Numerous foreign firms, including banks, law firms and credit enhancers, are ramping up their efforts to tap the huge potential for mortgage-backed securitization in China. The main focus is on helping second- and third-tier regional and city banks raise funds through MBS, with calls for regulatory support to facilitate the process. That, however, may be easier said than done.
When China Construction Bank completed People's Republic's first MBS at the end of 2005 (ASR, 1/9/06), it was tempting to think the pathway had been cleared for an immediate surge of issuance.
One of the two state-supported pilot schemes, CCB's RMB3 billion deal ($371.6 million) - structured by Standard Chartered - cleared every regulatory obstacle put in its way to score a blowout success with institutional investors. With the template established, logically it follows that further activity should be easy, right?
The numbers are impressive. The bank mortgage sector is estimated to be worth around $150 billion. Despite this, mortgages account for just 9% of loans, so there is room for significant growth.
The need of the larger banks, like CCB, to issue mortgage-backed deals is actually far less than that of the second- and third-tier players. Larger banks don't need funds and continue to benefit from substantial equity injections by the government. Consequently, they are reluctant to transfer quality mortgage loans off their books.
Most analysts say securitization would be of greater benefit for larger banks in trying to resolve nonperforming assets. Rumors suggest CCB is seriously contemplating such an initiative later this year.
Significant growth in home ownership
This contrasts with the situation facing regional and city banks. While small by Chinese standards, many of the 115 city commercial banks have huge customer bases.
Home ownership is growing substantially, but the surface has barely been scratched.
"Many city banks have between 2 and 3 million customers, but maybe only as many [as] 60,000 of them have home loans," said one source who has held discussions with several smaller banks regarding possible MBS transactions. "You compare that to a market like Australia, where up to 50% of a bank's customers have mortgages, so it is a huge untapped resource in China."
The good news as far as securitization professionals are concerned is most of these banks desperately need funds. While the government continues to back the larger policy banks, this support - once a given - no longer extends to smaller players in the market that face critical issues.
First, they are insufficiently capitalized to cover asset growth or loan loss provisions. Second, they are being squeezed out of the market for new deposits. Securitization, bankers say, would achieve the twin aims of improving capital management and raising funds.
Foreign players are keen to support MBS plans. With China's accession to the World Trade Organization conditional on opening the financial sector to foreign competition by Dec. 11, 2006, it was once feared this would make the situation for smaller banks even worse.
Instead, foreign banks are aligning themselves with second- and third-tier banks, acquiring shareholdings at attractive prices.
Commonwealth Bank of Australia now holds an 11% stake in Jinan City Commercial Bank. Newbridge Capital owns 17.89% of Shenzhen Development Bank. Standard Chartered bought a 19.9% holding in Bohai Bank. Other foreign investors such as ING, HSBC and Singapore's Temasek Holdings formed similar allegiances.
Talks have been held with Chinese partners
According to reliable sources, most foreign firms have held preliminary discussions with their Chinese partners over MBS issues. The desire is there, a template has been established, yet there is one major difficulty facing the banks. And it is not one of the most commonly cited hindrances to Chinese MBS.
"Issues such as uncertainty over foreclosure laws and poor historical data are not the biggest obstacle for the smaller banks," said a senior manager of an international credit enhancement firm. "Take date quality: no, it is not of the standard you expect in an established market. However, you do have access to other information, such as payment of utility bills, which enables you to see who the better borrowers are. It is possible to create a workable structure to securitize mortgages of most city banks.
"The biggest issue is getting regulatory backing. These smaller banks are not so established, and consequently hold less influence over regulators that a larger bank would enjoy. They are being told to wait patiently, but when you are pushed down the pecking order whenever one of the bigger banks wants to do something, it doesn't exactly help the smaller players' motivation."
One Hong Kong-based ABS banker admitted the regulatory framework needs to be relaxed, but hoped the support of foreign players would aid the lobbying effort.
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