Chinese lenders roll out first bad loan securitization since 2008

China Merchants and Bank of China are first in line.

China's largest banks are turning to loan securitization to reduce the amount of non-performing assets on their books. China Merchants Bank and Bank of China have both proposed their first-ever securitizations of non-performing loans, which would be issued by the end of May.

According to Moody's, retail loan-oriented banks such as CMB will benefit more from the re-opening of the NPL securitization market, which was shut down by regulators during the height of the financial crisis in 2008.

"Securitization allows banks to divest a wide range of NPLs, ranging from granular consumer finance
portfolios to concentrated corporate loan portfolios. The CMB asset portfolio is very granular with 60,007 borrowers’ unsecured credit card receivables, while the BOC portfolio has just 42 corporate borrowers and mostly secured loans," Moody's said in a report.

CMB's securitised pool makes up about 35.1% of its credit card NPLs and 3.2% of its total NPLs as of the end of 2015. For BOC, meanwhile, the outstanding principal balance of the securitised pool is about 1.2% of the bank’s corporate NPLs and 0.9% of total NPLs as of year-end 2015.

The proposed size of the senior notes in the CMB securitization is about RMB188 million, or about 63.3% of the estimated recoverable amount or about 12.5% of the outstanding principal balance for the deal portfolio.

For the BOC securitization, the proposed size is RMB235 million, or about 55.7% of the deal’s estimated recoverable amount or about 19.1% of the outstanding principal balance for the deal portfolio

“The development of an NPL securitization market is credit positive because it will provide an additional means for the banks to dispose their NPLs,” Moody’s said.