Covered Bonds covering grounds in Asia, growing globally

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Covered bonds, the financial instruments has had its roots deep into the European countries for centuries, are now slowly deepening its roots into the Asian economies as well. The launch of a covered bond program by a major Singaporean bank (United Overseas Bank)[1] is the sign of how these traditional European products are gaining traction in the Asian markets. DBS bank had announced Singapore’s first covered program in the summer of 2015, which was followed by the aforesaid recent program launched in the country to diversify the way the banks fund the loans they make.

Covered bonds are seen as ultra-safe investments as they give dual recourse to the investors on both the issuer and the assets in case of a default, however they have failed to spread their wings in the US economy since securitisation, which allows banks to transfer complete risks away from their balance sheets and efficiently manage their capital requirements, is still a dominant mode of funding in the country

However, the scenario is quite the contrary in other economies. In case of Asian countries, Kookmin a South Korean bank issued the country’s first and Asia’s 3rd covered bond program in October, 2015[2].  Also in India[3] the National Housing Bank , country’s apex institution in the for housing finances of the country and also a subsidiary of the country’s central bank, is looking forward to issue of covered bonds to promote other capital market solutions for the mortgage lending business in India.

Further, the Australian government had announced a reform package, post the economic crisis in 2008, which was mainly for the purpose of implementing Australian banking sector’s competitiveness and searching for funding sources for mortgage market. The package consisted of two components: Issuance of covered bond and Mortgage-backed securities structure improvement.[4]

Also the Bank of New Zealand issued Covered Bonds in Asia Pacific region in June, 2010 for the first time with an issue size of NZ$425million[5].The covered bonds were issued with the purpose of solving two main problems for the banking sector first being over-reliance in short-term deposits and second being securitization.

In most of the Asian countries banks are more reliant on retails deposits than wholesale markets for funding their loans. A developed infrastructure for covered bonds in the Asian economies could be seen as an evolutionary product, which would allow them to fund themselves in times of economic slowdowns. The Asian institutions have lived through very rough and volatile market conditions and know the fact that deposits can dry up, so they are adapting new funding options from their European counterparts.

Reported by: Ameet Roy

Date: 16/12/2015

Securitization news and updates

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China – Now Asia’s biggest securitization market

 

The securitization surge in China has seen a quantum jump in the first eight months of 2015 from $20.8 billion to $26.3 billion in the same period last year[1] making it Asia’s largest securitization market, leaving behind Japan and Korea. The surge in the securitization volumes has been possible owing to the progressive changes in the Chinese regulations pertaining to securitization in the recent past. The recent reforms have led to expansion and quickening of lending and bundling of loans for refinancing purposes.  

China’s economy has had its internal challenges with the economy going into recessionary phase. The securitization market in China has had a pulley effect reviving the Chinese economy from the clutches of non-existent growth.

China started the securitisation pilot project in 2005 but remained conservative through the global financial crisis of 2007. The securitisation program was revived in 2012 in China, however it is only in the last year that the regulatory reforms have led to the upsurge in volumes and enough traction to gauge global attention.

Some of the recent regulatory changes introduced by the Chinese regulators are as follows:

 

a.       Approval system for issuance of securities on deal-by-deal basis has been replaced by a registration system in which the repeat issuers are free to issue Asset Backed Securities (ABS) within approved quota. Though new firm has to take permission from the regulatory authority, nevertheless this relaxation seems to be a major step in enhancing the securitization market.[2]

b.      Latest set of disclosure standard unveiled this year on securitization of non revolving consumer loans.[3] 

c.       Increase in the limit of new securitization for 2015 to Rmb500 billion.[4]

 

 

 

The typical asset classes in vogue in Chinese securitization market are as follows:

a.       Equipment on lease

b.      Real estate loan

c.       Consumer loan

d.      Auto Loan

Since Chinese government reopened the country’s securitization market in 2012, sponsors have  been gradually expanding to auto finance companies and city commercial bank. Issuance of  ABS  has been a game changer in leading the securitization market among the developed countries of the world. Issuance from the financing units of car makers including Ford Motor Co. and Volkswagen AG has led behind the securities backed by the auto loans which now forms a smaller piece of the market. The growth of the infrastructure  has contributed no less in boosting the economy of the country by channelising its capital through the means of various asset class of securitization.

Converging from the process of selling asset backed securities after being approved by deal on deal basis to freely sell the securities after registering with the regulators has made the entire process hassle free. Issuance of ABS in China has shot up dramatically to become the largest securitization market in Asia, and this year issuance had passed RMB269 billion (US$42.14 billion) as of the end of October.[5]

Bankers believe that the domestic investor base in China will make the process of securitization more sustainable unlike other countries in Asia where issuers sell their asset-backed securities to the foreign investors alone. Owing to the impetus that the local investors feel more secured to invest in their home assets with which they are quite familiar, the securitization market in China will be more intensified in the upcoming years.

 

Reported by:  Surbhi Mohata

Dated: 4th  December, 2015