zhaoyin hezhi 2021 phase i personal consumer loan asset

Presale:

Zhaoyin Hezhi 2021 Phase I Personal Consumer LoanAsset-Backed SecuritiesNovember 30, 2021

Preliminary Ratings As Of Nov. 30, 2021

Class Preliminary rating Preliminary amount (mil. RMB) Credit supported (%)

A-1 AAA (sf) 1,403.0 25.92

A-2 AAA (sf) 820.0 25.92

B AA (sf) 180.0 19.92

C A (sf) 160.0 14.59

Subordinated NR 407.0 1.03

This presale report is based on information as of Nov. 30, 2021. The ratings shown are preliminary. Subsequent information may result in theassignment of final ratings that differ from the preliminary ratings. Accordingly, the preliminary ratings should not be construed as evidence offinal ratings. This report does not constitute a recommendation to buy, hold, or sell securities. RMB--Chinese renminbi. NR--Not rated.N/A--Not applicable.

Transaction Participants

Issuer Zhaoyin Hezhi 2021 Phase I Personal Consumer Loan Asset-backed Securities

Originator and seller China Merchants Bank Co. Ltd.

Servicer China Merchants Bank Co. Ltd.

Trustee China Resource SZITIC Trust Co. Ltd.

Supporting Ratings

Bank account provider Bank of China Ltd.

Transaction Key Features

Expected closing date Dec. 10, 2021

Final maturity date April 19, 2028

Collateral Credit card receivables originated by China Merchants Bank Co. Ltd.

Aggregate receivables (mil. RMB) 3,001

Presale:

Zhaoyin Hezhi 2021 Phase I Personal Consumer LoanAsset-Backed SecuritiesNovember 30, 2021

PRIMARY CREDIT ANALYST

Andrea Lin

Hong Kong

+ 852 2532 8072

[email protected]

SECONDARY CONTACTS

Jerry Fang

Hong Kong

+ 852 2533 3518

[email protected]

Patrick Chan

Hong Kong

+ 852 2533 3528

[email protected]

Yilin Lou

Hong Kong

+852 2533 3524

[email protected]

www.spglobal.com November 30, 2021 1

© S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimeron the last page.

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mailto: [email protected]








Transaction Key Features (cont.)

Number of accounts 265,261

Weighted-average contractual interest rate 6.80%

Asset domiciled China

Rationale

The preliminary ratings assigned to the class A-1, class A-2, class B, and class C notes to beissued by China Resource SZITIC Trust Co. Ltd. as trustee of Zhaoyin Hezhi 2021 Phase I PersonalConsumer Loan Asset-backed Securities, reflect the following factors.

- Credit risk. We considered the portfolio's historical payment, deemed charge-off, yield,purchase, and dilution rates in our analysis. We set our base-case assumptions in line with ourglobal consumer receivables criteria, taking into account macroeconomic conditions andindustry trends (see "Global Methodology And Assumptions For Assessing The Credit Quality OfSecuritized Consumer Receivables," published Oct. 9, 2014).

- Operational risk. We consider the servicer's severity risk and portability risk to be low under ouroperational risk criteria (see "Global Framework For Assessing Operational Risk In StructuredFinance Transactions," published Oct. 9, 2014). We took into account the obligor segment of theunderlying credit card receivables, the depth of China's credit card market, and projected cashflow available to pay a replacement servicing fee. These factors do not constrain ourpreliminary ratings on the notes in this transaction.

- Cash flow analysis. The transaction's cash flow can meet the timely payment of interest and theultimate payment of principal to the rated noteholders under stresses commensurate with theratings. Based on the results from our cash flow scenarios assuming early amortization, theavailable credit enhancement and excess spread (if any) for the rated notes is sufficient toabsorb credit losses, payment of senior fees and expenses, as well as interest on the ratednotes under their respective rating stress scenarios. Our cash flow scenarios assumed acombination of key parameters such as payment sequence, turbo-pay structural triggers, andcredit parameters reflecting portfolio-specific characteristics.

- Counterparty risk. The transaction is exposed to counterparty risk through Bank of China Ltd.as the bank account provider. The rating dependent counterparties meet our minimum ratingrequirement to support the 'AAA' rating. The documented downgrade and replacementlanguage is also in line with our current counterparty rating criteria (see "Counterparty RiskFramework: Methodology And Assumptions," published March 9, 2019). The transaction alsohas sufficient credit enhancement levels to withstand the deposit set-off risk.

- Legal risk. We consider the issuer to be bankruptcy remote, in line with our criteria (see "LegalCriteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology,"published March 29, 2017).

- Ratings above sovereign. The preliminary ratings on the class A and class B notes are higherthan our sovereign rating on China. We applied our criteria "Incorporating Sovereign Risk InRating Structured Finance Securities: Methodology And Assumptions," along with itsassociated guidance, published on Jan. 30, 2019. Based on our analysis, the criteria allows a



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Presale: Zhaoyin Hezhi 2021 Phase I Personal Consumer Loan Asset-Backed Securities

maximum differential of four notches above the sovereign rating. Therefore, the highest ratingthat can be assigned to this transaction is 'AAA (sf)' under our criteria for a rating above thesovereign.

Strengths And Weaknesses

Strengths

The strengths we observed in the rating analysis are:

- The securitized portfolio is well-diversified due to the requirements under the documentedeligibility criteria and portfolio parameters, which specify limits for obligors and receivableexposures as well as geographical and credit score distributions. The securitized receivableswill also have a weighted average interest rate of at least 6.75%, which can provide somecapacity for the transaction's liquidity needs even during higher default or delinquency stress.

- The transaction benefits from a sequential pay structure during the amortization period, whichmeans subordinated items are only paid after rated note principal. If an acceleration eventoccurs, excess spread might be available to turbo-pay principal to the rated notes or toreimburse charge-offs.

- The transaction will have legal rights to a cash reserve funded from collections from theunderlying pool between the cut-off date and the entrustment date. The reserve will betransferred to the trust promptly following transaction close in accordance with the transactiondocuments. This is in contrast to no cash reserve at close for the majority of comparableChinese transactions. The cash reserve will provide about two months of liquidity to thetransaction if an unexpected event occurs, such as servicer transition.

- China Merchant Bank's (CMB) established operating record in consumer credit origination andservicing. CMB has stable underwriting policies, as demonstrated by multi-year historicalperformance data, and effective risk management and control on asset quality. It also has avast branch network across China and well-established internal systems and processes, whichstrongly support loan servicing for this transaction.

Weaknesses

The weaknesses of the transaction and the corresponding mitigants we observed in our ratinganalysis are:

- This is not a closed-portfolio transaction. It means that new receivables can be added duringthe transaction's revolving period, and this could cause a negative shift in the collateralportfolio's composition and credit quality. In this transaction, documented asset eligibilitycriteria and portfolio parameters, the loss-coverage cash flow allocation, and some portfolioperformance-related amortization triggers are set up to manage the portfolio credit qualityduring the revolving period. We also believe the seller's relatively stable credit underwritingstrategies may partly mitigate the risk. In addition, our cash flow analysis considers aworst-case portfolio composition in terms of product types and borrowers' credit scoredistribution when the transaction enters into amortization.

- Limited availability of historical data compared with developed markets. While Chinese banksbegan offering retail financing products in late 1990, the applicable historical performance



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data is only available roughly since 2010. We expect these issues to be addressed or improveover time as the operational and performance track record builds further.

- Lack of experience in servicing transition in China's securitization market. Despite the rapiddevelopment of China's securitization market recently, few transactions to date haveexperienced the critical stress of a failure of important counterparties such as the servicer, andthe resulting negative effect on the transaction's cash flow. In this transaction, the servicertransition risk and associated potential collection disruption is largely mitigated by the cashreserve. In our view, this will allow the transaction sufficient time to find a new servicer andresume asset collections.

Environmental, Social, And Governance (ESG) Factors

Our rating analysis considers a transaction's potential exposure to ESG credit factors. As theportfolio is a revolving pool of line of credit receivables, we considered our ESG sector benchmarkfor credit card ABS, for which we view the exposure to environmental credit factors as belowaverage, social credit factors as above average, and governance credit factors as average (see"ESG Industry Report Card: Credit Card Asset-Backed Securities," March 31, 2021).

The exposure to environmental credit factors in this transaction is in line with our sectorbenchmark, in our opinion. The underlying receivables are unsecured and the significant collateralpool diversification by obligor and geography reduces exposure to physical climate risks.

The transaction's exposure to social credit factors is above average, in line with the sectorbenchmark. However, regulators in China are increasingly focused on credit products withrelatively high borrowing costs. They also ensure that lenders are prudent with the loan pricing intheir underwriting and ongoing management of revolving credit lines. CMB, as a regulatedfinancial institution, complies well with local regulations, which helps mitigate conduct risk andthe exposure to social credit factors.

We consider the transaction's exposure to governance credit factors to be average, which is in linewith the sector benchmark. Given the nature of structured finance transactions, most haverelatively strong governance frameworks through, for example, documented restrictions onactivities.

Transaction Structure

This securitization transaction is based on China's credit assets securitization (CAS) scheme setup by the China Banking and Insurance Regulatory Commission (CBIRC) and the People's Bank ofChina (PBOC).

CMB will sell a pool of dividable credit card receivables, originated from the designated eligiblecredit card accounts, along with all related rights, to a special purpose trust (SPT), which is set upby the trustee for the purpose of securitization. To fund the initial and ongoing receivablespurchase, the trustee will issue, on behalf of the SPT, five classes of notes: class A-1, class A-2,class B, class C, and subordinated notes. Such initial and ongoing transfer will segregate theassets from the originator under China's Trust Law, and the SPT reflects our criteria in relation tobankruptcy remoteness.

The transaction has a nine-month revolving period, during which the principal collections (afterprincipal draw if necessary) can be used to purchase additional eligible receivables from CMB on adaily basis under the designated eligible credit card accounts, provided that an early amortization



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event has not occurred. The acquired new receivables, as well as the portfolio profile, need tomeet the documented asset eligibility criteria and portfolio parameters.

The transaction adopts separate interest and principal waterfalls. During the amortization period,principal collections available after covering any shortfall in senior fees and expenses, rated noteinterest payments, and replenishing the required liquidity reserve, will be used to pay down classA, B, C and subordinated notes in a pass-through manner.

The transaction will have legal rights to a cash reserve funded from collections from thereceivables between the cut-off date and the entrustment date. The reserve will be transferred tothe trust promptly after transaction close in accordance with the transaction documents. Thecash reserve is equal to roughly two months' liquidity, which is sufficient to cover senior fees andexpenses as well as rated note interest.

The originator will be the transaction's servicer to collect borrower payments and to managearrears.

Chart 1 shows the transaction structure.



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Chart 1

Table 1

Interest Priority Of Payments

(a) Taxes

(b) Initial/one-off upfront transaction fees and expenses

(c) Ongoing senior fees and expenses (expense capped at RMB500,000 per month)

(d) Senior servicing fee

(e) Pari passu and pro rata, note interest of class A-1 and class A-2

(f) Class B note interest

(g) Class C note interest

(h) Top up the liquidity reserve to its required level



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Table 1

Interest Priority Of Payments (cont.)

(i) If an acceleration event occurs, transfer all remaining funds into the principal account.

(j) If no acceleration event occurs, continue to apply as per the following:Return to principal draw used to top uprequired liquidity reserve upon transaction close.

(k) Transfer to the principal account, (A) The amount equal to the principal balance outstanding (PBO) of newlydefaulted loans in the preceding collection period + (B) The principal balance outstanding of loans thatdefaulted in collection periods before the preceding collection period + (C) principal draw in previous periods- (D) interest collections diverted to the principal distribution account per this payment priority on previouspayment dates.

(l) Any expense exceeding the senior expense cap and unpaid

(m) Before senior notes are fully repaid, interest to subordinate notes at no more than 5% per annum

(n) During the revolving period, remains in the interest collection account; during the amortization period,transfer to the principal account

Principal payment structure

The transaction will have a nine-month revolving period, during which the principal collections(after necessary principal draw) can be used to purchase additional eligible receivables from CMB,provided an early amortization event has not occurred.

After the end of revolving period, or upon occurrence of an early amortization event, thetransaction will enter amortization and principal collections will be used to repay the class A-1,class A-2, class B, and class C notes on a sequential basis. If an acceleration event is triggeredduring the amortization period, principal on the class A-1 and class A-2 notes will be paid on a paripassu and pro rata basis, before principal payments to the class B and class C notes. In addition,excess spread after paying senior fees and expenses as well as the rated notes interest andrequired reserve amount, will be used to repay note principal after the occurrence of anacceleration event.

The class B notes will receive principal payments only after the class A notes are fully repaid; theclass C notes will receive principal payments only after class B notes are fully repaid; and thesubordinated notes will receive principal payments only after the class C notes are fully repaid.

Table 2

Principal Priority Of Payments

(a) The amount equal to shortfall from (a) tax to (h) replenishment of required reserves in the interestwaterfall, in the following order:

(b) If no acceleration event occurs, repay class A-1 principal until it is fully paid down.

(c) If no acceleration event occurs, repay class A-2 principal until it is fully paid down.

(d) If any acceleration event occurs, pari passu and pro rata, pay down class A-1 and A-2 until they arefully paid down.

(e) Repay class B principal until it is fully paid down.

(f) Repay class C principal until it is fully paid down.

(g) Cover unpaid junior servicing expense.

(h) Subordinated note principal outstanding.

(i) Transfer to interest distribution amount to pay to the subordinated note.



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Early amortization triggers

Early amortization of the transaction begins upon the occurrence of any of the following events:

- Weighted average portfolio yield is less than 6.75% at the end of a collection period.

- For three consecutive months, credit score of group 1 accounts for less than 45%, or creditscore of group 1 and 2 accounts for less than 75%.

- For three consecutive months, instalments receivables exceed 45% of the outstanding balanceof the underlying receivables.

- On any payment date, the three-month average loss rate exceeds 0.75%.

- Idle cash eligible for receivable purchase exceeds 5% of the initial pool balance for 90consecutive days.

Call option

The originator has a "clean-up call" option to purchase the underlying receivables from the trust ifthe pool balance at the end of any month is 10% or less of the initial pool balance or theoutstanding balance of notes is 10% or less of the issuance amount. The clean-up call price forthe receivables must be sufficient to fully repay the rated notes and all fees and expenses of thetrust, and the higher of zero and the subordinated notes' principal balance net of pool losses.

Our analysis is on the basis that the notes are fully redeemed by their legal final maturity date. Wedon't assume the clean-up call will be exercised.

China's Credit Card Industry Overview

The credit card industry experienced rapid growth in the past decade.

The number of issued credit cards increased to 790 million as of June 30, 2021, from 331 millionas of end-2012. Bank card outstanding balances have risen to Chinese renminbi (RMB) 8.18trillion from RMB1.1 trillion over the same period. The year-end card loan balance has increasedsignificantly in the past decade.



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Chart 2

Growth slowed after 2018.

The credit card industry was negatively affected by the 2017 regulatory tightening on cash loans,person-to-person lending (P2P) and internet finance. As shown in chart 2, the growth rate ofyear-end credit card loan balances fell to nearly 4% in 2020 from close to 40% in 2017. Thereduction in the growth rate of credit card receivables mainly reflected the tightened financialflexibility of credit card holders as a result of the crackdown on many P2P and internet financelending companies. In addition, banks also reduced their cash advance business in response tothe regulatory changes.

Besides the tightened regulations, the evolving payment system in China also poses newchallenges to the credit card industry. Currently, most of the non-cash transactions are madethrough the two major digital payment platforms, Alipay and WeChat Pay, which inevitablyreduced the share of credit card payment.

We expect the growth rate of the credit card industry to remain moderate in the near future. Thetight regulations on unsecured consumer finance lending will continue to restrain the cashadvance business however not credit card usage.

Asset quality has stabilized since 2018.

China credit card nonperforming loan (NPL) rate (defined as loans overdue more than threemonths) is crawling close to 1% of total loans in recent years. The ratio has stabilized since 2018following the regulatory tightening. Although the outbreak of COVID-19 in the first half of 2020 hascaused some performance volatility, the increase in NPL was not significant. After the first half of2020, the NPL ratio has gradually returned to pre-pandemic level.



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Chart 3

The regulatory environment is evolving and has seen relaxation of the interestrate limit since 2021.

China's credit card industry is highly regulated by PBOC and CBIRC. The earliest credit cardregulation was issued by PBOC in 1996. In 2011, CBIRC released further guidance for the creditcard business.

In recent years Chinese regulators have taken some steps to mitigate risks in China's fast-growingconsumer-lending market. One significant movement was the tightening of unsecured personallending and internet finance since the end of 2017. The regulation also put a cap on interest ratesthat can be charged on credit cards, with the annual cap ranging from 12%-18%, depending onthe type of card.

Since Jan. 1, 2021, the limits on credit card overdraft rates were eliminated by PBOC, which allowsbanks to set their own interest rates for overdrafts or unpaid monthly balances.

Major credit card issuers

Large national banks and some of mid-size joint stock commercial banks such as CMB are mainplayers in the Chinese credit card industry.



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Chart 4



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Originator/Servicer Overview

Company background: Seventh-largest bank in China with over 30-yearoperating history.

CMB, headquartered in Shenzhen, provides a comprehensive range of commercial bankingproducts and services primarily to domestic corporate and retail customers in China. It wasestablished in March 1987 and listed the Shanghai stock exchange in April 2002 and on the HongKong stock exchange in September 2006.

CMB's entrenched retail banking position in China and status as the seventh-largest commercialbank by assets support its business position. The bank has a strong retail franchise and a solidposition in corporate banking. As of Dec. 31, 2020, the total number of CMB's retail customersreached 165 million, exceeding that of any other national joint stock commercial banks.

CMB is an experienced sponsor across various sectors such as credit card-related receivables,residential mortgage-backed securities and so on, with dozens of transactions issued in the pastfew years.

Credit card underwriting

Applications for credit cards will either go through automatic review or manual review. Accordingto CMB, highly complicated and high-risk cases are generally assigned through automatic reviewand be rejected, while simple and low-risk cases would be automatically approved. Cases thatdon't not fall into either of the two categories would go through manual review. For the casesundergoing manual review, the system would prompt risk factors for the underwriting officer tocheck. The system also proposes a credit limit.

CMB's credit model has been in place since 2005. The bank classifies obligors into five categories:the first group (best in terms of creditworthiness); the second group, the third group; the high-endgroup; and the unscored group (which typically is due to no transactions in the previous sixmonths). The composition of CMB's receivable book in terms of credit score group changes overtime. However, on average, the first group tends to account for around 60%, the second groupabout 20%-25%, the third group low-single digit, the high-end group high-single digit, and theunscored group about 10%.

Instalments from eligible receivables in the monthly account statement are subject to furtherscrutiny by CMB compared with interest-free receivables and revolving receivables. Since theovercall credit limits were determined upon credit card application, the key point of underwritinginstalment products is to review whether or not the obligors applying are eligible for instalments,and if so, what the tenor and the amount are. Cash advance and revolving receivables are noteligible for instalments. Application for instalments is subject to real-time review and approval.

Credit card receivables servicing

Obligors can pay the receivables from card cards through a wide range of options, includingauto-debit, mobile phone application, internet banking, auto teller machines, CMB's telephonebanking and branches.

It is likely that a credit card would have multiple receivables with different due dates. Generally



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speaking, the obligors will decide which amounts due are paid. Moreover, if a receivable related tocar purchase has a due date earlier than the general credit card receivable, auto-debit to repaythe auto loan will be effected before that for the general credit card receivable.

If collections are received but the credit card holder has not nominated the payment sequence,CMB has coded a fixed payment sequence in its information technology system. Such paymentsequence rule is not subject to variation. The sequence takes into consideration whether or notreceivables are overdue more than 90 days, billed or unbilled, and so on.

In our view, CMB's arrears management in its credit card business is in line with the marketpractice in China. Delinquent cases are allocated mainly based upon aging buckets. Collectionsapproaches and strategies are risk-based, with a combination of approaches such as auto-dialcall-out, SMS messages, phone calls made by experienced staff, legal actions, and outsourcing.

CMB adopts write-off policy largely per regulatory measures. Amongst other conditions, CMBwould write off a credit card receivable if the receivable is no greater than RMB50,000 andbecomes more than 180 days past due, or the receivable is greater than RMB50,000 and becomesmore than 360 days past due. Despite CMB's write-off policy, we applied different overduebuckets to estimate potential credit losses.

Credit Card Receivable Product Overview

We summarize key attributes of loan and receivable products available from CMB's credit cardsfor rating and credit analysis purposes. Actual terms and conditions are subject to CMB's changefrom time to time.

It is noteworthy that cash advances are not securitized. This largely reflects regulatory direction.

Each receivable is dividable and identifiable in terms of ownership. Also, the trustee on behalf ofthe SPT in the capacity of receivable purchaser in principle would purchase all eligible receivablesin respect of the same eligible account.

Table 3

Product Available Under Credit Card

TypeLump sum(purchase)

Revolving(purchase) Cash advance

Instalment(convertedfrom lump sumpurchase)

Instalment(purchase) (via5000+ partneredmerchants/stores) Auto loan

Tenor 1) Due on thefollowing duedate; 2) Couldbecome revolvingif the card holderdecides not topay full amounton or before duedate; 3) Couldbecomeinstalment if thecard holderapplies beforedue date, subjectto CMB'sapproval.

Minimumpaymentrate: 5%

Minimumpayment rate:100%

1, 2, 3, 6, 10,18, 24, 36months; 12months is themost common.

3, 6, 12, 24 months. 12, 18, 24, 36months.



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Table 3

Product Available Under Credit Card (cont.)

TypeLump sum(purchase)

Revolving(purchase) Cash advance

Instalment(convertedfrom lump sumpurchase)

Instalment(purchase) (via5000+ partneredmerchants/stores) Auto loan

Interest rateor fee

Non-interestbearing

Per day:0.05%; APR:c. 18%

1) Interest rateper day:0.05%; nointerest-freeperiod 2) Fee:onshore 1% /offshore 3% onamount

1) Fee:0%-1.67% perinstalment;(est. 10%-12%if annualized)2) Fee andnumber ofinstalments tobe decided inreal-time byCMB uponapplication.

1) Fee varies amongstores; 2) Fee couldbe paid by one-off orper instalment.

Per loan size:12 months:5.5%; 24months:10.5%; 36months:14.5%.

Account/Bill Generalaccount/bill

Generalaccount/bill

Generalaccount/bill

Generalaccount/bill

General account/bill Dedicatedaccount/bill

Initial creditapprovalupon creditcardapplication

Required Required Required Required Required Required

Credit line Under generalcredit line.

Undergeneralcredit line.

Under generalcredit line; ingeneral,capped at 50%of generalcredit line.

Under generalcredit line.

Under general creditline.

Separatecredit line,which cannotbe fungiblewith othercredit cardproducts.

On anongoing basis

No additionalapprovalrequired beforeuse

No additionalapprovalrequiredbefore use

Eachdrawdown issubject toreal-timeverificationand review.

1) Eachapplication issubject toreal-timeverification andreview. 2)Certainreceivablessuch as cashadvance,instalment, feeand interest,etc. areprohibited fromapplyinginstalment.

Each drawdown issubject to real-timeverification andreview.

A separateunderwritingprocess shallbeundertaken.

Securitized inHeZhi series

Yes Yes No Yes Yes No



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The Underlying Pool Characteristics

Pool attributes as of initial cut-off date

The portfolio consists of three types of retail purchase products, namely lump sum purchase,revolving receivables, and instalments. The lump sum purchase and revolving receivables arecollectively called transaction receivables due to their transaction-driven nature. Cash advance orcash advance instalments are not part of the securitized pool.

Some of the distinct features of the initial collateral pool are as follows.

Table 4

Key Pool Statistics As of Jul 31, 2021

Number of accounts 265,261

Total receivables 3,000,777,607.89

Average account balance 11,312.55

Weighted average contract term of instalment receivables (month) 17.20

Weighted average remaining term of instalment receivables (month) 11.27

Weighted average seasoning of instalment receivables (month) 5.93

Weighted average portfolio yield (%) 6.80

Table 5

Pool Distribution As of Jul 31, 2021

% of initial pool balance

Product type

Transaction – lump sum 48.42

Transaction - revolving 26.66

Instalment 24.92

Credit score

Group 1 64.88

Group 2 35.12

Group 3 0.00

Eligibility criteria

The transaction documents set out certain eligibility criteria for the securitized receivables andaccounts, some of which are highlighted below.

- Cardholders that are classified as Group 1 account for no less than 45% of the underlying pool.

- Underlying accounts contain no delinquent receivables as of the initial cut-off date or thesubsequent cut-off date. Historically, there were no delinquencies associated with theseaccounts that continued for 30 consecutive days or 60 days in accumulation. These accounts



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are not overdue for more than 30 days as of the trust settlement date.

- Underlying accounts have at least six-months' seasoning.

- Securitized products are transaction or instalment receivables.

- Due dates of instalment receivables are not later than the expected maturity date of thesubordinated notes.

- Weighted average portfolio yield as at the initial cut-off date is no higher than 24%.

Portfolio parameters during the revolving period

The transaction has a set of portfolio parameters. These include, but are not limited to, theminimum weighted average interest rate of the acquired receivables and the distribution ofinternally assessed credit scores. Failure to maintain these portfolio parameters will result intransaction amortization. Upon amortization, the issuer will apply collections to amortize noteprincipal instead of purchasing new receivables from CMB.

Performance Parameters

Historical performance data

We reviewed the monthly performance data of credit card receivables originated by CMB fromAugust 2011 to August 2021.

The key variables that are subject to our rating stress include the deemed charge-off rate,purchase rate, yield rate, payment rate, and dilution rate.

The credit card portfolio we analyzed consists of the same types of retail purchase products as thesecuritized pool. The data available to us is at the pool level rather than the product level. The mixof the three products remains stable in recent years. CMB intends to maintain a stable productmix.

Our credit analysis and determination of base case performance parameters for this transactiontake into account historical collateral performance in conjunction with growth strategy, and thedocumented portfolio parameters for the securitized pool.

Deemed charge-off rate

We calculate the monthly charge-off rate as the annualized percentage of the outstandingportfolio balance at the beginning of the month, which is charged-off during the month. CMBtypically charges off accounts that are 180 days in arrears, but we deem receivables overdue formore than 90 days as charged-off in our analysis, considering the common recognition ofnon-performing loan (overdue 90 days) in China. We also reviewed charge-off rates calculated on afour-month lagged receivables balance basis to observe any biasing effect of a changingreceivables balance in the denominator of the charge-off rate calculation. However, the laggedcharge-off rates largely mirrored the non-lagged figures because there has not been a rapidgrowth in receivables balance in recent years.

Our analysis also considers the portfolio parameters related to credit score distribution of accountholders. Failure to meet such credit score distribution would lead to the early amortization of the



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transaction.

Our 10.1% base-case charge-off assumption reflects the CMB portfolio's historical performance,economic cycles affecting China, and the portfolio parameters.

Purchase rate

When setting assumptions regarding the purchase rate we tend to look at the quality of theoriginator and its rating rather than the historical values. However, in this transaction, after theend of the revolving period, the issuer will not acquire new receivables. Consequently, we assumeda 0% purchase rate.

Yield

We define the yield rate as the annualized percentage of portfolio yield as a proportion of theoutstanding portfolio balance at the beginning of the month. For the purpose of determining ourbase-case assumptions, portfolio yield consists of cash collections of finance charges (interest),late fees, and annual fees.

In our view, 18% and 9% are appropriate base-case yield rates respectively for the transactionand instalment receivables. This is based upon dynamic pool data that shows a relatively stabletrend before early 2019 and the recent trend over the past one to two years. Our assumption alsoreflects the company's stable growth strategy.

Payment rate

We calculate the monthly payment rate as the total principal and finance charge collections as apercentage of the outstanding balance at the beginning of the month.

Based upon the historical payment rate, the historical volatility in payment rates, and the recenttrend over the past one to two years, we believe that a base-case payment rate of 18.5% and 14%for respective transaction and instalment receivables respectively is appropriate.

Dilution losses

Dilutions are non-cash reductions to the receivables balance, including merchandise returns,rebates, refunds, and fraud. We expect the dilution risk to be remote for this transaction becausecard holders are obliged to make credit card payments regardless of any dispute between obligorsand merchants. This is a market practice generally accepted in the consumer finance sector inChina. Therefore, we did not consider dilution loss in our analysis.

Cash-Flow Analysis

Table 6

Base Case Performance Parameters

Transaction receivables Instalment receivables

Performance parameter Base case (%) Base case (%)

Deemed charge-off rate 10.1 10.1



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Table 6

Base Case Performance Parameters (cont.)

Transaction receivables Instalment receivables

Performance parameter Base case (%) Base case (%)

Yield rate 18.0 9.0

Payment rate 18.5 14.0

Dilution rate 0.0 0.0

Our base-case assumptions are intended to be "best estimates" of future performance(nonstressed) for the asset portfolio. Our approach in determining these base cases considershistorically observed performance.

Table 7

Rating Scenario Stresses

Rating Deemed charge-off stress (x) Yield rate haircut (%) Payment rate haircut (%) Dilution rate stress (x)

AAA 4.8 57.5 55.0 Not applicable

AA 3.9 61.3 60.0 Not applicable

A 2.9 65.0 65.0 Not applicable

Our cash-flow model only considers the early amortization period in which notes have to be paiddown amid deteriorating asset credit performance. We believe the notes can withstand losses andcash flow stresses commensurate with the ratings assigned, based on the assumptions andstresses outlined above, and other risk considerations.

Our cash-flow assumptions include:

- The worst-possible pool mix consisting of 45% of instalments and 55% of revolving transactionreceivables. Revolving transaction receivables are deemed less risky from a cash flow testingperspective because their much higher yield rate would generate higher excess interest incometo offset assumed credit losses than instalments. We assume that instalments could reach45% of total pool balance in the worst-case scenario, which would then trigger earlyamortization.

- The initial deemed charge-off rate of 9.0% under all rating stress scenarios. This reflects thelower of our base-case deemed charge-off rate of 10.1% and the loss rate trigger of 9.0% forearly amortization. We modelled transaction cash flows assuming that portfolio losses increasefrom the respective initial deemed charge-off rate to the rating scenario peak loss level of48.2% under a 'AAA' stress, 39.2% under a 'AA' stress, and 29.1% under a 'A' stress over 12months as suggested by our criteria.

- Stressed yield rate assumption of 10.4% and 5.2% under a 'AAA' stress, 11.0% and 5.5% undera 'AA' stress, and 11.7% and 5.9% under a 'A' stress for transaction and instalment receivablesduring the amortization period.

- Stressed payment rate assumption of 10.2% and 7.7% under a 'AAA' stress, 11.1% and 8.4%under a 'AA' stress, and 12.0% and 9.1% under a 'A' stress, for transaction and instalmentreceivables during the amortization period.



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Counterparty Risks

The bank account provider

Bank accounts for this transaction will be held with Bank of China Ltd. The transactionarrangement requires a minimum rating of 'A' on the account provider, and requires the bank bereplaced if the rating on the bank is lower than that, within 90 calendar days of the downgrade.This arrangement meets our counterparty criteria to support a 'AAA' rated transaction,considering the transaction's cash flow arrangement.

Servicer commingling Risk

CMB as an initial servicer will hold the asset collections before it remits to the issuer's accountduring both the revolving and amortization period. This could create servicer commingling risk.

Our counterparty criteria consider a transaction's commingling risk through the rating on theservicer, the amount of funds likely to be held in a servicer account at any given time, and thepotential impact of a delay in receipt of those funds on the supported securities.

In our opinion, the transaction has the following arrangements to mitigate potential servicercommingling risk and is compatible with our counterparty rating criteria to support a 'AAA' ratedtransaction. Firstly, during the revolving period, CMB will remit collections to the trust account onebusiness day following the receipt of the collections. Secondly, during the amortization period,CMB will remit collections to the trust account within two business days from receipt. Last but notleast, if the rating on CMB falls below 'BBB', the bank must send out Right Perfection Notices to allborrowers and guarantors (if any) within five business days following rating downgrade, to redirectborrowers' payments directly to the trust account.

Legal Risks

This transaction is structured in accordance with China's Trust Law and CAS scheme. We believethe asset true sale and issuer's bankruptcy remoteness in this transaction reflect ourspecial-purpose entity criteria.

Receivable transferability

According to part III (contract), article 545, of the Civil Code, the right of a contract can betransferred to a third party except for any restriction by the contract. The terms and conditionsused for the receivables to be transferred in this transaction do not prohibit those receivablesfrom transfer. This is covered by the originator's legal due diligence and confirmed by the legal duediligence finding.

Notification to obligors of the securitized pool

The originator shall announce the establishment of the SPT and asset transfer in nationwidemedia in accordance with article 12 of the Administrative Measures for the Securitization of CreditAssets. However, notification to individual obligors will not be made at transaction close. As aresult, the transfer of the receivables is legally effective between the originator and the trustee,



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but does not have legal effect against the obligors. A risk could arise should the originator/servicerbecome insolvent and obligors continue to make payments to the originator acting as the servicer.This risk is addressed by a minimum rating requirement for CMB as the initial servicer, andnotification of receivable transfer and redirecting borrowers' payment to a trust account shouldthe rating on the bank fall below 'BBB'.

Ratings Above Sovereign

The preliminary ratings assigned to the class A-1, class A-2 and class B notes are higher than our'A+' sovereign rating on China. We applied our criteria "Incorporating Sovereign Risk In RatingStructured Finance Securities: Methodology And Assumptions", published on Jan. 30, 2019, alongwith its associated guidance, published on Jan. 30, 2019, and formed the view that 'AAA (sf)' is themaximum rating level that can be achieved for this transaction. As per these criteria, thetransaction's sensitivity to country risk is moderate because credit card ABS typically is a plainvanilla structured finance instrument and the set-off risk is materially covered by thegovernment-sponsored deposit insurance. In addition, the transaction can withstand theadditional stress test required per the criteria. As a result, the possible maximum rating for thistransaction can be four notches higher than the sovereign rating.

Deposit set-off risk

The transaction is exposed to deposit set-off risk because CMB is a deposit-taking financialinstitution. The potential set-off amount could fluctuate because borrowers are not notified withthe transfer of their receivables at transaction close and upon ongoing transfer.

According to the transaction documents, should any set-off occur, CMB undertakes to deposit thesame amount into the trust asset to mitigate such risk. However, this arrangement alone isinsufficient to support a 'AAA' rated transaction per our counterparty criteria.

In China, there is a deposit insurance scheme. As such, deposit set-off risk can be analyzed underthe Ratings Above Sovereign criteria.

China's deposit insurance scheme has been rolled out since May 2015. According to the DepositInsurance Act, should a bank experience deposit run, the deposit insurance fund will cover adepositor's deposit loss up to RMB500,000. Moreover, the claim shall be made within sevenbusiness days from a bank's bankruptcy. According to the government, the insurance claim limitcan cover over 99% of deposit accounts. Despite short track record, the deposit insurance schemehelps largely moderate the potential depositors' setoff risk in our view. The rated notes' creditenhancement levels also help withstand potential deposit set-off risk. We have assumed set-offloss of 0.50% in our analysis, based on an estimate of potential set-off exposure.

Sensitivity Analysis

We ran sensitivity analyses to demonstrate the likely effect of scenario stresses on the ratings weassigned. Essentially, we stress our deemed charge-off rates, payment rates, and yield.

As a part of our sensitivity-testing approach, we re-rated the transaction, assuming that the keycredit parameters—deemed charge-off rate, payment rate, and yield--have deteriorated.



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Table 8

Sensitivity Analysis Stresses

Performance parameter Base run Sensitivity scenario

Transaction receivables

Deemed charge-off rate (%) 10.1 13.1

Yield rate (%) 18.0 16.2

Payment rate (%) 18.5 16.7

Instalment receivables

Deemed charge-off rate (%) 10.1 13.1

Yield rate (%) 9.0 8.1

Payment rate (%) 14.0 12.6

After changing the base case for sensitivity analysis (see table 8), we applied our standard ratingmethodology that we used to rate the transaction. At the same time, we did not change ourpurchase-rate assumption.

The output of the analysis shows the likely rating transition of the notes, given the appliedstresses, and the value and timing of any forecast principal and interest shortfalls.

When applying sensitivity stresses in the manner described above, the results of the modeling areintended to be a simulation of what could happen to the ratings on the notes.

Under the sensitivity scenarios, we observed that the initial ratings on the notes could transition.Table 9 sets out what the rating of the rated notes would be at the transaction close under eachsensitivity scenario.

Table 9

Sensitivity Analysis Results

Class Preliminary Rating Sensitivity scenario

A1 AAA (sf) AA- (sf)

A2 AAA (sf) AA- (sf)

B AA (sf) A (sf)

C A (sf) BBB (sf)

Monitoring And Surveillance

We consider this transaction to be exposed to any change in the following performance indicators:

- Deemed charge-off rate;

- Yield rate; and

- Payment rate.

It is difficult for these parameters to move in isolation, and an improvement in the performance ofone parameter could compensate for deterioration in the performance of another.

We continually monitor the collateral performance for any adverse effect on the ratings on the



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notes.

Related Criteria

- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10,2021

- Criteria | Structured Finance | General: Global Framework For Payment Structure And CashFlow Analysis Of Structured Finance Securities, Dec. 22, 2020

- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology AndAssumptions, March 8, 2019

- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating StructuredFinance Securities: Methodology And Assumptions, Jan. 30, 2019

- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology,March 29, 2017

- Criteria | Structured Finance | ABS: Global Methodology And Assumptions For Assessing TheCredit Quality Of Securitized Consumer Receivables, Oct. 9, 2014

- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk InStructured Finance Transactions, Oct. 9, 2014

- General Criteria: Global Investment Criteria For Temporary Investments In TransactionAccounts, May 31, 2012

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28,2009

Related Research

- China Auto ABS and RMBS Tracker: October 2021, Nov. 26, 2021

- China Securitization Performance Watch 3Q 2021: Government Policies Give GreenSecuritization A Push, Nov. 15, 2021

- ESG Industry Report Card: Credit Card Asset-Backed Securities, March 31, 2021

- S&P Global Ratings Definitions, Jan. 5, 2021

- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top FiveMacroeconomic Factors, Dec. 17, 2016

The issuer has not informed S&P Global Ratings whether the issuer is publicly disclosing allrelevant information about the structured finance instruments that are subject to this ratingreport or whether relevant information remains non-public.



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