HONG KONG, June 14 (Reuters Breakingviews) - China's major banks appear to have pulled off an impressive feat. Their balance sheets have so far managed to avoid imploding as the property bubble bursts in the world's second-largest economy. Now a different threat is looming: poor earnings.
Real estate directly and indirectly accounts for an estimated 159 trillion yuan of total bank loans in the country, reckon analysts at Citi, equivalent to 38% of lenders' assets last year. Yet non-performing loans stood at just 1.59% of the total at the end of 2023, down from some 1.73% two years earlier. That's impressive considering the property sector, which accounts for around a fifth of GDP, is engulfed in a liquidity crisis that has laid low indebted developers including Country Garden (2007.HK), opens new tab and the now bankrupt China Evergrande (3333.HK), opens new tab.
One explanation is developers make up just a single-digit percentage of banks' real estate exposure. Three quarters come from residential mortgages and corporate borrowing collateralised with property, per Citi. Those loans typically don't exceed 60% of the value of the underlying asset, so are considered safe. And most mortgages are concentrated in wealthier cities, where home values have been stable, according to analysts at Fitch Ratings. Thus far, defaults have been rare.
Though China's banks are widely considered to under-report overall bad loans, they spent the years preceding this property crash cleaning up parts of their balance sheets. Since 2016, the face value of total loans disposed of has surpassed 1.5% of GDP annually, estimates China analyst Jason Bedford, and in 2020 alone reached nearly 3%, or more than 3 trillion yuan ($414 billion).
Stable earnings growth helped: in the three years before the pandemic, annual net income at the country's five largest lenders by assets, led by the $260 billion Industrial and Commercial Bank of China (601398.SS), opens new tab, grew over 4% on average, Visible Alpha data show.
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Profitability, though, is being squeezed amid sluggish loan demand and an uptick in deposits from households. Average net interest margins on earning assets at the Big Five fell to 1.55% last year from over 2% in 2019, per Visible Alpha, and are forecast to fall further to 1.36% this year.
Recent policy changes aren't helping. Earlier this year, the central bank cut a benchmark interest rate used for long-term lending by a quarter of a percentage point as part of Beijing's industrial policy to funnel cheap credit into strategic sectors. Recently, authorities unveiled new property measures, including a 300 billion yuan relending programme to support unsold home purchases and mortgage rate reductions. Banks are also under pressure to lend to cash-strapped developers like China Vanke (000002.SZ), opens new tab as well as renegotiate existing loans with local government financing vehicles; Fitch analysts put total LGFV exposure as high as 17% of bank assets.
The hope is that this will foster economic growth. For banks, it's squeezing the bottom line.
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CONTEXT NEWS
China Vanke is in advanced talks with major lenders including the Industrial and Commercial Bank of China for a loan of about 50 billion yuan ($6.9 billion), Bloomberg reported on May 30, citing people familiar with the matter.
Financial regulators had instructed the banks to offer funding support to the developer, the report added.
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