Bad debts of­fer good op­por­tu­nity for as­set man­age­ment firms

Non­per­form­ing loans can be a prob­lem for banks, but they’re also a source of profit for the com­pa­nies that are set up to re­solve the prob­lem, Yang Zi­man re­ports

China Daily (Canada) - - BUSINESS -

As non­per­form­ing loans creep up in China, the sit­u­a­tion is pre­sent­ing op­por­tu­ni­ties for at least one sec­tor — as­set man­age­ment com­pa­nies — to ben­e­fit from the op­por­tu­nity to ac­quire NPLs cheaply from trou­bled lenders and sell them at a profit.

Any de­cline in the property mar­ket, which many an­a­lysts have warned is likely to cool or even slump, will pro­vide even fur­ther chances for the AMCs to gain as loans to de­vel­op­ers sour.

Chi­nese commercial banks’ NPLs stood at 563.6 bil­lion yuan ($93.2 bil­lion) as of late Septem­ber, up 14 per­cent from the end of 2012.

The NPL ra­tio, which re­mained at about 1 per­cent at that point, means the banks look pretty safe, at least on paper.

“In­vestors be­lieve that the ac­tual NPL ra­tio is much higher than just 1 per­cent, be­cause the off-bal­ance sheet businesses are not fac­tored in,” said Lucy Feng, re­gional head of bank re­search at No­mura In­ter­na­tional (Hong Kong) Ltd

“I had commercial bank


the value of non­per­form­ing loans of Chi­nese commercial banks at the end of Septem­ber man­agers com­ing to me and ask­ing why their stock prices re­main weak while their quar­terly re­ports con­sis­tently show good re­sults. I told them that share­hold­ers no longer buy into what they write on paper.”

China Cinda As­set Man­age­ment Co Ltd is so far the big­gest ben­e­fi­ciary of the bad as­set buildup. Its shares have per­formed strongly since it went pub­lic in Hong Kong in De­cem­ber.

“As­set man­age­ment com­pa­nies tend to grow when the econ­omy slows down,” said Feng.

“No­mura was the first se­cu­ri­ties com­pany to write a re­port rec­om­mend­ing Cinda to in­vestors. We con­tinue to see great op­por­tu­ni­ties ahead for AMCs’ per­for­mance in the stock mar­ket.”

NPL dis­pos­als con­trib­uted 53.8 per­cent of the com­pany’s net prof­its in the first half of 2013, far more than the other two sec­tors — in­vest­ment as­set man­age­ment and fi­nan­cial ser­vices — in its port­fo­lio.

The vol­ume of NPLs pur­chased by Cinda will grow to more than 50 per­cent of the com­pany’s port­fo­lio, ac­cord­ing to Gold­man Sachs Group Inc.

The com­pany is bet­ting on China’s ever-grow­ing NPLs, which are ex­pected to soar from an es­ti­mated 593 bil­lion yuan in 2013 to 1 tril­lion yuan by the end of 2015, said Gold­man Sachs.

Cinda was orig­i­nally one of the four AMCs es­tab­lished in 1999 by the State Coun­cil to deal with 1.4 tril­lion yuan in bad as­sets then held by the “big four” Sta­te­owned banks. The banks’ fi­nances were be­ing cleaned up to pave the way for their own IPOs.

Cinda out­per­formed the other three in terms of both rev­enue and net profit in 2010 and 2012.

Cinda’s suc­cess story was partly built on the foun­da­tions of the “golden decade” of the real es­tate in­dus­try, which ended in about 2010. As of June 30 last year, 60.4 per­cent of Cinda’s NPLs were re­lated to real es­tate.

“Cinda was as­signed to take over the NPLs of China Con­struc­tion Bank Corp and China De­vel­op­ment Bank Corp” in 1999, said Mei Xingbao, ex­ter­nal au­di­tor of Bank of China Ltd.

“Since CCB’s bad as­sets were mostly gen­er­ated by in­fra­struc­ture con­struc­tion and real es­tate projects, they could rise ex­po­nen­tially in value with care­ful man­age­ment, thanks to soar­ing land and hous­ing prices.”

How­ever, the boom times for real es­tate may soon end. Ye Tan, a Shang­hai-based econ­o­mist, said that the property mar­ket is now go­ing through a “sil­ver decade” as China continues to tighten its grip on the hous­ing mar­ket.

Home prices will fluc­tu­ate only within a limited range in the fu­ture, rather than soar­ing by dou­ble-digit amounts, Ye said.

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