Mainland banks and trust firms selling risky products, Fitch says
Mainland banks and trust companies are increasingly active in packaging high-yielding risky loans and selling them to investors as wealth management products without adequate disclosure and formal guidelines, according to Fitch Ratings.
The rating agency said the growth of collateralised loans sold as wealth management or trust products had accelerated in the past two years.
The size of the collateralised loans market is unknown because disclosure is extremely poor and is getting worse, said Charlene Chu, a senior director at Fitch, who estimated that the growth of loan-backed wealth management products constituted 20 per cent of the overall loan growth at mainland banks between 2008 and 2009.
'Our view is that this is like Lehman Brothers' minibonds,' Chu said. 'Although the China Banking Regulatory Commission is closely monitoring the activities, it has yet to issue any formal guidelines regulating the transactions or to demand for disclosure.'
The commission has told banks to diversify the assets in which wealth management and trust products invest in from loans, and banning them from selling products built around their own loans at the end of last year.
The number of loan-backed investment products launched in the last quarter of last year was estimated at 2,000. It has since fallen to about 1,500 in the first quarter of this year, but Chu believes the number of products distributed was more than her estimates, derived from public data on wealth management products sales.
To circumvent the new regulations, the transactions have recently become more complex.
While some banks have begun to sell each other's products, the trust companies, which used to take the role of structuring the deals after buying the loans from the banks and letting the banks distribute, are now selling the products themselves directly to investors.
According to Chu, there have been several cases of defaults in the past years, some of which have been settled by banks. A few were heard in courts and the results of these were not reported.
Apart from a lack of an adequate legal framework governing securitisation, one major concern of Chu is that investors, including the banks, are taking on high credit and concentration risk.
This is because products are often structured around one borrower or just a single loan. In the event of a default, it could trigger a withdrawal of liquidity to cover losses.