New | NPLs overwhelm Chinese lenders but state ‘bad banks’ look the other way
“The level of NPLs was really unexpected,” said Wilson Pang, a partner at KPMG in Hong Kong. “Banks don’t have a really good plan for how much they need to dispose and what the time table for that is”
With so much bad debt on their hands, mainland banks might want to find more common ground this year with the state companies that buy their bad assets. But, despite a large volume of non-performing loan transactions last year, the two sides will likely have trouble seeing eye-to-eye on deals.
In 2014, more than 20 banks sold at least 120 billion yuan in bad debt to state-run asset management companies (AMCs), double the transactions in 2013, according to figures from KPMG. Some have put the value of the transactions at above 200 billion yuan.
But the market has become more challenging for both the banks and the AMCs. Banks were unprepared for the high volume of bad loans this year, experts said. They are also increasingly reluctant to sell off bad assets at low prices.
AMCs, on the other hand, have a spectrum of easier, higher-return businesses they can snatch up – ones that don’t include sticky restructuring or liquidation. The government, which a decade ago mandated the transfer of about 1.4 trillion yuan from banks to asset managers, has taken a backseat in the business.
That is to say, the distressed asset market in China has become, if anything, more market-like.
Chinese banks saw a considerable uptick in non-performing loans in 2014. In the first 11 months of the year, the official sector-wide NPL ratio hit 1.31 per cent, up from 1 per cent in at the close of 2013. That figure is likely far lower than the real rate. BNP Paribas put the implied NPL ratio at 7.1 per cent in 2014.
The incoming wave of bad debt follows years of credit binging and a debt-to-gross-domestic-product ratio that climbed to more than 250 per cent in July.
Banks in 2014 were simply caught off guard by the volume of bad debt, and without a strategy for selling it off.
“The level of NPLs was really unexpected,” said Wilson Pang, a partner at KPMG in Hong Kong. “Banks don’t have a really good plan for how much they need to dispose and what the time table for that is.” The wave of debt has also led to a much higher number of banks entering the market to sell bad debt. During the first wave more than a decade ago, the mainland’s four biggest banks transferred NPLs to four newly created asset managers. Each bank had a corresponding AMC.
The sell side has expanded greatly since then, with more than 20 banks learning how to sell off their debt. The number of buyers is slow growing, though. Ten provincially controlled AMCs sprung up last year but those businesses are smaller, less experienced and not as adequately capitalised, raising questions over the players’ capacity to take on the volume of debt coming to the market.
Most insiders agreed that these conditions brought the price of NPL portfolios down in 2014.
The banks have not been pressured to sell. They hold ample provisions – 1.3 trillion yuan by BNP’s count – after regulators required banks to build them up during the last credit binge. The government has been pushing banks to use that cache to write off bad loans before they get classified as NPLs. Banks have listened, ratcheting up provisions by 76 per cent sector wide in the third quarter compared to the same period in 2013, and reducing the need to sell off portfolios of NPLs at low prices.
“Banks are loath to take more write-downs and would prefer to hang on to the debt and potentially get their 60 cents later on,” said Ted Osborn, a partner at PwC – as opposed to selling to AMCs at what some market participants said was half that price.
It’s not just the banks that are reluctant to sell. The AMCs have become fully licensed financial conglomerates conducting a wide range of businesses, not just debt restructuring.
“After 2007, the AMCs developed other non-NPL business lines and were not very focused on NPL acquisitions. Today they are involved in a range of businesses,” said Benjamin Fanger, managing director and founder of Guangzhou-based Shoreline Capital, which has been investing in Chinese distressed debt for more than a decade.
Those new businesses include shadow banking. China Cinda Asset Management grew its shadow-lending business to 158 billion yuan last year from 9.7 billion yuan in 2011, now almost seven times the size of its non-performing loan business, according to a report from CLSA analyst Patricia Cheng.
China Huarong Asset Management, the mainland’s biggest bad bank by assets, did about 100 billion yuan in transactions in 2013 but outstanding principal balance for NPL transactions was only about 25 billion yuan of the total, according to a person close to the deals.The decreased interest in bad debt among the AMCs has, however, opened a window for a few other investors to move into the market.
Fanger at Shoreline, for example, says the firm is looking to buy NPL portfolios directly from banks and could close more deals in the first six months of the year than it has in the past six years.
Gaofei Consulting began co-investing with AMCs in portfolios last year, said Claire Liu, a business manager at the Beijing-based firm that invests in distressed assets. Liu said AMCs such as Cinda will likely slow their acquisitions in 2015. As more banks join the market and AMCs slow their acquisitions, the price of portfolios could come down further this year.
“The AMCs are more rational now and they are thinking about how many of these assets they really want to hold,” Liu said. “We’re hoping that will bring the price down.”
