Real estate woes threaten Chinese banks’ profits: Natixis

Bad loans are growing whilst new regulations' effects are yet to reflect.

Chinese banks’ credit risks from the real-estate sector are growing, as non-performing loans climb and relaxed regulations have little effect, according to a report by Natixis Asia.

The non-performing loan (NPL) ratio of Chinese banks fell from 1.84% in 2019 to 1.73% in 2021. But the real estate NPL ratio climbed from 0.7% to 2.3%. It shows the overall asset quality has improved but with growing credit risks in the real estate sector, according to Natixis.

“With a high bond with repayment pressure ratio, China’s bond market also shows property developers, especially the private firms, are at the core of credit risks,” the report said, further noting that with regulatory pressure and risk aversion behavior, the growth of corporate loans to developers has decelerated.

The government is expected to roll out measures to help developers consolidate and restructure, which should support banks.

Despite this, Chinese banks will definitely still need to shoulder the burden with their profitability.

Also Read: E-payments poised to replace credit cards in China, Indonesia: Experian

The share of real estate in local banks’ corporate loans only fell from 11.8% in 2019 to 11.3% in 2021. If the room for reducing exposure is limited, real estate will remain a key determinant in the asset quality of Chinese banks, which is affected by home demand and the funding of developers, Natixis warned.

Property developers in China have been beset with a plethora of challenges, from lockdowns affecting demand, and a lack of significant rebound in property sales and mortgage loan growth despite the relaxation of regulations.

“The sharp decline in pre-sales remains a challenge for developers. Bakers need flour to make bread as developers need land to build houses, but the share of land purchases by state-owned firms has grown from 40% before 2019 to 74% so far in 2022. It shows private firms find it difficult to maintain their business model of high leverage and quick turnover,” Natixis added.

For now, the rebound in real estate investment is limited. Investors still view 40% of real estate firms in the market as negative. Only 17.9% of households think of home purchase in the next three months in Q1, lower than 20.7% over the same period in 2019.

All in all, China's banking sector should be able to absorb the poorer asset quality related to real estate as it only forms 4.5% of total assets–but the question remains how costly it can be, said Natixis.

“The overall credit risk is rising in real estate, especially with the widening credit polarization among property developers. Still, there is no direct correlation between real estate exposure and the related NPL ratio. It means the potential loss will diverge among banks depending on their risk profiles,” the report read.

*****

You May Also Like:

Also Read

Taiwanese banks' loans to SMEs reach $314.57b in September

South Korea's household loans up 0.9% in Q3

Since you're here...

...there are many ways you can work with us to advertise your company and connect to your customers. Our team can help you dight and create an advertising campaign, in print and digital, on this website and in print magazine.

We can also organize a real life or digital event for you and find thought leader speakers as well as industry leaders, who could be your potential partners, to join the event. We also run some awards programmes which give you an opportunity to be recognized for your achievements during the year and you can join this as a participant or a sponsor.

Let us help you drive your business forward with a good partnership!

I want to download the media kit