There have long been serious concerns that mounting non-performing assets at mainland banks could drag some of the institutions into the abyss of credit ruin. But a few are poised to reap big rewards.
China Cinda Asset Management Co., Ltd. (01369.HK), which will debut in Hong Kong next Thursday, holds most of the aces in this sector and has unsurprisingly become the toast of the investment community.
The Hong Kong Economic Journal, EJ Insight’s parent publication, reported Wednesday that Cinda has locked up a cool HK$154 billion (US$19.86 billion) in share sales with more than 70,000 subscribers, a record for the year.
As one of the four state-owned assets management companies (AMCs, the other three being Great Wall, Orient and Huarong), Cinda was incorporated in the late 1990s to dispose of China Construction Bank’s staggering amount of bad loans.
The process of dealing with non-performing assets can be thorny and time-consuming. But Cinda is rolling in dough from the business because of its well-tested “buy low and sell high” strategy.
The firm’s prospectus reveals that first-half net profit leapfrogged 34 percent year on year to 4 billion yuan (US$660 million), with an enviable pre-tax annual return reaching 44.5 percent at one point thanks to cheap money from the central bank and the Ministry of Finance which Cinda leverages for the bulky purchase of such assets. The loans from the government are kept at an ultra-low fixed interest rate of just 2.25 percent.
Under the existing regulatory regime, only the big four AMCs are eligible for the cheap money and can carve up those seemingly malignant assets from state-owned banking giants at substantially discounted prices, reportedly equivalent to less than 10 percent or even as low as 0.1 percent of these assets’ original face value.
Instead of recouping the debts or loans themselves, Cinda and its peers simply resell the assets on equity exchanges or through auctions to the highest bidder. The fat spread is their major source of income on top of the revenues from its debt-for-equity swaps.
For example, the 21 Century Business Herald reports that Cinda once bought 56.9 billion yuan worth of non-performing assets for just 850 million yuan, or 1.5 percent of the original value, and resold them to CCB International and Citigroup for 1.138 billion yuan.
Analysts believe that Cinda’s heady business model can be sustained as there will be another spike in non-performing or toxic assets among lenders when the Chinese economy wades deeper into structural reform. The amount is expected to climb to more than 1 trillion yuan by 2015, according to Goldman Sachs. The Financial Times notes that Cinda will swallow 100 billion yuan worth of bad debts and loans in the next two years.
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