Key Takeaways
- New securitization issuance decreased by 7% year on year to Chinese renminbi 1.9 trillion (US$264 billion) in 2023. We expect issuance to stay flat in 2024, with the issuance momentum of dominant segments to slow.
- Issuance trends by asset type will continue to vary. Consumer ABS, green auto ABS and micro and small enterprise loan ABS may see increasing issuance volume while issuance of auto loan ABS and RMBS will remain sluggish.
- Collateral performance was stable in the fourth quarter of 2023 for our rated auto and consumer loan ABS, as well as RMBS. We expect the performance to hold up in 2024.
China's securitization issuance saw another year of declining volume amid a weak property market and slow auto sales. New securitization issuance decreased by 7% to Chinese renminbi (RMB) 1.9 trillion (US$264 billion) in 2023, and it will likely remain flat in 2024.
S&P Global Ratings believes delinquency trends are gradually stabilizing. The delinquency ratios in residential mortgage-backed securities (RMBS) have dropped following a one-off spike, and auto loan asset-backed securities (ABS) have also seen a decline in severe delinquency ratios. In 2024, we believe our ratings on auto ABS and RMBS transactions will remain stable, based upon our projections for China's economy.
In 2023, S&P Global Ratings assigned 'AAA (sf)' ratings to two consumer loan ABS transactions from China. In response to increasing investor attention to China's consumer loan ABS sector, we have also published an article summarizing the key asset characteristics and performance trends of four active consumer loan ABS issuers (see "A Comparative Overview Of Select China Consumer Loan ABS", published Jan. 22, 2024, on RatingsDirect).
Chart 1
Yield Trend
Auto loan ABS coupons rebounded at year-end
The one-year loan prime rate (LPR) and five-year LPR benchmarks have remained unchanged at 3.45% and 4.20%, respectively, since September 2023. However, People's Bank of China (PBOC) recently announced a 50 basis point (bps) reduction to the reserve requirement ratio (RRR) for financial institutions, effective Feb. 5, 2024. The central bank expects this move to inject RMB1 trillion worth of liquidity into the market.
The six-month Shanghai Interbank Offered rate (SHIBOR) climbed during the fourth quarter, after bottoming at about 2.1% in August 2023. As of Dec. 31, 2023, the rate was 2.56%, compared with 2.36% at the end of September. Nonetheless, we believe that SHIBOR may ease off slightly in the coming months as the RRR cut leads to additional liquidity in the market.
Following the trajectory of SHIBOR, coupons on the most senior tranches of auto loan ABS overall also trended up during the last quarter of 2023 to 2.3%-2.8%, from 2.0%-2.6% in the third quarter.
Chart 2
New Issuance Trends
Overall issuance will likely be stagnant during 2024
New securitization issuance decreased 7% to RMB1.9 trillion (US$264 billion) in 2023, marking a second consecutive decline. There were no RMBS issuances in 2023, following a significant drop in 2022. The halt is likely because of the persistent property market downturn and sluggish mortgage originations in China. Auto ABS issuance has also declined for two consecutive years, mainly because of slow auto loan originations during 2022 and 2023.
Despite tepid issuance overall, some sectors, such as consumer loan ABS and micro and small enterprise (MSE) loan ABS under the credit asset securitization (CAS) scheme, saw increasing issuance momentum in 2023.
In 2024, issuance prospects will depend on the fundamentals of the respective sectors amid a slow recovery of China's economy.
Chart 3
Positive momentum in consumer loan and MSE loan ABS
2023 saw robust growth in the issuance of MSE loan and consumer loan ABS under the CAS scheme, maintaining momentum from the second half of 2022. MSE loan ABS issuances jumped 61% to RMB75 billion, accounting for about 21% of total securitization issuance under the scheme. At the same time, issuance of consumer loan ABS rose 36% due to debut transactions as well as repeated issuances.
In 2024, we expect issuances of MSE loan ABS under the CAS scheme to maintain pace, while consumer loan ABS under major regulatory regimes should see significant growth. Our forecast considers factors including a gradual, albeit slowed, recovery in China's economy and policy support in MSE and consumer financing. This will lead more originators to issue ABS, coupled with investors seeking other avenues in the absence of RMBS issuance. Issuers are likely to tap a broader base of offshore investors, given market participants' increasing familiarity with these asset classes.
Chart 4
Issuance trend varies under different schemes
Issuance under the National Association of Financial Market Institutional Investors (NAFMII) scheme dropped about 31%, while that under the China Securities Regulatory Commission (CSRC) scheme increased by 1% during 2023, and remained the most popular avenue for issuances. CAS managed by NAFR and the PBOC recorded a slight decline of about 2%. Based on our observation, leasing and factoring companies remained active in ABS issuances in the exchange market for fundraising.
Chart 5
Auto ABS Issuance
Slow auto sales and loan originations drag auto ABS issuance
The volume of auto ABS issuance decreased by 18% in 2023 to RMB180 billion. Captive auto finance companies issued 38 transactions in 2023, down from 45 transactions in 2022. Slow growth in auto sales and loan origination for certain auto finance companies likely contributed to the decrease. We expect auto ABS issuance to stay flat or see tepid growth in 2024, given our projected light vehicle sales growth of up to 2% in 2024 (see "China Industrials Are Making Do With Less," published on Feb. 1, 2024).
Despite the slowing issuance of auto ABS, transactions backed by green auto loans increased their share of total issuances in the sector overall. In 2023, seven originators sponsored 10 green auto ABS issuances, accounting for about 26% of the total number of auto ABS issuances. This is a notable increase compared with 18% in 2022 and 6% in 2021. We expect the issuance momentum of this subsector to continue over the next year due to the rapid adoption of electric vehicles in China.
In 2023, three originators issued debut green auto ABS, increasing the number of green issuers to nine. We anticipate more first-time originators will come to the market because the number of participants at present is relatively limited.
Chart 6
RMBS Issuance
Dim issuance prospects amid sector weakness
RMBS issuance has remained stalled since February 2022. The halt in issuance is likely because of the persistent property market downturn and sluggish mortgage originations in China. Issuance prospects will depend on developments in the property market, trajectory of banks' mortgage originations, and the regulatory stance on mortgage growth and RMBS issuance.
In our view, issuance will not resume until the property market recovers meaningfully and mortgage loan origination picks up for at least two quarters. Considering our expectation of an extended "L-shaped" recovery extending into 2024, RMBS issuance may not resume until the second half of 2025 at the earliest.
We expect China's property sales to drop by 5% in 2024 (See "China Property Watch: A Slow, Sequential Recovery In 2024", published Oct. 16, 2023). Rounds of policy support aimed at upper-tier cities will see these markets stabilize first; lower-tier cities are still contending with excess supply and weak demand.
Relaxations on mortgages in 2023 will support sales volumes in the four first-tier cities: Guangzhou, Shenzhen, Shanghai, and Beijing.
Developers will likely further discount residential prices to boost sales in lower-tier cities, given that demand remains depressed. As a result, we forecast a 9% sales drop for such cities in 2024.
Chart 7
Auto Loan ABS Performance
Stable performance across delinquency buckets
In terms of all auto loan ABS outstanding, asset performance has been stable.
- The M2 (31-60 days in arrears) ratio ticked up to 0.13% in December 2023 from 0.12% in September 2023.
- The M3 (61-90 days in arrears) ratio ticked up to 0.08% in December 2023 from 0.07% in September 2023.
- The M4+ (91+ days in arrears) ratio decreased to 0.18% in December 2023 from 0.22% in September 2023.
In general, securitized auto loan receivables were on a stabilizing trend in the fourth quarter of 2023. However, we have observed divergence in asset performance among originators amid weak economic conditions. In 2024, the divergence may continue, because the prospects of slowed macroeconomic growth could weigh on vulnerable borrowers' repayment capacity.
For the auto ABS transactions that we rate, delinquency ratios stayed stable, in line with our expectations. M2 and M3 ratios were 0.10% and 0.03% in December 2023, compared with 0.08% and 0.04% in September 2023. The M4+ ratios slid to 0.12% in December 2023, from the peak of 0.26% in the first quarter of 2023.
Some of our rated transactions have distinct pool attributes. For example, vehicles backing the loans for some issuances are not from carmakers associated with the originators. Higher credit enhancement mitigates the increased credit risk in these transactions.
Chart 8
Cumulative default rates remain low
Cumulative default rates of all outstanding ABS as of end-2023 remained largely stable, and stayed below 0.5% for 2016 and later vintages.
Comparing default performance across annual vintages, the 2022 vintage has risen relatively faster than the 2020 and 2021 vintages. In the fourth quarter of 2023, the cumulative default rate increased by 8bps to 0.24% for the 2022 vintage, while 2021 and earlier vintages recorded minimal or no changes. In terms of absolute levels, the cumulative default rate of 2022 vintages stayed low at less than 0.3%, after seasoning of 12 months.
We believe the performance of our rated auto loan ABS will remain stable in 2024 because of favorable pool attributes, such as low loan-to-value ratios and higher seasoning relative to the initial loan tenor.
Chart 9
RMBS Performance
Delinquency ratios for rated transactions descend from recent peaks
For RMBS transactions that we rate, delinquency ratios remained relatively elevated, though they have declined from recent peaks.
- The M1 ratio (1-30 days past due) decreased to 0.50% in December 2023 from 0.56% in October 2023.
- The M2 ratio decreased to 0.19% in December 2023 from 0.24% in October 2023.
- The M3 ratio decreased to 0.10% in December 2023 from 0.14% in October 2023.
- The M4+ ratio decreased to 2.45% in December 2023 from 2.48% in October 2023.
A one-off, significant drop in the underlying pool balance could have partly driven rising delinquency ratios for our rated transactions in September and October 2023. Mortgage rate cuts in September led to a wave of prepayment activity, which shrunk the underlying pool balance significantly. This can drive up the delinquency ratios because of the effect of a smaller base.
The lower mortgage rate had no rating impact on our rated transactions. The level of credit support for all RMBS under our surveillance has increased at least 8 percentage points since deal close. This is more than sufficient to absorb the effect of pool yield reduction and supports the stability of our ratings.
We have adopted an asset coverage ratio to monitor RMBS that we rate in order to better gauge and track the change in credit enhancement in percentage terms as transactions amortize (see chart 11). The ratio measures the number of times current collateral (excluding assets in severe delinquency) could cover the outstanding balance of rated notes.
Since RMBS transactions usually have the lowest credit enhancement level as a percentage at closing, the inclusion of a new transaction will cause the ratio to dip for the month of addition.
In general, as transactions continue to repay rated notes, the asset coverage ratios tend to trend upward over time. This indicates a steady buildup in credit enhancement and therefore more cushion to withstand potential deterioration of the underlying pools. We expect the ratings on all Chinese RMBS that we rate to remain stable during 2024.
Chart 10
Chart 11
Cumulative default rates trend up with slower speed.
Cumulative default rates of most vintages saw an uptick of 1bps-6bps during the fourth quarter of 2023. This indicated that the accumulation of defaults has slowed down for most vintages. Future asset performance of RMBS will hinge on property price movements, regulatory stance, and the strength of China's economic recovery.
We note cumulative default rates remained relatively high for some transactions from the 2020 vintage. This is partly due to the default of some large-sized mortgages and the effects of COVID-19. These transactions were not rated by us and it is unclear if their asset quality will stabilize.
Chart 12
Prepayment rates drop from the peak
As we expected, the constant prepayment rate (CPR) for bank-issued RMBS transactions has decreased rapidly to 15% in December 2023, from the peak of 62% in September 2023. The one-off mortgage rate cut in September 2023 and borrowers opting for refinancing largely led to the recent movement of prepayment rates. The future prepayment rate will mainly depend on the interest rate level and the likely returns on wealth management products. A declining trend on the expected return for such products incentivizes prepayment because the investment yield may barely cover the mortgage interest.
Chart 13
Consumer Loan ABS Performance
Performance of our rated consumer loan ABS transactions remains stable
S&P Global Ratings has assigned 'AAA (sf)' rating to two consumer loan ABS transactions in 2023. Both transactions are still within the revolving period, but the reported delinquency and default levels have remained stable since deal close.
We expect our ratings on consumer loan ABS to remain stable in 2024, considering steady collateral performance and structural mitigants that can help contain credit loss in the event of economic stress.
Compared with auto loan ABS and RMBS transactions, consumer loan assets are reporting relatively higher delinquency ratios, probably due to the unsecured nature of the loans. However, favorable factors, such as higher credit enhancement levels and a shorter weighted-average transaction life should help mitigate additional credit risks.
New Issuances In 2023
- Anyihua 2023 Phase VI Personal Consumption Loan Asset Backed Securities, Dec. 26, 2023
- Generation 2023-5 Retail Auto Mortgage Loan Securitization, Dec. 12, 2023
- Ruize Tianchi 2023 Phase II Retail Auto Mortgage Loan Securitization Trust, Nov. 24, 2023
- Generation 2023-3 Retail Auto Mortgage Loan Securitization, Sept. 19, 2023
- Silver Arrow China 2023-2 Retail Auto Loan Asset Backed Notes Trust, Sept. 12, 2023
- Anyihua 2023 Phase III Personal Consumption Loan Asset Backed Securities, July 28, 2023
- Fuyuan 2023-2 Retail Auto Mortgage Loan Securitization Trust, July 18, 2023
- Ruize Tianchi 2023 Phase I Retail Auto Mortgage Loan Securitization Trust, July 13, 2023
- Generation 2023-2 Retail Auto Mortgage Loan Securitization, June 9, 2023
- Silver Arrow China 2023-1 Retail Auto Loan Asset Backed Notes Trust, March 14, 2023
- Generation 2023-1 Retail Auto Mortgage Loan Securitization, March 10, 2023
- Xin Rong 2023-1 Retail Auto Mortgage Loan Securitization, Feb. 24, 2023
Rating Actions In 2023
- Jianyuan 2021-8 Residential Mortgage Backed Securities Class B Notes Upgraded To 'AAA (sf)'; Class A-2 And A-3 Affirmed, June 26, 2023
- Xin Rong 2021-3 Class A2 Notes Upgraded To 'AAA (sf)', June 19, 2023
- River Funding No. 4, Ltd. Class 1 Notes Rating Affirmed At 'AA- (sf)', April 17, 2023
Related Research
- China Industrials Are Making Do With Less, Feb. 1, 2024
- China Retail Sales Will Likely Grow Slower Than GDP This Year, Jan. 23, 2024
- A Comparative Overview Of Select China Consumer Loan ABS, Jan. 22, 2024
- China Structured Finance Outlook 2024: Consumer ABS A Bright Spot Amid Flat Total Issuance, Jan. 11, 2024
- Credit Conditions Asia-Pacific Q1 2024: India, Southeast Asia Advance As China Slows, Dec. 5, 2023
- China Property Watch: A Slow, Sequential Recovery In 2024, Oct. 16, 2023
- How We Rate China Leasing Securitizations, Oct. 12, 2023
- China Mortgage Rate Cuts Will Help Home Buyers And Won't Hurt Rated RMBS, Oct. 10, 2023
- What's Behind The First 'AAA (sf)' Rating Assigned To Chinese Consumer Finance ABS?, Aug. 24, 2023
- China Ratings Affirmed At 'A+/A-1'; Outlook Stable, June 28, 2023
- A Primer On China's Consumer Loan ABS Market, June 9, 2023
- A Primer On China's MSE Loan ABS Market, May 10, 2023
- A Primer On China's Equipment Lease ABS Market, March 2, 2023
- A Primer On China's Residential Mortgage Backed Securities Market, May 24, 2022
- A Primer On China's Auto Loan Asset-Backed Securities Market, April 28, 2022
This report does not constitute a rating action.
| Primary Credit Analyst: | Yilin Lou, Hong Kong +852 2533 3524; yilin.lou@spglobal.com |
| Secondary Contacts: | Patrick Chan, Hong Kong + 852 2533 3528; patrick.chan@spglobal.com |
| Melanie Tsui, Hong Kong +852 2532 8087; melanie.tsui@spglobal.com | |
| Jerry Fang, Hong Kong + 852 2533 3518; jerry.fang@spglobal.com | |
| Andrea Lin, Hong Kong + 852 2532 8072; andrea.lin@spglobal.com | |
| Carol Hu, Hong Kong + 852-2912-3066; carol.hu@spglobal.com |
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