Consumer loan securitization boom stalled as China targets leverage
A boom in asset-backed securities issued by micro-lenders aiming to expand in China's fast-growing online credit market looks set to slow this year amid growing regulatory scrutiny.
Micro-lenders have raised billions of dollars packaging consumer loans into securities for sale to institutional investors on China's nascent market for asset-backed securities in order to rapidly expand their loan books.
Many of China's largest internet and technology companies have issued securities backed by micro-loans. Ant Financial Services Group, an affiliate of Chinese e-commerce giant Alibaba Group Holding, currently dominates the market. And the finance arms of JD.com Inc, Baidu Inc, VIPShop Holdings and Xiaomi Technology have also raised funds through the products.
But the market for the securities is set to slow this year, industry sources say, as regulators target lenders' high debt levels and limited asset disclosure.
Rules announced on December 1 limited the amount of lending backed by the products the companies can make. They were also required to consolidate them on their balance sheets.
China's exchanges and the National Association of Financial Market Institutional Investors (NAFMII) have suspended the issuance of securities backed by consumer loans by internet-based micro-lenders, said Guo Yonggang, general manager of the structured financing department at Golden Credit Rating International Co.
NAFMII last week amended 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 surged more than 35 times in the last two years, with the proceeds used to finance loans for individuals looking to buy the latest iPhone or to finance overseas holidays.
About 489.4 billion yuan ($75.36 billion) of the securities were issued in 2017, compared with 98.9 billion yuan in 2016, according to China Securitization Analytics.
Repackaging the loans as asset-backed securities has allowed lenders to transfer the loans off their balance sheets, bypassing government rules that stipulate how much they can lend in proportion to their equity capital.
Largest issuer
Ant Financial is the largest issuer of consumer loan securities, accounting for 60 percent of all issuances in 2017, according to Reuters' calculations based on data from China Securitization Analytics.
Its two Chongqing-based micro-loan companies in Southwest China had a total net capital of 10.6 billion yuan, but had issued 265.1 billion yuan in loans by the end of June 2017, according to CIB Research, a unit of Industrial Bank Co.
Outstanding loan securities issued by the two units have exceeded 250 billion yuan, it said.
"The ratio of total financing to total capital is far beyond the 2.3-times leverage requirement set by the Chongqing banking regulator," CIB Research noted in a December report.
As China issued its new rules, Ant Financial quietly withdrew plans to issue asset-backed notes worth billions of dollars, said two sources with knowledge of the matter.
Officials from the People's Bank of China, the country's central bank, have met with Ant Financial to discuss the high debt levels of its consumer finance business, said one of the sources.
The source said that the central bank may prevent Ant Financial from issuing new consumer loan securities until it reduces its leverage level.
Ant Financial said the program's cancelation was due to "tight funding conditions and rising prices on the bond market" at the end of 2017.
The company plans to increase registered capital in 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 history, weak disclosure
The short history of micro-loan companies and China's asset-backed securities market raise significant challenges for ratings agencies and investors trying to gauge risk.
"The hypotheses or parameter estimations we use for data analysis could differ from the actual situation to some degree," said Zheng Kaiwen, senior analyst at China Chengxin Securities Rating Co, pointing to loan companies' short business histories.
There has yet to be a default from a consumer loan securitization product, according to China Chengxin.
But the likelihood of default may be "underestimated," said Guo of Golden Credit Rating, citing incomplete credit ratings data and the rapid expansion of consumer loans.
Before the government cleanup, small and mid-tier Chinese banks, as well as private funds with high risk tolerance, were among the most active buyers of micro-loan securities, loan companies said.
In March, the Bank of Jiangsu Co and Debang Securities launched a 20 billion yuan investment fund that focused on loan-backed securities, the first of its kind in China.
Despite government efforts to control consumer loan-backed securities, reining them in will be difficult as many transactions take place "off-market," company sources said.
Those private sales take place on local financial exchanges and equity trading centers, as well as internet-based financial trading platforms powered by Chinese tech giants, making them difficult for the government to track.
Several ratings agencies and loan companies said they were unable to accurately estimate the total of such private transactions due to limited information disclosure.
Some loan companies choosing private sales have weak operating quality, aggressive strategies and incomplete risk control systems, said Guo from Golden Credit Rating.
"Due to the weak information disclosure of off-market product issues, borrowers could have taken out loans from multiple platforms, or these loans could just be non-compliant campus loans or housing down-payment loans," he said.
