Market, May 10, 2023
- China Auto: Navigating Demand Uncertainty, April 26, 2023
- China Consumer Products And Retail: Sales Pick Up As COVID Controls Wind Down, Jan. 13, 2023
- China Structured Finance Outlook 2023: Issuance Likely To Slowly Stir, Jan. 12, 2023
- Global Structured Finance 2023 Outlook, Jan. 11, 2023
- A Primer On China's Residential Mortgage Backed Securities Market, May 24, 2022
- A Primer On China's Auto Loan Asset-Backed Securities Market, April 28, 2022
This report does not constitute a rating action.
|Primary Credit Analyst:||Patrick Chan, Hong Kong + 852 2533 3528;|
|Secondary Contacts:||Yilin Lou, Hong Kong +852 2533 3524;|
|Andrea Lin, Hong Kong + 852 2532 8072;|
|Jerry Fang, Hong Kong + 852 2533 3518;|
|Melanie Tsui, Hong Kong +852 2532 8087;|
|Carol Hu, Hong Kong + 852-2912-3066;|
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