Consumer loan securitization boom on hold as China cuts leverage
BEIJING (Reuters) – A boom in asset-backed securities issued by micro-lenders aiming to expand into China’s fast-growing online credit market is expected to slow this year amid growing regulatory scrutiny.
Micro-lenders have raised billions of dollars by turning consumer loans into securities for sale to institutional investors in China’s nascent asset-backed securities market to rapidly expand their loan portfolios.
Many of China’s biggest internet and technology companies have issued securities backed by micro-loans. Ant Financial Services Group, a subsidiary of Alibaba Group Holding BABA.Ndominates the market and the financial branches of JD.com Inc. JD.OBaidu Inc. BIDU.OVIPShop Holdings VIPS.N and Xiaomi Technology have also raised funds through the products.
But the securities market is expected to slow this year, industry sources say, as regulators target lenders’ high debt levels and limited asset disclosure.
Rules announced on Dec. 1 limited the amount of product-backed loans companies can make. They were also required to consolidate them in their balance sheets.
China’s stock exchanges and the National Association of Financial Markets Institutional Investors (NAFMII) have suspended the issuance of consumer loan-backed securities by micro-lenders over the internet, said Guo Yonggang, general manager of the finance department. structure of Golden Credit Rating International Co.
NAFMII last week changed its disclosure requirements for consumer loan securities to reflect the central bank’s higher transparency standards.
The volume of securities backed by consumer loans has increased 35 times over the past two years, with the proceeds being used to fund loans to individuals looking to buy the latest iPhone or finance holidays abroad.
About 489.4 billion yuan ($75.36 billion) of securities were issued in 2017, up from 98.9 billion yuan in 2016, according to China Securitization Analytics.
Repackaging loans into asset-backed securities has allowed lenders to shift loans off their balance sheets, circumventing government rules stipulating how much they can lend as a proportion of their equity.
Ant Financial is the largest issuer of consumer loan securities, accounting for 60% of all issuance in 2017, according to Reuters calculations based on data from China Securitization Analytics.
Its two Chongqing-based micro-credit companies had a total net capital of 10.6 billion yuan, but issued 265.1 billion yuan in loans as of the end of June, according to CIB Research, a unit of Industrial Bank Co. . 601166.SS. The outstanding loan securities issued by the two units exceeded 250 billion yuan, he said.
“The ratio of total funding to total capital is far beyond the 2.3 times leverage requirement set by the Chongqing banking regulator,” CIB Research said in a December report.
As Beijing released its new rules, Ant Financial quietly withdrew plans to issue asset-backed notes worth billions of dollars, two sources with knowledge of the matter told Reuters.
People’s Bank of China officials met with Ant Financial to discuss high debt levels in its consumer finance business, one of the sources said. The source said the central bank may prevent Ant from issuing new consumer loan securities until it reduces its debt level.
Ant said the program’s cancellation was due to “tight funding conditions and rising prices in the bond market” at the end of 2017.
The company plans to raise the registered capital of two consumer loan units – Chongqing Mayi Micro Loans Co and Chongqing Mayi Shangcheng Small Loans Co – to 12 billion yuan from the current 3.8 billion yuan, the company said. in an email.
The central bank did not respond to a faxed request for comment.
SHORT STORY, WEAK DISCLOSURE
The short history of microcredit companies and China’s asset-backed securities market poses significant challenges for rating agencies and investors trying to assess risk.
“The assumptions or parameter estimates we use for data analysis may differ to some extent from the actual situation,” said Zheng Kaiwen, senior analyst at China Chengxin Securities Rating Co, pointing out the companies’ short trading histories. loan.
According to China Chengxin, there has not yet been a failure of any consumer loan securitization product.
But the probability of default may be “underestimated”, Golden Credit Rating’s Guo said, citing incomplete credit rating data and the rapid expansion of consumer loans.
Prior to the government cleanup, China’s small and medium-sized banks, as well as risk-tolerant private funds, were among the most active buyers of micro-loan securities, lenders said.
In March, Bank of Jiangsu Co 600919.SS and Debang Securities launched a 20 billion yuan investment fund focused on loan-backed securities, the first of its kind in China.
Despite the government’s efforts to control consumer loan-backed securities, it will be difficult to get a handle on them because many transactions take place “off-market”, company sources said.
These private sales take place on local financial exchanges and stock trading hubs, as well as internet financial trading platforms powered by Chinese tech giants, making them difficult for the government to track.
Several rating agencies and lending companies said they were unable to accurately estimate the total of these private transactions due to limited disclosure of information.
Some loan companies choosing private sales have poor operational quality, aggressive strategies and incomplete risk control systems, said Guo of Golden Credit Rating.
“Due to poor disclosure of off-market product issues, borrowers might have taken out loans on multiple platforms, or those loans might just be non-compliant campus loans or down payment loans for housing,” he said.
Reporting by Shu Zhang and Elias Glenn; Additional reporting By Matthew Miller; Editing by Philip McClellan