China Said to Agree $7.7 Billion of Bad Loan Securitization

Updated on
Chinese Stocks Tumble Most in a Month
  • First quota since 2008 as soured loans rise to decade high
  • Bank of China awaiting CBRC approval for first NPL sale

China will allow domestic banks to issue up to 50 billion yuan ($7.7 billion) of asset-backed securities based on their non-performing loans, the first quota for such sales since 2008, people familiar with the matter said.

The quota, which will initially be allocated mainly to China’s largest banks, will allow lenders to remove non-performing loans from their balance sheets at a time when asset quality is deteriorating and the economy is slowing, the people said, asking not to be named as the plan isn’t public. The first batch of asset-backed securities based on NPLs will be sold as early as the first half of this year, the people added.

The Chinese government is stepping up efforts to help banks clear their books and free up more capital to support an economy that grew last year at the slowest pace in a quarter century. The highest level of soured loans in a decade has hurt bank profits and cut their bad-loan coverage ratios close to the regulatory minimum, prompting lenders including Industrial & Commercial Bank of China Ltd. to urge regulators to ease the requirement.

“This is certainly positive news to the Chinese banking sector as it can help accelerate their bad loan disposals,” Zhou Min, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said by phone. “The biggest concern among foreign investors about China’s economy and banking sector is asset quality.”

Rising NPLs

The weaker economy has undermined borrowers’ ability to repay loans, boosting Chinese banks’ nonperforming loans to 1.27 trillion yuan by December, the highest level in a decade, data released earlier this month by the China Banking Regulatory Commission showed.

Hedge fund managers such as Kyle Bass have warned that the nation’s banking system may see losses of more than four times those suffered by U.S. lenders during the 2008 credit crisis. Goldman Sachs Group Inc. analysts, in a Feb. 17 report, flagged the potential for a 9 percent bad-loan ratio in China’s banking system, more than the official reported level of 1.7 percent.

To ease the drag on bank earnings, China’s cabinet has discussed lowering the ratio of provisions banks must set aside for bad loans, people with knowledge of the matter said earlier this month. Some big banks have already used a ratio of around 120 percent for their 2016 budgeting, compared to the current minimum ratio of 150 percent, they said.

The new securitization quota could help the banks remove between 100 billion yuan and 150 billion yuan of distressed loans from their balance sheets, depending on the discounts needed to attract buyers, Zhou estimated. “That’s relatively significant,” he said.

Bank of China Ltd. is awaiting approval from the CBRC for the first securitized sale of NPLs, the people said. The banking regulator currently needs to approve the individual banks’ sales, they said.

The CBRC didn’t immediately respond to a fax seeking comment. A Bank of China press officer declined to comment.