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Trust Fears Are Overhyped: Summary

Core Content

This report from DBS Group Research provides an analysis of trust assets and products in China, particularly focusing on Single-donor Trust Funds (SDTFs) and Multi-donor Trust Funds (MDTFs). The key message is that fears surrounding trust assets and products are overplayed, and the trust sector is resilient enough to absorb potential defaults without triggering systemic risks.

Main Points

1. SDTFs Are Relatively Safe

• SDTFs account for 69.5% of total trust assets and are primarily used by banks to bypass lending restrictions.
• They are generally safer than MDTFs, with an average interest rate of 7.61% compared to 8.53% for MDTFs.
• The asset risk profile of SDTFs is similar to normal bank loans, with limited exposure to high-risk sectors like developers.
• The slowdown in SDTF issuance due to regulatory tightening is manageable and can be offset by alternative financing methods such as brokerage asset management and local government bond financing.
• SDTFs are expected to have a 1.5–2.5% NPL ratio, which is slightly higher than bank loans but still within acceptable limits.
• The majority of SDTFs are initiated by banks, and trust firms act as intermediaries. This is especially true for state-owned enterprises (SOEs) and local government-owned trust firms.

2. MDTFs Are Riskier, but Trust Firms Can Bear Defaults

• MDTFs are more risky with higher yields and are packaged as wealth management products.
• The report estimates that 2–4% of MDTFs could default in 2014–2016, with the highest risk in the coal and property sectors.
• Coal MDTFs are expected to face a repayment spike in mid-2014, with Rmb72–102bn maturing, while property MDTFs had their last maturity peak in mid-2013 and are expected to have a new one in late 2015.
• Infrastructure MDTFs are expected to peak in December 2014, driven by local government fiscal cycles.
• Trust firms have historically bailed out MDTFs that have defaulted, using proprietary assets and seeking recovery through collateral auctions or third-party takeovers.

3. No Notable Maturity Peak for Trust Products in 2014–2016

• The report forecasts Rmb1.0tn in MDTFs maturing in 2014, with Rmb971bn from existing MDTFs and Rmb52bn from new ones.
• The overall trust product maturity peak is not expected until 2Q15, but this is due to the concentration of MDTFs with two-year maturities.
• The report emphasizes that continued MDTF issuance will prevent a future maturity crunch.

4. Investor Recommendations

• The report recommends buying Chinese banks as dilution risks are declining.
• The top picks are ABC and Minsheng.
• Trust firms are expected to eventually stop bailouts as investors become more aware of risks, but in the short term, they are capable of managing expected losses.

Key Information

• SDTFs are mainly used for channeling bank credit and are relatively safe, with limited exposure to high-risk sectors.
• MDTFs are more complex and risky, with higher yields, but trust firms are able to absorb near-term defaults.
• The report provides a detailed breakdown of MDTF issuance and maturity by sector, including coal, property, and infrastructure.
• Trust firms have been actively involved in managing defaults, using their own capital and collateral.
• The report highlights the importance of regulatory changes and their impact on SDTFs and MDTFs.

Conclusion

The trust sector in China is not as vulnerable as feared. While there are risks associated with MDTFs, especially in the coal and property sectors, the sector is expected to manage these without causing systemic issues. The slowdown in SDTF issuance is manageable and will be offset by other financing channels. Trust firms have the capacity to absorb losses and are recommended as a safe investment for the short term.