Bank of Jiangsu launches ABS funds as financing demand rises
The bank has raised two 20 billion yuan funds to specialise in securitised consumer and real estate loans.
Bank of Jiangsu, a mid-size lender in China, has raised a combined 40 billion yuan (US$5.8 billion) for two investment funds slated for the buoyant asset-backed securities (ABS) market, as mainland financial institutions increasingly resort to securitisation to expand their funding sources.
Gao Zengyin, head of the bank’s investment banking and asset management department, said more large ABS funds will be launched by the A-share listed lender to capitalise on the rising financing demand amid a potential cash squeeze on the country’s monetary market.
“The two funds are in the registration process,” Gao told the South China Morning Post. “They are prepared to invest in lucrative deals. We plan to launch more ABS funds after gauging the market demand.”
The two funds, each 20 billion yuan, will specialise in securitised consumer and real estate loans.
The bank teamed up with Tebon Securities to manage the fund focusing on securitised consumer loans while partnering with GoHigh Capital to operate a fund engaged in securitised investment products backed by real estate loans.
To date, they are the largest ABS funds on the mainland, where securitisation is growing on a fast track in line with Beijing’s efforts to de-leverage an economy saddled with increasing bad-loan risks.
ABS products are created through a securitisation process, under which underlying assets or loans are pooled and turned into financial instruments that can be sold to general investors. These products, it is believed, will help banks and other financial institutions ward off bad-loan risks while allowing the issuers to raise funds.
According to Shenwan Hongyuan Securities, the outstanding value of ABS products stood at 1.01 trillion yuan at the end of 2016.
Last year, about 800 billion yuan of ABS products were sold on the mainland, compared to the total proceeds of 600 billion yuan raised from ABS issuance in the previous year.
Buyers of securitised loans are exposed to risks of defaults with the borrowers unable to repay the debts.
The ABS funds managed by the Jiangsu bank, which raised 7.1 billion yuan in its Shanghai IPO last August, will look for investment opportunities in the primary and secondary markets.
“We aim to find quality assets worth investing,” Gao said. “Some investors with little knowledge about the market are still wary of committing their capital to the funds.”
On the mainland, ABS products are listed on either the interbank market or the stock exchanges.
Fitch Ratings predicted that China’s auto ABS issuance is likely to increase by 20 to 30 per cent this year, based on 59 billion yuan issuance in 2016.
Banks, trust firms, rural credit cooperatives, and auto financing companies are among the ABS issuers.
The incumbent Chinese leadership is taking a positive stance on ABS, viewing it as an effective way of reducing banks’ loan exposure.
Beijing began a pilot ABS programme in 2005 but made a U-turn after the global financial crisis in 2008 because they were at the centre of the credit bubble.
The ABS market in China reopened in 2012 when the banking regulator resumed vetting applications for ABS issuance under a quota system.
The Chinese government drastically liberalised the ABS market in 2015, scrapping a review-and-approval procedure before adopting a registration-based system to facilitate financial institutions’ issuance of securitised loans and assets.