After a recent round of deals that saw Canadian banks securitizing their own assets - Bank of Nova Scotia recently securitized over $1 billion of its personal lines of credit and Royal Bank of Canada securitized C$349 million of its credit card receivables at the end of last month - the jury is still out on whether these banks are going to be actively securitizing this year.
But if last year was any indication, the answer seems to be negative. Dominion Bond Rating Service's (DBRS) year-end report said that asset-backed oustandings pertaining to bank assets exhibited very little growth in 2000.
The rating agency said that bank-related outstandings only grew from $32 billion, which is 48% of outstandings at the end of December 1999, to roughly $33 billion, which is 41% of outstandings. This is in direct contrast to the growth in the securitization of bank assets in 1999, which, according to DBRS, rose by $9 billion from the end of 1998.
Careful analysis needed
However, some market players say that banks are starting to see the benefit of securitization, especially in terms of building a heretofore lackluster market for subordinate securities.
David Allan, group head of the Canadian securitization group at CIBC World Markets, said that since there is not much of a high-yield market in Canada, banks generally do not sell double-B pieces and do not sell a large volume of triple-B pieces. The banks had to figure out how much capital they were saving by securitizing.
"You have to be able to assess with some precision how much of your economic capital you can reduce through securitization," Allan said.
Allan explained that since banks are generally rated double-A, if they only sell securities that are rated triple-A and double-A, there would be no reduction in total capital.
To get capital relief, these institutions have to sell down below the single-A level in order to achieve any kind of reduction in capital that banks have to hold for the risks associated with the assets they securitize.
"Judging by the fact that Hollis and Golden have come back to the market, one can assume that banks are coming to the conclusion that, although the immediate ROE boost may not be huge," said Allan, "by doing these transactions you are creating the possibility of ultimately developing a market for those triple-B and double-B pieces that would really give you significant ROE enhancement through securitization."
The Basel Hitch
Some sources say that a factor in the decline in bank issuance is the fact that banks have securitized the vast bulk of their fairly large, easy-to-securitize asset classes. Further, with the slowing economy, the growth in the banks' balance sheet has not been that significant over the last couple of years, so the resulting funding and capital pressures have not been that great either.
If there is a glitch to future bank securitization activity, all fingers point to the Basel proposal.
"I think it is clear to most people that the Basel proposal is there to basically eliminate any capital arbitrage that the bank regulators see occurring at the moment," said Mark Adams, a vice president at DBRS.
"You can point to a number of things in the current proposal but what sticks, to my mind, is the comment that they are going to be looking at potentially adding a new charge to securitizations to cover any residual risk that may not have been previously covered. The market at this stage would expect that securitizations would not be treated particularly gently," said Adams.
What's in it for us?
But aside from more general concerns, the decision whether or not to securitize is bank-specific, and also dependent on the personality play between the bank at large and their own securitization groups.
Securitization seems to be part of Scotiabank's funding strategy, for instance. The bank has regularly securitized its personal lines of credit through Hollis Receivables Term Trust since September 1999, coming to market once a year with deal sizes consistently in the $1 billion range. The bank has also securitized its auto loan and credit card receivables.
Royal Bank, on the other hand, only regularly securitizes its credit card receivables, though there are many other Royal Bank assets that have not been done.