3 years after Evergrande crisis, China's key banks struggle to cap property risk exposure

China's systemically important banks are still grappling with high levels of bad assets in their property loan portfolios, as the ongoing real estate downturn continues to drag the country's efforts to stabilise the national economy and fend off financial risks.

Banks are faced with an elevated non-performing loans (NPLs) ratio - an indicator of a bank's asset quality and credit risks - in the property sector, with a median NPL ratio of 2.79 per cent among the top 18 banks, according to the Post's review of their midyear financial reports.

The average property-related bad loan ratio across China's "big four" state-owned banks - the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China, Bank of China and the China Construction Bank - was 5.2 per cent.

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It marked a slight fall from 5.5 per cent at the end of last year, but remained high compared to the overall average NPL ratio of 1.56 per cent at the end of June.

The big four banks, which account for most of China's bad property loans, are on the list of "global systemically important banks" by the Bank for International Settlements.

Specifically, the Agricultural Bank of China reported the highest NPL ratio in the real estate sector, standing at 5.42 per cent. The ICBC, China's largest by asset size, registered a NPL ratio of 5.35 per cent.

China's central bank classifies 20 commercial banks as "systemically important", but two - Guangfa Bank and Bank of Beijing - did not release midyear property-loan breakdowns.

Beijing has repeated a bottom line of no systemic financial risk, with the subprime loan crisis in the United States, which was the prelude to the 2008 global financial crisis, a widely cited lesson in academic circles.

The level of bad loans in China, though, is still lower than the double-digit ratio reported by US peers during the subprime crisis.

Overall, US banks saw their bad-loan ratio spike, climbing from 1.4 per cent at the end of 2007 to 4.96 per cent in 2009.

China's commercial banks reported combined bad loans of 3.3 trillion yuan (US$465 billion) by the end of June, a decline of 27.2 billion yuan from the previous quarter, with the NPL ratio falling by 0.03 percentage points to 1.56 per cent, according to the National Financial Regulatory Administration.

Financial executives, though, have remained cautious as the property sales and investment continue to drag.

Executives at China Minsheng Bank noted in their midyear earnings briefing that the real estate market remained in a "bottoming out stage" during the first half of the year, leading to a higher NPL ratio and placing strain on the bank's asset quality.

"Although second-hand home sales in key cities recently rebounded, it will take time for the overall market to recover," the bank said.

It added that real estate companies would remain under financial strain, and further risks in underperforming projects across certain regions were likely to surface, until home sales stabilised.

Ping An Bank and China Minsheng Bank saw the largest increases in NPL ratios since the end of 2023, with Ping An's NPL ratio rising by 0.4 percentage points to 1.3 per cent and Minsheng's climbing to 5.3 per cent.

People's Bank of China governor Pan Gongsheng said in an interview with the state-backed Xinhua News Agency in mid-August that the central bank was committed to "guarding against systemic financial risks".

To manage risks in the real estate sector, the PBOC has lowered down payment requirements and mortgage rates, while also introducing refinancing programmes to support the acquisition of existing housing inventories, he added.

Citing "a deeper-than-expected property downturn which has yet to bottom", investment bank UBS slashed China's 2024 gross domestic product growth estimate from 4.9 per cent to 4.6 per cent last week, while also lowering next year's growth estimate by 0.6 percentage points to 4 per cent.

"We think the continued declines in property activities and property prices have been the main drag on the economy, especially consumer and business confidence," the UBS analysts said.

Despite ongoing challenges, many top banks have increased their loans to developers compared to the end of last year, with the Postal Savings Bank of China and ICBC reporting the largest growth, at 12.8 per cent and 11.8 per cent, respectively.

Leading credit rating agency Fitch Ratings said on Wednesday that property stress and mortgage repricing could remain a drag on the bank's profitability, which are already pressured by tepid retail loan demand and narrowing net interest margins.

"However, we expect the rated banks' viability ratings to be resilient despite continued weakness in the property sector," said the agency, citing manageable developer loan exposure and modest average loan-to-value ratios of around 40 to 50 per cent for mortgage loans.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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