Have Chinese banks just hit a eureka moment in securitisation finance?

The mainland banking industry has just passed through a landmark moment in securitisation finance, according to Moody's Investors Service.

For the first time, a mainland bank has managed to come up with a revolving structure for an asset-backed security (ABS) that will allow it to sidestep some of the interest rate and duration concerns in existing ABS.

In a recent deal by Bank of Ningbo that raised 3.7 billion yuan (HK$4.49 billion), Moody's has identified a template in which new loans priced at different rates could be continuously added into an ABS portfolio - the rates and duration profile in the instrument could then be recalibrated over the course of the instrument's lifetime. The agency says the deal could serve as a model for other mainland banks.

In previous structures, banks would package off unwanted loans from their books into an ABS that was then sold to investors with a fixed rate and pre-determined maturity. All proceeds would be returned to the investors by the end of a set investment period. Banks make money when they can arbitrage the spread between what investors are willing to pay for the loan portfolio and the interest they charge from borrowers of the underlying loans.

However, the People's Bank of China has been dropping its rates aggressively since November. With every cut, banks need to reprice rates for the underlying loans, making less from their borrowers but still having to keep up with the same rate of return they have struck with investors.

Banks have mostly seen ABS as a bad deal this year, because they could be locked with a quagmire of conflicting duration and rates mismatches. However, with the new Ningbo deal, banks may now find new flexibility with the manoeuvrability to manage the instrument's rates profile.