It will help steer banks’ credits towards companies with stronger balance sheets.
China’s latest guidelines limiting banks’ property loan exposure is a credit positive for the country’s banking industry, reports Moody’s Investors Service.
"The new guidelines will limit banks' exposure to the real estate sector and address authorities' concerns that rising signs of overheating in the property market would weaken banking system stability," said Ray Heung, a Moody's senior vice president.
Affected banks that are adjusting to the new rules may face higher property-related nonperforming loans in the short term. They could also lose some capital efficiency as they shift their loan mix away from property exposures.
That said, the overall impact on affected banks' capitalization, asset risks and profitability will be moderate because of the small size and pace of these loan adjustments, according to Moody’s.
The limits are also expected to steer local banks' allocation of credit toward companies that are larger and have stronger balance sheets. This, in turn, will promote credit differentiation and industry consolidation in the property sector.
On the other hand, the new rules are a negative for property developers as they will see weaker sales growth and liquidity due to the constrained access to credit.
"Property developers will face tightened access to bank loans for construction activities and mortgage financing. The latter could slow sales and weaken their liquidity as well as business growth over the next 1-2 years," noted Kaven Tsang, a Moody's senior vice president.
At the same time, the guidelines will cap leverage buildup among developers and promote the sustainable development of the property sector.
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