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China Merchants Bank has been given the green light to sell off a fresh batch of asset-backed securities (ABS) using credit card debt. Photo: EPA

China Merchants Bank to relaunch credit card asset-backed securities

Market for credit card asset-backed securities is reopened after mainland financial regulators banned the same products just months earlier

Don Weinland

Regulators have given China Merchants Bank the green light to sell off a fresh batch of asset-backed securities (ABS) using credit card debt after banning the same products just months earlier.

The reopening of the credit card ABS market, which so far constitutes a fraction of the total debt that banks have securitised in China, was one of several recent signs of central government support for ABS sales in China this year.

Merchants Bank will issue credit card ABS within the next few months, Bai Yang, the general manager of the finance department at China Resources SZITIC Trust, told the .

The trust firm, a subsidiary of CR Holdings, was the lead underwriter for credit ABS the bank issued last year before the China Banking Regulatory Commission banned the products.

"We have permission to start this again," Bai said, although she declined to say how much debt would be securitised or an exact date for issuance. "The regulator has confidence in Merchants Bank for handling this kind of product."

In November, sources confirmed that CBRC called for a total halt on credit ABS yet never issued a formal statement on the ban. The move was a signal that, despite outwardly promoting the ABS market, the regulator would continue to take a cautionary stance on riskier products, such as credit card debt, which often sees more defaults than car loans and mortgages.

Regulation has lightened since then. In April, the State Council announced that banks would no longer need to gain regulatory approval to issue ABS.

Instead, banks would need only to register the products and meet a certain number of requirements. Previously, banks had to seek out approval from both the CBRC and the People's Bank of China.

The State Council in April also approved an additional quota of 500 billion yuan (HK$632 billion) on top of the 300 billion yuan in outstanding ABS.

"I think the government is showing to be supportive of this market," said Helen Wong, a senior director at Fitch Ratings.

Fitch has flagged the development of the market as positive for China's banking sector, as long as the assets are transferred out of the banking system.

Selling off securitised loans frees up banks' balance sheets. However, banks have also been the primary buyers of other banks' ABS. That means, on the whole, the development of the market has done little to free up liquidity in the banking sector.

Non-bank financial companies are set to take a greater role in the market but "in the medium term they are not likely to overturn the dominant position held by the banks", Fitch said in a report.

Mainland regulators opened the market to asset-backed securities in 2005 but shut it down in 2008 in response to the global financial crisis, which was triggered in part by securitised debt products. The market was reopened in 2012 but saw limited growth until last year.

In 2014, ABS issuance grew to 269 billion yuan from just 16 billion yuan at the end of 2013, Fitch data showed. Total issuance by the end of April surpassed 350 billion yuan.

Merchants Bank issued 15.39 billion yuan in credit card asset-backed securities in March last year, the largest issuance of its kind. After the CBRC banned new credit ABS in November, it also fined seven banks 2.4 million yuan for granting excessive credit and not verifying borrower information.

Analysts at the time said there was a mismatch in the maturity period of credit card debt and the time required to gain approval for issuing the ABS products. Credit card debt is short-term, yet banks faced an approval process that took months.

The maturity on the credit card debt Merchants Bank planned to securitise was longer than the global standard, which would help the bank avoid any mismatch problem, said Tian Bing, a vice-general manager for structured finance at China Lianhe Credit Rating.

This article appeared in the South China Morning Post print edition as: Merchants Bank gets credit ABS go-ahead
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