January 19, 2024 (MLN): China’s more stringent rules for financial leasing companies will raise the regulatory and economic hurdles for operating in the sector, accelerating the exit of weaker and smaller firms, and driving further sector consolidation, says Fitch Ratings.
Fitch believes the tightened shareholder requirements suggest a regulatory direction towards greater commitment and responsibility from major shareholders to their financial leasing subsidiaries, reinforcing our view of a high probability of parental support for our rated Chinese financial leasing companies in times of stress.
The National Administration of Financial Regulation (NAFR), China’s new centralized financial regulator, published a consultation paper on January 05, revising the rules governing financial leasing companies.
The paper introduces new measures on capital, leverage, and liquidity management of supervisee lessors and targets to improve the sector’s corporate governance and risk management practices, including imposing stricter requirements on major shareholders and mandating more transparent financial reporting.
The revised rules cap leverage – total equity assets – at 10x, and mandate Tier 1 capital to cover at least 6% of adjusted on- and off-balance-sheet assets.
These new measures, if implemented successfully, should enhance the standalone credit profiles (SCPs) of the larger financial leasing companies and are positive for the sector’s long-term development.
However, we do not expect the potential improvement in the Fitch-rated Chinese financial lessors’ SCPs to affect their Issuer Default Ratings, which are derived using a top-down approach and driven by shareholder support.
Fitch's assessment of shareholder support largely reflects the rated financial leasing companies’ strategic importance to their parents.
The consultation paper continues to mandate the major shareholder of a financial leasing company to provide capital and liquidity support to the subsidiary when needed but still does not specify a required time frame, as in the current regulation.
The proposed revision that raises the minimum shareholding requirement for major shareholders to 51% will not affect our rated issuers as they already meet the new threshold.
The higher shareholding requirement does not necessarily have a positive effect on our support assessment, as Fitch focuses on the actual management control of the parent and the level of integration between the parent and subsidiary.
The narrowing of qualifying lease assets mainly to equipment that has clear ownership and economic value and can generate recurring income will challenge some existing lessors’ balance-sheet expansion, especially for lessors with existing large exposure to immovable assets – primarily public infrastructure and public utility assets – or those that have limited expertise in managing lease assets.
The credit rating agency further believes that the regulator will continue to pivot the sector’s focus towards core leasing products, including direct leases and operating leases, aiming to support the economy by providing financing for manufacturing upgrades, green energy, and new infrastructure.
The consultation paper includes a new section on risk resolutions and exit mechanisms.
This underlines the elevated business challenges and high asset quality and capital pressure faced by some lessors, evident from the bankruptcy of Guotai Financial Rent Co., Ltd., and the merger between China National Foreign Trade Financial & Leasing Co., Ltd. and CRRC Financial Leasing Co., Ltd. in late 2023.
The formal introduction of a liquidation and restructuring mechanism may allow an orderly exit for more high-risk lessors, especially those unable to meet the additional capital adequacy and leverage requirements within the one-year grace period.
While the eased provisioning requirement for non-performing loans may alleviate profitability and capital pressure for others.
China Development Bank Financial Leasing Co., Ltd. (A+/Stable) has the lowest Tier 1 capital ratio among Fitch-rated Chinese financial leasing companies at 9.9%, and its total asset-to-equity ratio of 10.2x at end-1H23 slightly exceeded the new regulatory cap of 10x.
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Posted on: 2024-01-19T11:59:33+05:00
