East Asian Finance-Road to Robust Markets Asset Securitisation in East Asia Ismail Dalla Hong Kong June 22-23, 06 Views expressed in this presentation do not represent official views of the World Bank 1
Key Economic Indicators East Asia and Pacific (in %) 1991-2000 1999 2000 2001 2002 2003 2004 est. 2005 est. Real GDP growth 7.7 5.6 7.2 5.6 6.9 8.0 8.3 7.4 Private consumption per capita 5.5 4.9 5.4 3.6 4.4 4.9 6.0 6.3 GDP per capita 6.4 4.4 5.9 4.6 6.0 7.0 7.4 6.5 population 1.2 1.2 1.3 0.9 0.9 0.9 0.9 0.8 Gross domestic investment/gdp 1 31.9 30.1 31.1 32.1 34.0 37.4 40.9 42.8 Inflation 2 5.6 2.9 4.1 2.0 3.9 3.6 5.3 2.2 Central gvt. budget balance/gdp -1.2-2.7-3.1-3.1-3.3-2.8-2.4-2.4 Export market growth 3 8.2 7.2 14.1-1.8 4.3 8.2 12.1 8.3 Export volume 4 12.0 4.2 22.8 2.4 14.8 21.2 23.1 14.9 Terms of trade/gdp 5 0.1-0.6-0.3-0.3 0.5-0.2-0.9 0.8 Current account/gdp 0.4 4.1 3.4 2.4 3.4 3.7 3.1 2.5 GDP growth: East Asia excluding China 4.6 3.2 5.9 2.4 4.6 5.4 6.0 5.4 Source: Global Development Finance 2005 Notes: 1. Fixed investment, measured in real terms; 2. Local currency GDP deflator, median; 3. Weighted average growth of import demand in export markets; 4. Goods and nonfactor services; 5. Change in terms of trade, measured as a proportion to GDP (percentage) 2
East Asian Savings (% of GDP) 1997 1998 1999 2000 2001 2002 2003 2004 China, People's Rep. of 41.5 39.8 39.4 38.0 38.6 38.7 42.7 44.7 Hong Kong, China 31.6 30.5 30.9 32.9 31.6 33.9 31.6 31.6 Korea, Rep. of 33.7 34.4 32.9 32.4 30.2 29.2 32.8 35.0 Indonesia 31.5 26.5 19.5 25.1 24.9 21.1 21.5 25.3 Malaysia 43.9 48.7 47.4 47.1 42.2 41.8 42.9 43.8 Philippines 18.7 21.6 26.5 24.8 17.0 17.3 18.9 20.9 Singapore 50.5 51.7 48.8 47.9 43.6 44.2 46.7 48.0 Thailand 33.6 36.1 32.8 31.0 30.0 30.5 32.8 33.4 Source: ADB. Key Indicators 2005 3
Gross Domestic Investment (% of GDP) 2000 2001 2002 2003 2004 2005 2006(e) 2007(e) China 36.3 38.5 40.2 43.8 45.6 44.7 43.8 41.0 Hong Kong 28.1 25.9 23.4 22.8 23.0 23.5 23.3 22.6 Korea 31.0 29.3 29.1 30.0 29.1 30.3 30.4 30.2 Indonesia 21.3 23.5 20.4 17.3 21.3 22.3 24.2 26.1 Malaysia 27.1 23.9 23.8 21.4 22.5 21.6 21.0 21.5 Philippines 18.4 19.0 17.6 16.6 17.0 18.5 19.0 19.5 Singapore 32.4 26.0 22.8 14.8 18.3 21.7 23.0 24.1 Thailand 22.8 24.1 23.9 25.0 27.1 24.0 26.0 27.0 Source: ADB, Asian Development Outlook 2005 4
East Asia Gross International Reserves (in US$ billion) 1997 1998 1999 2000 2001 2002 2003 2004 2005 China, People's Rep. of 142.8 149.2 157.7 168.3 215.6 291.1 408.2 614.5 821.5 Hong Kong, China 92.8 89.6 96.2 107.5 111.2 111.9 118.4 123.5 124.2 Korea, Rep. of 20.4 52.0 74.0 96.1 102.8 121.3 155.3 199.0 210.3 Indonesia 16.6 22.7 26.4 28.5 27.2 31.0 35.0 35.0 33.0 Malaysia 20.8 25.6 30.6 29.5 30.5 34.2 44.5 66.4 n.a. Philippines 7.3 9.2 13.2 13.0 13.4 13.1 13.5 12.9 15.9 Singapore 71.3 74.9 76.8 80.1 75.4 82.0 95.7 112.2 115.8 Thailand 26.2 28.8 34.1 32.0 32.4 38.0 41.1 48.7 50.7 Total (excludes Japan) 398.1 452.1 509.1 555.2 608.4 722.8 911.6 1,212.2 1,371.4 Japan 219.7 215.5 286.9 354.9 395.1 461.2 663.3 833.9 834.3 Total 834.1 935.1 1,093.2 1,187.3 1,261.9 1,606.7 1,574.9 2,046.1 2,205.7 Source: International Financial Statistics 5
East Asian Financial Markets (2005) 6000.0 (US$ billions) 5000.0 4000.0 3000.0 2000.0 1000.0 0.0 Bonds Equity Banks Source: Dalla (2005), Deepening Capital Markets in East Asia, Dec 2005, World Bank background paper for East Asian Finance-Road to Robust Markets, World Bank (2006). 6
Financial Sector Profile (Dec. 2005) Nominal GDP Country of 2005* Bonds Equities Banks 1) US$ billion US$ billion % GDP US$ billion % GDP US$ billion % GDP China, People's Republic of 2) 1,927.0 605.3 31.4 401.9 20.9 3,692.2 191.6 Hong Kong, China 178.2 48.5 27.2 1,055.0 591.9 808.0 443.3 Indonesia 204.7 50.2 24.5 81.4 39.8 140.0 68.4 Korea, Republic of 801.1 655.7 81.9 718.0 89.6 814.5 101.7 Malaysia 128.4 123.5 96.2 180.5 140.6 208.5 162.5 Philippines 3) 101.4 38.0 37.5 39.8 39.3 72.5 71.5 Singapore 116.8 68.5 58.6 257.3 220.3 235.3 201.4 Thailand 179.3 79.0 44.1 123.9 69.1 183.0 102.1 TOTAL 3,636.8 1,668.7 45.9 2,857.9 78.6 6,154.1 169.2 Germany 3,093.3 1,911.7 61.8 1,221.1 39.5 5,850.2 189.1 Japan 4) 4,929.5 8,370.7 169.8 7,542.7 153.0 7,076.4 143.6 United Kingdom 2,337.8 1,002.8 42.9 3,058.2 130.8 7,618.5 325.9 United States of America 5) 12,479.5 20,310.5 162.8 17,000.9 136.2 12,264.3 98.3 Data sources: GDP = World Development Indicators. International Financial Statistics, Jun. 2006 Bonds = World Federation of Exchanges, Table 16 A, Table 16B; BIS; ADB, Asian Bond Indicators Equities = World Federation of Exchanges, Table on Equity - 1.1.Domestic Market Capitalization Banks = International Financial Statistics, Jun. 2006 Notes: 1) Deposit money banks only. The US banking data include commercial banks, credit unions, savings institutions, and money market funds. The US data is as of 2004. The bank assets of the US and Korea are as of 2004. 2) Shanghai SE, and Shenzhen SE 3) The Philippine bond data is from Asian Bond Online 4) Tokyo SE, and Osaka SE 5) Includes AMEX, NASDAQ, and NYSE * IMF Projection 7
The Size of Debt Securities in 2005 Sector/Country Debt Securities Government Financial Inst. Corporate Total % of World Total Euro area 5,068.6 2,813.0 984.0 8,865.6 20.1% France 1,096.6 576.9 243.4 1,916.9 4.4% Germany 1,083.4 791.5 122.3 1,997.2 4.5% Italy 1,392.3 592.2 223.6 2,208.1 5.0% United Kingdom 680.4 317.8 24.2 1,022.4 2.3% Canada 579.8 109.3 102.7 791.8 1.8% United States 5,787.4 11,356.2 2,695.7 19,839.3 45.1% Japan 6,761.2 1,114.2 711.7 8,587.1 19.5% Emerging market countries of which: Asia 1,007.9 588.5 253.9 1,850.3 4.2% Latin America 597.1 119.1 36.8 753.0 1.7% Europe 332.2 4.4 3.9 340.5 0.8% Africa 70.9 11.6 13.4 95.9 0.2% World 21,704.0 17,219.5 5,092.9 44,016.4 100.0% Source: BIS Notes: Asia includes China, Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, and Thailand. Latin America includes Argentina, Brazil, and Mexico. Europe includes Czech Republic, Poland, and Turkey. Africa includes South Africa. 8
Size of Domestic Bond Markets in Selected Countries Outstanding value as % of GDP, 2004 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 26% 32% 35% 41% 49% 49% 56% 61% 62% 77% 82% 84% 94% 163% 192% Mex China India Thai UK S.Africa Tur. Brazil Sing. Cnda GmnyS.Korea Mlys US Japan Source: Dalla(2005), Deepening Capital Markets in East Asia, Background Paper to East Asian Finance-road to robust markets, World Bank (2006) 9
Size and Composition of East Asian Bond Market (Size Sept., 2005: US$ 1,659.5 billion) Philippines 2.3% Malaysia 7.2% Singapore, 5.0% Thailand, 4.7% China, People's Rep. of, 35.3% Korea, Rep. of, 37.8% Indonesia 3.5% Hong Kong 5.2% Source: ADB, Asia Bond Indicators 10
1,800.0 East Asia: Bond Market Composition (1995-Sept 2005) 1,600.0 1,400.0 Domestic Government Debt Securities Domestic Financial Debt Securities Domestic Corporate Debt Securities 1,200.0 (US$ bil) 1,000.0 800.0 600.0 400.0 200.0 0.0 Source: BIS 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sept 2005 11
East Asian Bond Markets Outstanding Domestic Bonds (1998-2005) US$ billion 1998 % 1999 2000 2001 2002 2003 2004 US$ billion US$ billion US$ billion US$ billion US$ billion US$ billion 2005 (sep) US$ billion China, People's R 166.6 28.0 215.0 265.6 315.6 377.3 440.4 483.3 586.3 35.3% Hong Kong, Chin 51.4 8.7 57.1 60.5 63.3 68.3 71.9 78.2 85.1 5.1% Indonesia n.a. n.a. 45.1 49.4 45.1 55.2 64.4 57.7 47.5 2.9% Korea, Rep. of 240.0 40.4 265.4 268.9 292.7 380.9 445.7 568.5 626.7 37.8% Malaysia 61.9 10.4 66.1 74.7 82.7 84.3 98.8 106.7 116.1 7.0% Philippines 21.1 3.6 22.5 19.9 20.7 20.9 24.1 25 38 2.3% Singapore 29.5 5.0 37.3 44.6 54.8 61.5 67.2 78.6 82.5 5.0% Thailand 23.7 4.0 33.1 32.6 37.6 48.6 58.4 66.5 77.3 4.7% East Asia 594.2 100.0 741.6 816.2 912.5 1,097.0 1,270.9 1,464.5 1,659.5 100.0% Source: ADB, Asia Bond Indicators, BIS % 12
Fixed Income Securities Market in USA Municipal, $2.1 T Corporate bonds $5.0 T Outstanding Bond Market Debt (US$ Trillion) June 30, 2005 Asset-backed securities $1.9 T Mortgage related $5.6 T 20% 9% 8% 13% 23% Money market $3.2 T 16% 11% Treasury $4.0 T Federal Agency $2.7 T Source: The Bond Market Association 13
Role of Asset-Backed Securities Markets in the Economy Development of domestic bond markets Development of residential mortgage market Additional funding source for capital constrained financial institutions and corporations. As a risk management instrument, securitization can reduce risk in the financial market Potential investment opportunities for domestic and regional institutional investors. Potential source for infrastructure projects. 14
Securitizable Assets Residential mortgages Commercial mortgages Hire-purchase receivables Small business loans Credit card receivables Nonperforming loans Worker remittances Bond portfolio Collateralized mortgage-backed or loan backed obligations (CMOs or CLOs) Tax liens Toll road receivables Trade and export receivables Utility (e.g., electricity, telephone, and water receivables) Oil and gas receivables Service contracts Source: Asset-Securitization Market in Selected East Asian Countries, Ismail Dalla, World Bank, May 2006. 15
Asset-Backed Securities Terminology Securitization involves the repackaging of generally illiquid assets that generate cash flows. The assets are sold to a special purpose vehicle whose sole function is to buy such assets in order to securitize them. The attractiveness of the transaction is that it separates the assets from the credit profile of the company that originally owned them. By adjusting the tranche amounts and term structure, the assets can be altered to suit the needs of investors. In addition, swaps, guarantees, and reserve funds can be used to enhance the creditworthiness of the newly issued securities, making them desirable for a broader range of investors. Collateralized Debt Obligation. A security backed by a pool of assets. CDOs do not specialize in one type of debt. Those that do include collateralized bond obligations (CBOs) and collateralized loan obligations (CLOs) Monoline insurer. Agencies that provide credit guarantees. They began by offering guarantees on municipal bond defaults, but have branched out. 16
Asset-Backed Securities Terminology Mortgage-backed securities. A bond that represents a securitized interest in a pool of mortgages. The simplest form of MBS is a mortgage pass-through. With that structure, all principal and interest payments (less a processing fee) from the pool of mortgages are passed directly to investors each month. There are residential (RMBS) and commercial varieties (CMBS) of these bonds. Originator. Almost any entity that originates a receivable. Examples include a finance company with a pool of loans, a utility company selling electricity, or a credit card company. Obligor. The entity that pays the receivable, including the guarantor of the payment. Pass-through. Refers to mortgage pass-through securities when one or more mortgages are pooled and sold off. The cash flow of the resultant securities depend on the cash flow of the underlying mortgages. Receivable. The obligation to pay money. This can take many forms, such as payments on a loan, lease, or bond. Almost any cash flow can be securitized, though the receivable must be convertible into cash and the cash flow usually needs to be predictable. 17
Asset-Backed Securities Terminology Seniority. Affording a certain class of securities with a priority in claiming assets. It usually confers a greater creditworthiness, while subordinated issues offer higher yields. Servicer. They collect the payments on the receivables and are usually the originator. This is necessary since special-purpose vehicles typically have no staff or premises. Special-purpose vehicle. The entity that purchases the receivables and issues securities backed by them. It is typically structured to provide bankruptcy remoteness, insulating the issuer from the originator. SPVs are usually located in a tax-neutral location such as the Cayman Islands or Bermuda. SPV activity is typically restricted to the transaction being contemplated. Tranches. Different securities classes, typically with different payment structures and credit profiles. 18
Why invest in ABS? Attractive yields ( a yield pick up of 30-70 basis points over treasury) High Credit Quality Diversification Predictable cash flows Reduce Event Risks. 19
Cross Border East Asia Securitization Transaction by location of assets (US$ million) Securitization Transaction by Location of Assets in East Asia US$ Mil % US$ Mil % US$ Mil % US$ Mil % US$ Mil % Hong Kong 300.0 25.1% 0.0 0.0% 0.0 0.0% 419.9 35.0% 566.3 18.1% Korea 769.0 64.4% 2,301.4 90.2% 3,222.9 78.4% 652.9 54.4% 1,553.8 49.8% Singapore 125.0 10.5% 0.0 0.0% 290.1 7.1% 127.8 10.6% 1,002.0 32.1% Malaysia 0.0 0.0% 250.0 9.8% 600.0 14.6% 0.0 0.0% 0.0 0.0% Cross-Nation 33.3 2.8% 192.3 7.5% 141.3 3.4% 374.5 31.2% 0.0 0.0% Total 1,194.0 100.0% 2,551.4 100.0% 4,113.0 100.0% 1,200.6 100.0% 3,122.1 100.0% Source: Moody's Investors Service, IFS 2000 2001 2002 2003 2004 20
Cross-Border Asset-Backed Securities Transactions in Asia (2000 2004) 2004) US$ million The Size of ABS Issuance by Assets (millions of US$ 5,000.0 4,500.0 4,000.0 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 Global CBO/CLO Equipment Leases CMBS Real Estate Auto Loan CBO/CDO/CLO RMBS Credit Card Others 1,000.0 500.0 0.0 2,000 2,001 2,002 2,003 2,004 Source: Moody's Investors Service 21
Financial Corporations Public Corporation Korea is the largest ABS market in East Asia (ex x Japan) Korea ABS Issuance (2002-2005) (In KRW, billions) Originator 2002 2003 2004 2005 % Change 2004-5 Credit-specialized finance companies 28,067.8 19,154.1 8,473.7 8,124.1-4.1% (Credit card companies) 20,700.0 10,900.0 3,500.0 4,070.2 16.3% Banks 1,798.4 6,278.3 6,404.0 4,772.3-25.5% Securities companies 2,034.1 6,963.1 3,037.0 1,843.1-39.3% Insurance companies 509.3-175.8 230.0 30.8% Mutual Savings Bank 77.7-52.4 192.0 266.4% KoMoCo 528.2 326.6 - - Others 251.6 451.6 - - Total 33,267.1 33,173.7 18,142.9 15,161.5-16.4% Non-Financial Corporations 6,336.8 5,665.0 4,978.4 7,600.1 52.7% KAMCO 59.9 543.2 59.0 867.2 1369.8% Resolution & Finance Corporation 163.6-235.5 - Korea Housing Finance Corporation - - 3,016.1 4,378.1 45.2% Korea Highway Corporation - 500.5 500.5 500.3 0.0% Daejeon City - - 44.0 100.0 127.3% Total 223.5 1,043.7 3,855.1 5,845.6 51.6% Grand Total 33,490.6 34,217.4 21,998.0 21,007.1-4.5% Exchange rate 1,186 1,193 1,035 1,012-2.3% Total amount (US$ billion)) 28.2 28.7 21.3 20.8-2.3% Total number of ABS issues 181 191 170 236 38.8% Source: Financial Supervisory Service 22
KAL Japan ABS 1 Cayman Ltd KAL Japan ABS 1 Cayman Ltd. (Y27 billion) KAL Japan ABS 1 Cayman Ltd. (the Note Issuer), a limited liability company incorporated in the Cayman islands issued Y27 billion of secured floating rate notes. The transaction is a securitization of yendenominated future ticket receivables originated by Korean Air Lines Co., Ltd. in Japan for flights including its Japan-Korea routes. The Korea Development Bank (KDB) provided unconditional and irrevocable yendenominated credit facility and covers full payment of principal, interest, and priority expenses on the notes. 23
Malaysia-the runner up in local ABS 7,000 6,000 5,000 Issuance by Value and Volume Issue Volume (RM mil) (LHS) No of Transactions (RHS) 6,310 6 8 6 4,000 3,000 2,000 1,000 3 920 1,800 3 3,568 4 2,916 5 4 2 0 Source: Rating Agency Malaysia 2001 2002 2003 2004 9-05 0 24
Malaysia: ABS by Asset Type (2001-Sep 05) Issuance Value by Asset Type CDOs 27% Commercial properties 11% Residential mortgages 23% Progress payment receivables* 34% Source: Rating Agency Malaysia Credit card receivables 1% Auto-loans receivables 4% 25
Asset Securitisation and Implications on Financial Markets Positive A new financial instrument that facilitate development of bond market which in turn help create a more diversified financial markets. Can also be used for open markets. Improve risk management in the financial system and therefore reduce financial vulnerability. Create a new investment vehicle for investment for institutional and high net worth investors in the region. Increase liquidity for financial institutions. This would enable them to increase lending to corporate and households especially for housing finance. 26
Asset Securitisation and Implications Challenges Complex administration of capital adequacy under BASEL II. Should AAA rated securitized assets be given preferential treatment for capital adequacy?. Clear regulatory framework for securitization covering the accounting and tax treatment of SPV and other service providers. Increase in securitization reduce the efficacy of monetary policy (Arturo Estrella, FBRNY, Economic Policy Review, May 2002. Lack of liquid market can create valuation problem for ABS and the calculation of capital adequacy (marked to market issue). 27
The Future of Asian Securitization 28
Banks Dominate in China Financial Market Structure (China) 5,000.0 4,500.0 4,000.0 3,500.0 Bank Assets Equity Market Capitalization Domestic Bond Market (US$ billion) 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 0.0 1997 1998 1999 2000 2001 2002 2003 2004 Source: International Financial Statistics, World Federation of Exchange, Asia Bonds Online 29
Prospects for ABS markets (2006-2010) 2010) Rapid Growth : Malaysia, China China: Potential size : $300-500 billion assuming 10% securitization Moderate growth: Hong Kong Korea, and Singapore Emerging growth: Indonesia, Thailand, Philippines ABF III Assets: RMBS: China, Indonesia, Thailand, Korea Non-Performing loans: China Infrastructures (Malaysia, Indonesia and Thailand Reits (Hong Kong, Singapore, Malaysia) Credit Cards: Thailand, China, Indonesia. Student loans: Korea, Malaysia 30
Thank you Ismail Dalla idalla@worldbank.org Asset Securitization Markets in Selected East Asian Countries East Asian Finance-Selected Issues, World Bank (2006) 31