Major Chinese banks want to manage their own bad debts, attracted by the outsize profits being earned by recovery firms, in a sign of confidence that investments in internal risk assessment teams are set to pay off.
If they are right, it may mark the end of a buyer’s market for a distressed debt pile that has topped $100 billion, benefiting bank shareholders at the expense of asset-management companies such as China Cinda Asset Management Co (1359.HK).
But the phenomenon also poses a challenge for regulators as they push banks to lend more to stimulate growth; in retaining non-performing loans (NPLs) on their books in search of profit, the banks effectively limit their ability to make fresh loans.
“There are so many NPLs in China, there’s a lot of room for information asymmetry, where assets get written off that actually have some value,” said Benjamin Fanger, founder of Shoreline Capital, a Guangdong-based firm specializing in distressed debt investment in China since 2004.
It is a lucrative business at the moment. State-owned Cinda reported a 26 percent rise in net profit to 9.1 billion yuan ($1.5 billion) last year and China Huarong Asset Management’s net profit jumped 44 percent to 10.1 billion yuan.