25.08.2016, 18:47
Fitch: More NPLs to Drive China Asset Management Company Growth
OREANDA-NEWS. China's asset management companies (AMCs) will continue to significantly ramp up their activity in distressed asset management with bank NPL disposals likely to rise further through the medium term, Fitch Ratings says. The AMCs have experienced significant growth in recent years alongside rising NPLs and the rapid increase in overall leverage in the economy.
Official data showed the NPL ratio for commercial banks was 1.8% at end-1H16 - equivalent to CNY1.4trn - up only slightly from 1.7% at end-2015. In addition, there were CNY3.3trn of "special-mention" loans at end-1H16, representing 4% of total loans, up from 2.5% when this ratio was first disclosed by the regulator in 1Q14. Limited transparency and weak disclosure means that these figures are not directly comparable to those in other large banking systems, however, and ascertaining a precise adjusted NPL ratio is difficult. Nonetheless, considering the aggressive growth in system leverage to 243% of GDP at end-2015 from 125% at end-2008, there seems a high likelihood that the NPL rate will rise further through the medium term.
All three Fitch-rated national AMCs - China Orient Asset Management (A/Stable), China Huarong Asset Management (A/Stable) and China Cinda Asset Management (A/Stable) - have recorded double-digit asset growth over the past three years with Cinda's assets expanding by almost three times from end-2012. Rapid profit growth in turn has been underpinned by strong asset expansion.
The AMCs' credit profiles benefit from high profit margins and stable capitalisation, but rapid growth and acquisitions have added to risks and capital pressures. As such, further capital raises are likely, in line with already announced plans and to continue to position AMCs to play a major role in the wider economy's distressed debt disposal.
Notably, the China Banking Regulatory Commission allowed provincial governments to establish their own AMCs in 2014, though with restrictions on the number of AMCs and the ways in which they are allowed to manage distressed debt. Fitch believes that the national and provincial AMCs will collaborate given the scale of NPLs in the economy.
The nature of distressed asset management means greater inherent credit risk in AMCs' asset portfolios and there are concentration risks from Chinese property exposures. Furthermore, asset-quality pressures could increase in the event of a faster than expected downturn in the economy. Rapid growth, in particular, could add to execution risks, especially with the restructured assets portfolios, which have yet to weather a full economic cycle. Low loan-to-value ratios on their distressed assets partially mitigate these risks.
Ratings for China's national AMCs are linked to the sovereign's ratings (A+/Stable) with strategic linkages including state ownership and management control, which indicate a strong likelihood of extraordinary support, if needed.
Official data showed the NPL ratio for commercial banks was 1.8% at end-1H16 - equivalent to CNY1.4trn - up only slightly from 1.7% at end-2015. In addition, there were CNY3.3trn of "special-mention" loans at end-1H16, representing 4% of total loans, up from 2.5% when this ratio was first disclosed by the regulator in 1Q14. Limited transparency and weak disclosure means that these figures are not directly comparable to those in other large banking systems, however, and ascertaining a precise adjusted NPL ratio is difficult. Nonetheless, considering the aggressive growth in system leverage to 243% of GDP at end-2015 from 125% at end-2008, there seems a high likelihood that the NPL rate will rise further through the medium term.
All three Fitch-rated national AMCs - China Orient Asset Management (A/Stable), China Huarong Asset Management (A/Stable) and China Cinda Asset Management (A/Stable) - have recorded double-digit asset growth over the past three years with Cinda's assets expanding by almost three times from end-2012. Rapid profit growth in turn has been underpinned by strong asset expansion.
The AMCs' credit profiles benefit from high profit margins and stable capitalisation, but rapid growth and acquisitions have added to risks and capital pressures. As such, further capital raises are likely, in line with already announced plans and to continue to position AMCs to play a major role in the wider economy's distressed debt disposal.
Notably, the China Banking Regulatory Commission allowed provincial governments to establish their own AMCs in 2014, though with restrictions on the number of AMCs and the ways in which they are allowed to manage distressed debt. Fitch believes that the national and provincial AMCs will collaborate given the scale of NPLs in the economy.
The nature of distressed asset management means greater inherent credit risk in AMCs' asset portfolios and there are concentration risks from Chinese property exposures. Furthermore, asset-quality pressures could increase in the event of a faster than expected downturn in the economy. Rapid growth, in particular, could add to execution risks, especially with the restructured assets portfolios, which have yet to weather a full economic cycle. Low loan-to-value ratios on their distressed assets partially mitigate these risks.
Ratings for China's national AMCs are linked to the sovereign's ratings (A+/Stable) with strategic linkages including state ownership and management control, which indicate a strong likelihood of extraordinary support, if needed.
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