Primary contacts: KY Stephanie WongAnnie WuMaggie Yang

Secondary contact: Jerry Fang

Research assistant: Carol Hu

China Securitization Performance Watch 1Q 2020COVID Pain Still To Come

Agenda

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New Issuance trend for auto loan asset backed securities (auto loanABS), and residential mortgage backed securities (RMBS)

Key changes in 2020 Q1 and yield trends

Performance trend for auto loan ABS and RMBS

Key Takeaways

– We expect annual issuance to drop by 10%~15% in 2020 year over year, mainly due to weak RMBS issuance momentum.

– We estimate COVID-19 will increase the default rate for our rated China auto loan ABS and RMBS by 30 ~ 60 basis points (bps) over the remaining life of the respective transactions.

– This higher level is within our base-case assumptions (1% ~ 1.5%) and can be absorbed by credit enhancement available.

– Auto loan ABS issuance had a strong start to the year while RMBS issuance contracted.

– Asset performance has been volatile in the first quarter and remains under pressure.

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Key Changes in 2020 Q1 | The Near-Term Data Is Bleak But On The Path Of Recovery

– Gradual recovery. China has passed the first-wave COVID-19 peak and has gone some way toward restarting its economy.

– Policy stimulus has been building and should provide a tailwind for ongoing recovery through the second half.

– Stimulus. A range of targeted measures have been rolled out.

– The flow of credit to the nonfinancial sector has risen 4 percentage points of GDP over the past three months.

GDP growth contracted by 6.8% in 2020 Q1,

first decline on record.

The jobless rate rose amid lockdown and

plunging global demand.

RRR for smaller banks cut by 1 percentage point in two phases.

We expect very weak car sales in China with

8% – 10% decline in 2020.

Slowing export demand hit China’s

manufacturing sector as PMI fell.

COVID-19 / Financial Conditions / Social

China’s loan prime rate has been lowered twice

this year.

Purchasing Managers' Index

Auto salesUnemployment

Required reserve ratio (RRR)

Loan rates GDP

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Yield Trend | Auto Loan ABS Coupon Trended Downward

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– Market rates declined in response to central bank easing measures to support the weakened economy.

– In 2020 Q1, the six-month SHIBOR hit a record-low range of 1.5%-2.5%, from 2.7%-3.3% in 2019.

– Falling yields. Coupons on the most senior tranches of auto loan ABS also declined to around 2.5%-3.1% toward the end of Q1, and lower than 2% in May.

– Expectation. Coupons will remain low in near term. Fallen coupons are less attractive to offshore investors.

SHIBOR--Shanghai Interbank Offered Rate. ABS--Asset-backed securities. Source: National Interbank Funding Center, Chinabond; compiled by S&P Global Ratings.

Coupons On The Most Senior Tranche Of China Auto Loan ABS Moved Down In Line With Market Rates

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SHIBOR 6 months Coupons on the most senior tranche of China auto loan ABS

Securitization Issuance in 2020 Q1 Increased Year On Year

New Issuance Trend | New Issuance Rose In Q1

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Including issuance under the credit asset securitization scheme managed by the China Banking and Insurance Regulatory Commission and the People's Bank of China, the securitization scheme managed by the China Securities Regulatory Commission, and the asset-backed notes scheme managed by China’s National Association of Financial Market Institutional Investors. Source: Chinabond, WIND; compiled by S&P Global Ratings.

– New issuance in China's securitization market increased in 2020 Q1, despite the extended Chinese New Year holidays and the COVID-19 impact.

– RMB408.6 billion of new issuance came to the market, an increase of 9.2% from 2019 Q1.

– Q1 tends to be seasonally low so the COVID-19 impact is still hard to determine.

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Annual issuance Q1 issuance

Issuance Growth Varied Across Asset Classes

New Issuance Trend | Weak RMBS Momentum Will Likely Drag Down Full Year Activity

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*Including consumer loan ABS and micro-loan ABS issuance in CAS pilot program of the CBIRC and PBOC and securitization program managed by the CSRC. Source: Chinabond, Shanghai Clearing House, WIND; compiled by S&P Global Ratings.

– The growth was mainly driven by commercial receivables-backed transactions under the asset-backed notes (ABN) scheme managed by China’s National Association of Financial Market Institutional Investors.

– Auto loan ABS was another driver.

– We expect annual issuance to drop by 10%~15% in 2020 year over year, mainly due to weak RMBS issuance momentum.

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Auto loan ABS Credit card receivables Other consumer receivables* RMBS CLO

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2015 2016 2017 2018 2019 2020 Q1

Auto Loan ABS Issuance | Momentum From Repeat Originators Buoyed Q1 Volume…

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Source: Chinabond, WIND; compiled by S&P Global Ratings.

Number Of Auto Loan ABS Transactions By Originator

0 1 2 3 4 5 6 7 8 9 10 11 12 13

FAW Auto Finance Co. Ltd.China Construction Bank

Hangzhou United BankChangshu Rural Commercial Bank

Haima Finance Co. Ltd.Dongfeng Peugeot Citroen Auto Finance Co. Ltd.

Ping An Bank Co. Ltd.China Merchants Bank

BYD Auto Finance Co. Ltd.Changan Auto Finance Co. Ltd.

Dongfeng Motor Finance Company Ltd.Toyota Motor Finance (China) Co. Ltd.

Great Wall Automotive FinanceJincheng Bank Co. Ltd.

Beijing Hyundai Auto Finance Co. Ltd.Genius Auto Finance Co. Ltd.

GAC-SOFINCO Automobile Finance Co. Ltd.Fortune Auto Finance Co. Ltd.

SAIC Finance Co. Ltd.Ford Automotive Finance (China) Ltd.Volkswagen Finance (China) Co. Ltd.

Mercedes-Benz FinancialSAIC-GMAC Automotive Finance Co. Ltd.

Chery Huiyin Motor Finance Service Co. Ltd.BMW Automotive Finance (China) Co. Ltd.

Dongfeng Nissan Finance Co. Ltd.

Number of transactions

2016 2017 2018 2019 2020

Auto Loan ABS Issuance | ….However Full Year Activity Will Likely Be Flat

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– Issuance momentum stayed strong in Q1, with 10 repeat issuances by captive auto-finance companies (AFC) for RMB46.2 billion (up 48% YoY). This reflects AFCs’ intentions to take advantage of low interest rates and meet issuance targets earlier in year to avoid execution uncertainty.

– We estimate that issuance will be roughly flat for the full year.

– In view of the falling auto sales amid COVID-19, AFCs may increase their support to auto manufacturers to boost sales, with more loans with zero to low interest rates, longer tenors, and flexible payment methods to cope with borrowers’ repayment capability.

– We don’t expect AFCs with auto loan ABS that S&P rates to loosen their underwriting policies to boost loan origination. AFCs have their own risk management. We don’t believe they’d allow asset quality to deteriorate in order to support auto manufacturers.

– More transactions have adopted a revolving structure to increase funding efficiency. Typically there is a three to four month gap from the pool cut-off date to the entrustment date. As such 15% of the initial pool balance is commonly collected and the note paid down in the first payment date—a revolving structure mitigates this situation.

RMBS Issuance | Decelerated In Q1

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– Four RMBS transactions were issued in Q1, totalling RMB30.7 billion.

– This is a 50% YoY volume decline, from six issuances in 2019 Q1.

– Issuance slowdown was mainly driven by the COVID-19 and economic disruption as a result of containment measures.

– We expect the slow issuance trend to last throughout 2020, reflecting subdued need in balance sheet management amid sluggish economic conditions.

Note: Originators with more than one RMBS issuance. Source: Chinabond, WIND; compiled by S&P Global Ratings.

Number Of RMBS Transactions By Originator

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48

Ping An Bank

Jiangsu Jiangnan Rural Commercial Bank

Huishang Bank

Postal Savings Bank of China

Shanghai Pudong Development Bank

Bank Of Hangzhou

Agricultural Bank of China

Bank of Jiangsu

Bank of Communications

China Merchants Bank

Industrial Bank

China CITIC Bank

Bank of China

ICBC

China Construction Bank

Number of transactions

2016 2017 2018 2019 2020 Q1

Auto Loan ABS Performance| Early Delinquency Rate Stabilized; S&P Rated Transactions Outperform The Sector

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– Early delinquency rate stabilized. M1 ratio (1-30 days past due) rose modestly in January and February and declined in March.

– Biggest jump in M3 ratio (61-90 days past due), with overall sector’s weighted average increasing significantly to 0.19% in March.

– S&P rated auto transactions outperformed the sector with weighted average M3 ratio inching up to 0.03% in February and slightly further to 0.07% in March.

Data as of March 31, 2020. The delinquency rates exclude the first three months after transactions close. W.A.—Weighted average. Source: Trustee reports published on Chinabond's website; compiled by S&P Global Ratings.

Volatilities In Weighted Average Asset Delinquency Rate Of All Auto Loan ABS

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W.A. 31-60 days past due (M2) (right scale) W.A. 61-90 days past due (M3) (right scale)

W.A. 90+ days past due (M4+) (right scale) W.A. 1-30 days past due (M1) (left scale)

Auto Loan ABS Performance| Cumulative Default Rate Will Rise

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Months after transaction close

2012 2014 2015 2016 2017 2018 2019 2020

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– The cumulative default rate will rise as “default” kicks in after 90 days past due.

– We estimate the additional default rate due to COVID-19 for our rated deals to be 30bps ~ 60 bps based on the arrears trend in the past two months and our house view on the economy.

– No rating impact for now in light of our rating stress assumptions and credit enhancements provided. Risks titled to the downside, if the pandemic revives in China, or economic recovery takes longer than expected.

Data as of March 31, 2020. The delinquency rates exclude the first three months after transactions close. Source: Trustee reports published on Chinabond's website; compiled by S&P Global Ratings.

Auto Loan ABS Cumulative Default Rate Remained Stable But Under Pressure

RMBS Performance | Assets Face Pressure Over The Next Two Quarters

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– M1 stabilized as lockdowns relaxed. Delinquencies of 1-30 days improved, for S&P rated RMBS, to around 0.4% in March from the February peak of nearly 0.8% amid the height of the epidemic and lockdowns in China.

– Other overdue buckets inched up. M2, M3 and 90+ days past due ratios continue to inch higher in February and March, leaving asset quality under pressure for at least the next two quarters.

Data as of March 31, 2020. Weighted average of delinquency rates of S&P rated transactions, including Jianyuan 2018-11, Jianyuan 2018-21, Jianyuan 2019-2, Jianyuan 2019-7, and Jianyuan 2019-10 Residential Mortgage Backed Securities. RMBS --Residential mortgage-backed securities. W.A. --Weighted average. Source: Trustee reports published on Chinabond's website; compiled by S&P Global Ratings.

S&P’s Rated RMBS Delinquency Trend

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W.A. 31-60 days past due (M2) (right scale) W.A. 61-90 days past due (M3) (right scale)

W.A. 90+ days past due (M4+) (right scale) W.A. 1-30 days past due (M1) (left scale)

RMBS Performance | Cumulative Default Rate Will Head Higher

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– COVID-19’s toll on asset quality. Asset deterioration has yet been reflected in the cumulative default rate.

– We estimate additional default rate for our rated deals to be 30bps ~ 60 bps based on the arrears trend in the past two months and our house view on the economic recovery.

– No rating impact for now in light of our rating stress assumptions and credit enhancements provided. We may revise our projections given the uncertainty and fluidity.

Data as of March 31, 2020. The definition of default may be different from deal to deal. Number of transactions in 2014 and 2015 vintages were less than 10 transactions. Source: Trustee reports published on Chinabond's website; compiled by S&P Global Ratings.

China’s Bank-Sponsored RMBS Cumulative Default Rate

RMBS | Prepayment In V-Shape Move During Q1

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– February constant prepayment rate (CPR) for bank-issued RMBS transactions fell below 4%.

– Obligors need to go to branch to make prepayment because this is deemed a revision of loan terms and condition for some banks.

– CPR rebounded in March to 8% as the lockdown has gradually relaxed.

– We expect the CPR to remain under pressure in 2020, as the economic slowdown hits sentiment.

Data as of March 31, 2020. CPR excludes data from first month after transaction closing. Source: Trustee reports published on Chinabond's website; compiled by S&P Global Ratings.

Bank-Sponsored RMBS Performance – Weighted Average CPR

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Number of outstanding transactions(right scale)

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A Note On Our Coronavirus Coverage

– S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

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Related Research

– Economic Research: Jobs And The Climb Back From COVID-19, April 20, 2020

– Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP, April 16, 2020

– Credit FAQ: What Do The First Performance Reports Reveal About COVID-19's Effects On China Auto ABS And RMBS?, March 26, 2020

– Credit FAQ: How S&P Global Ratings Factors In The Potential Effects Of The COVID-19 Outbreak When Analyzing China Auto ABS and RMBS, March 4, 2020

– China Structured Finance Outlook 2020: Performance To Diverge Amid Flat-To-Modest Issuance Growth, Feb. 6, 2020

– China Auto ABS And RMBS Must Brace For Coronavirus Impact, Feb. 3, 2020

– An Overview Of China's Auto Finance Market And Auto Loan Securitization, March 12, 2019

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