(Bloomberg) – China’s banks face worst-case mortgage losses of $350 billion as confidence plummets in the country’s housing market and authorities struggle to contain deepening unrest.
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A spiraling crisis of stalled projects has shaken the confidence of hundreds of thousands of homebuyers, triggering a mortgage boycott in more than 90 cities and warnings of wider systemic risks. The big question is no longer if, but how much it will affect the $56 trillion national banking system.
In the worst-case scenario, S&P Global Ratings has estimated that 2.4 trillion yuan ($356 billion), or 6.4% of mortgage loans, are at risk while Deutsche Bank AG warns that at least 7% of loans real estate is in danger. So far, listed banks have only reported 2.1 billion yuan of delinquent mortgages directly affected by the boycotts.
“Banks are caught in the middle,” said Zhiwu Chen, professor of finance at the University of Hong Kong Business School. “If they don’t help developers complete projects, they’ll end up losing a lot more. If they do, that would of course make the government happy, but they add more to their exposure to delayed real estate projects.
Already buffeted by the headwinds of slowing economic growth, Covid disruptions and record youth unemployment, Beijing is placing financial and social stability at the top of its priorities. Efforts that have been considered so far have included a grace period on mortgage payments and a central bank-backed fund to provide financial support to developers. Either way, banks should play an active role in a concerted state bailout.
Here are five charts to show why the crisis could worsen and undermine financial stability:
Chinese banks’ exposure to the real estate sector exceeds that of any other industry. There were 39 trillion yuan in outstanding mortgages and another 13 trillion yuan in loans to developers at the end of March, according to data from the People’s Bank of China.
The real estate market is “the ultimate foundation” for financial stability in China, Teneo Holdings chief executive Gabriel Wildau said in a note this month.
As authorities scramble to control risk, highly exposed lenders could come under closer scrutiny. Mortgage loans accounted for about 34% of the total loans of the Postal Savings Bank of China Co. and the China Construction Bank Corp. at the end of 2021, above a regulatory cap of 32.5% for the largest banks.
About 7% of outstanding mortgages could be impacted if defaults become widespread, according to Lucia Kwong, an analyst at Deutsche Bank. That estimate may still be conservative given limited access to information on unfinished projects, she said.
To limit the fallout, China could tap into the excess capital and excess lending provisions of its 10 largest lenders, which amounts to a combined total of 4.8 trillion yuan, according to a report by Francis Chan and Kristy Hung, analysts. at Bloomberg Intelligence.
Local banks – urban and rural commercial lenders – could take on more responsibilities than their state counterparts, based on previous bailouts and also because of their closer ties to local governments, although their capital reserves lag far behind. industry average.
Chinese banks raised a record amount of capital in the first half through bond sales as they brace for a possible spike in distressed loans.
Bad loans to lenders, which stood at 2.9 trillion yuan at the end of March, are poised to hit new highs and strain an economy that is growing at the slowest pace since the start of the Covid epidemic.
With China’s total debt-to-GDP ratio expected to hit a new high this year, consumers have been reluctant to take on more debt. It sparked a debate about the risk of China slipping into a “balance sheet recession” as households and businesses cut back on spending and investment.
Disposable income growth is slowing, further hurting homebuyers’ ability to repay debt. Weak house prices in China spread to 48 of 70 major cities in June, from 20 in January.
S&P Global predicts home sales could fall as much as 33% this year amid the mortgage boycott, further squeezing liquidity for struggling developers and driving more defaults. According to Teneo, some 28 of the top 100 developers by sales have either defaulted on bonds or negotiated debt extensions with their creditors over the past year.
Real estate investment, which drives demand for goods and services that make up about 20% of the country’s gross domestic product, fell 9.4% in June.
The bank’s revenues are at stake. After recording the fastest profit expansion in nearly a decade last year, the country’s lenders are facing a tough 2022 as the government urges them to support the economy at the expense of profits.
A 10 percentage point slowdown in real estate investment growth translates to a 28 basis point increase in overall bad debt, meaning a 17% drop in their revenue in 2022, Citigroup analysts led by Judy Zhang in a July 19 report.
The Hang Seng index of mainland banks plunged 12% this month.
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