China Retail Auto Loan Market Credit Performance Outlook 2020

China Retail Auto Loan Market Credit Performance Outlook 2020

March 10, 2020

Key Takeaways

S&P Global (China) Ratings expects the credit performance of China's retail auto loan market to remain stable in 2020. However, product offerings and credit performance may be more divergent among different brands. The stable outlook is mainly driven by the following three aspects:

- The overall regulatory environment for China's retail auto loan market is prudent, and mainstream underwriting policies and risk control standards remain stable among major commercial banks and auto finance companies (AFCs).

- Based on the available relevant historical data, our forward-looking analysis suggests that the market's overall credit performance will not deteriorate sharply within the year.

- The industry's transformation in recent years has had a strong influence on different brands' business strategies, which will further differentiate product composition and credit performance.

CREDIT ANALYST Kan Zhou Beijing +86-10-6516-6081 Kan.Zhou@

Jieqiong Du Beijing +86-10-6516-6083 Jieqiong.Du@

Table of Contents

What's Changed...............................................................................................................................................2 Key Credit Factors ? Prudent Regulatory Environment and Stable Mainstream Risk Management.....3 Key Credit Factors ? Forward-looking Analysis on Available Relevant Historical Data..........................5 Key Credit Factors ? Product Offerings and Credit Performance Diverge Further ..................................6 What to Look For .............................................................................................................................................7

S&P Global (China) Ratings

March 10, 2020

China Retail Auto Loan Market Credit Performance Outlook

March 10, 2020

What's Changed

The consumer auto financing industry in China began as auto loan products sold by commercial banks and has experienced rapid growth for more than two decades. Today it has developed into a well-diversified market with major players including banks, AFCs, leasing companies and internet auto finance companies. The total RMB outstanding auto loan balance is now in the trillions, growing rapidly from the beginning of the century. S&P Global (China) Ratings estimates the overall market size in 2019 exceeded 1.5 trillion RMB, with a compound annual growth rate of more than 20% in the past decade. The credit performance of the market has gone through different stages, and the overall non-performing loan (NPL) ratio has remained at a low, relatively stable level in the past five years. According to the "China Financial Stability Report (2019)" from The People's Bank of China (PBoC), the retail auto loan NPL ratio stood at 0.70% at the end of 2018 and was much lower than the average level of retail loans.

Table/Chart 1

China Retail Auto Loan Outstanding Balance and NPL Ratio

billion 1,500

2.0%

1,200 900 600 300

1.50% 1.5% 0.70% 1.0%

0.5%

0 2013

2014

2015

2016

2017

2018

0.0%

Retail auto loan balance NPL Ratio of retail auto loan

AFC retail auto loan balance NPL Ratio of overall personal loan

Note 1Retail auto loan balance includes auto loans from both commercial banks and auto finance companies (AFC); 2016-2018's data was estimated by S&P Global (China) Ratings.

Source: PBoC, CBIRC, Wind, complied by S&P Global (China) Ratings. Copyright ?2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Since 2019, the central government and local authorities have introduced a series of policies to promote automobile sales amid downward pressure in the economy. These policies mainly included relaxing limits on license plate registrations and purchases in certain areas, encouraging upgrades and the retirement of old models, supporting the development and sales of new energy vehicles (NEVs), and reducing purchase taxes and value-added taxes. Despite these measures, there has been no significant uplift in automobile sales, and sales volume has differentiated among different brands and models. The growth of car parc per thousand has slowed down.

The total outstanding retail auto loan balance is now in the trillions. The NPL ratio has remained low and stable. We believe there is still room for further growth, however, it will continue to slow down in 2020.

S&P Global (China) Ratings

March 10, 2020

China Retail Auto Loan Market Credit Performance Outlook

Table/Chart 2

Car Parc Per Thousand in China, US, Japan and South Korea

900

25.0%

800

700

19.4%

20.0%

600 500

16.3%

15.3%

14.6%

13.4%

15.0%

400

11.0%

12.0% 10.7% 10.0%

300

200

5.0%

100

-

2010

2011

2012

2013

South Korea

Japan

2014 US

2015

2016

China

2017

2018

China yoy growth rate

0.0%

Note: Car parc per thousand =Registered number of cars/(population/1000); US 2018 data not available Source: CEIC, complied by S&P Global (China) Ratings. Copyright ?2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

According to data from the China Banking Association, the current consumer auto financing penetration rate is close to 50% in China, while the average penetration rate is around 70% for countries with more developed auto financing industries. Based on the penetration rate and the car parc per thousand statistics, we believe there is still ample room for growth. However, consumer confidence and disposable income growth may not improve significantly, as property-related expenditure continues to rise in overall household expenses, and automobiles still represent a relatively large purchase for households. In addition, we believe the market in its current form has not yet reached the upgrade or replacement cycle. Therefore, the growth rate of China's auto financing market size could slow down further.

Key Credit Factors ? Prudent Regulatory Environment and Stable Mainstream Risk Management

Since the PBoC issued the "Administrative Rules for Automotive Consumer Loans" in 1998, the consumer auto financing industry has been one of the key sectors under heavy supervision. The table below shows a list of the main regulatory policies that have had a direct impact on the industry over various periods. The 1998 rules were the first guidelines specifically designed for authorized state-owned commercial banks to conduct pilot auto financing business. The "Measures for the Management of Auto Loans" promulgated by the PBoC and China Banking Regulatory Commission (CBRC) in 2004 included regulatory measures on non-banking financial institutions -- mainly for AFCs which were established to fulfil commitments made to open the auto loan market after China became a member of the World Trade Organization (WTO). The revised regulatory measures, together with the "Notice of the PBoC and CBRC on Adjusting the Policies on Automotive Loans" issued by the PBoC and CBRC, were implemented in 2017. These two updated policies further enhanced regulations on the retail auto loan market, which was going through a changing dynamic due to rapid developments in internet financing, new energy and the used car market.

March 10, 2020

The overall regulatory environment is prudent for the retail auto loan market in China, and mainstream underwriting policies and risk control standards remain stable among major commercial banks and AFCs.

S&P Global (China) Ratings

March 10, 2020

China Retail Auto Loan Market Credit Performance Outlook

Table/Chart 3

Consumer Auto Financing Industry Regulation Summary

Year 1998

Issuing Authority

PBoC

Rules/Guidance

Administrative Rules for Automotive Consumer Loans

Main Content and Influence

State-owned commercial banks are permitted to conduct auto financing business on a pilot basis.

2003

CBRC

Administrative Rules Governing Auto Financing Companies, Associated Implementation Rules Governing Auto Financing Companies

Extends the coverage of the lenders to include Chinese, overseas or JV non-bank financial institutions authorized to conduct auto financing business.

2004

PBoC, CBRC

Administrative Rules for Automotive Loans

Mentions the length of auto loans (including extensions) should not exceed 5 years, in which used car loans (including extension) should not exceed 3 years.

2008

CBRC

Rules Governing Auto Financing Companies

Requires AFCs to be rich in experience managing auto financing and adjusts scope of business and risk management.

2016

PBoC, CBRC

Guidance on Improving Financial Support to New Consumption Areas

The lowest down payment ratio for NEVs and used cars are 15% and 30% respectively. AFC product innovation encouraged, calls for auto loan ABS balance sheet improvements.

2017

PBoC, CBRC

Administrative Rules for Automotive Loans, Notice of Adjusting Policies on Automotive Loans

Adjusts the highest LTV to 80% for traditional passenger vehicles, 70% for traditional commercial vehicles, 85% for NEV passenger vehicles, 75% for NEV commercial vehicles, 70% for used cars.

2018

CBIRC etc.

A series of administrative rules and measurements for financing guarantee business

Detailed guidance on related regulations about financing guarantee business and the calculation of guarantee liability balance.

2019

CBIRC

Ministry of Finance, Ministry of Commerce etc.

Supplementary Provisions on Supervision of Financing Guarantee Companies

2020

CBIRC

Interim Rules on Financial Leasing Companies (Draft for Comments)

Source: Public information complied by S&P Ratings (China) Co., Ltd. Copyright ?2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Supervision of dealers, auto service providers that have operated financing guarantee business without the required business license.

Clarifies scope of lease items, the proportion of financial leasing assets, investments, business concentration, etc. Requires lower leverage ratio and sets fixed income securities investment ceiling (should not exceed 20% of net assets).

We believe that regulators have not relaxed controls on overall risk management while encouraging the development of the market. The latest "Administrative Rules for Automotive Loans" (2017) clearly stipulates the maximum term, maximum size and corresponding risk control measures required for different types of auto loans. Article 23 for risk management has been updated to require the lender to use external credit ratings cautiously and determine the credit quality of the borrower through a combination of internal and external ratings. In 2018, two main regulatory bodies merged to form the China Banking and Insurance Regulatory Commission (CBIRC), and undertook responsibility for supervising finance leasing companies, which were previously supervised by the Ministry of Commerce. Based on the direction of policies published in the past

S&P Global (China) Ratings

March 10, 2020 March 10, 2020

China Retail Auto Loan Market Credit Performance Outlook

two years, we believe that financial regulatory policies are often closely connected. Overall supervision is becoming more stringent. Meanwhile, S&P Global (China) Ratings has researched and analyzed the underwriting policies and risk control procedures of major banks and auto finance companies, and we believe that mainstream underwriting policies and risk control standards remain stable in the industry.

Key Credit Factors ? Forward-looking Analysis on Available Relevant Historical Data

The retail auto loan is generally one of the highest quality assets on a bank's retail loan book, second only to the credit quality of personal residential mortgages. AFCs have become major participants in China's retail auto loan market after more than a decade of development. The following chart shows the changes in the historical NPL ratios of a few banks and AFCs, with overall NPL ratios remaining relatively low since 2013.

Table/Chart 4

Commercial Banks and AFCs' NPL Ratio Examples

1.5%

1.0%

0.5%

0.0% 2013

DF-Nissan AFC ICBC

2014

2015

Volkswagen AFC CCB

2016

BMW AFC CMBC

Note 1All commercial banks' NPL ratios are overall retail loan NPL ratios, except for Ping An Bank, Note 2Bejing Hyundai AFC's 2013 and 2014 data has been adjusted after being written off. Source: Public information complied by S&P Ratings (China) Co., Ltd. Copyright ?2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

2017

2018

Beijing Hyundai AFC Ping An Bank

There are certain limitations associated with NPL ratios in terms of how they reflect overall portfolio credit quality, especially within a rapidly growing market. However, their analysis, combined with an assessment of changes in the economic environment, business strategies, underwriting standards, assets characteristics and other relevant factors is still useful in providing a better understanding of future performance trends. By assessing these factors, our forward-looking analysis also fine-tunes our assumptions, and we expect overall credit performance will not deteriorate sharply within the year based on current available data.

As an increasingly important funding channel for auto loan market participants in recent years, the relevant data presented by securitization transactions could also confirm future performance trends of the overall auto loan market. Our typical forward-looking analysis on auto loan securitization transactions includes analyzing dynamic and static pool, collateral pool mixes and asset characteristics, peer comparison, changes on recovery and charge-off as well as taking considerations of an originator/servicer's operational and administrative framework, track record,

March 10, 2020

Based on the available relevant historical data, our forwardlooking analysis suggests that the market's overall credit performance will not deteriorate sharply within the year.

S&P Global (China) Ratings

March 10, 2020

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