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Shenzhen is among the major Chinese cities that have seen a marked decline in sales of new and second-hand homes in recent months. |
China's policy support for homebuyers and restrained approach to monetary easing will likely help banks keep credit and earnings risks under control as the country grapples with an economic slowdown.
The world's second-largest economy is likely to further ease restrictions and lower borrowing costs on home purchases to support the property market, which will be crucial to meet its 2022 GDP growth target of around 5.5%, outlined at China's annual political meetings last week, analysts said. Instead of direct lending or other forms of bailouts, policies aimed at boosting housing demand will help restore cash flow and thus the repayment ability of debt-ridden developers, which have been a major source of credit risk for banks since the second half of 2021.
"It is another mild dose of medicine trying to stop a patient to deteriorate further," said Guo Zhen, Shanghai-based real estate analyst at GF Securities.
The emphasis of a "prudently flexible" monetary stance during the meetings, also known as the "Two Sessions" as they were convened by two major political bodies, indicated China could lower interest rates further, though the pace will be measured and the cuts targeted, analysts said.
Such monetary conditions are likely to limit the downside of banks' net interest margins, which have been falling since China introduced a more market-based approach in setting benchmark lending rates in 2019. Restrained monetary easing will also help improve market liquidity without encouraging speculation in the home market or releveraging the developers that had accumulated massive debt for years.
Banks in China are facing rising pressures on their profitability, as a continued downturn in the property sector and lingering pandemic-related disruptions weigh on their loan growth, NIMs and asset quality.
China's GDP growth target for 2022, while exceeding market expectations, will be the slowest expansion in more than three decades. The target suggests the government's intention of growing the economy without massive or broad-based stimulus, analysts said. The nation's year-over-year GDP growth slowed to 4% in the fourth quarter of 2021, from 4.9% in the previous quarter.
Nonperforming property loans
The policy outlook for the property sector was one of the highlights in the annual Government Work Report presented by Premier Li Keqiang at the Two Sessions.
The report mentioned "reducing financing costs" and "pushing for continual interest rate drop," which appeared only twice in work reports from the past 14 years, GF Securities' Guo said.
The word "stable" appears 76 times in the current report, compared with 64 times in the report last year, and the phrase "persistent development is a number one priority" came up for the first time since 2016, according to Huaan Securities in a March 5 note. This indicates efforts by the authorities to keep the growth pace from "falling off track," the brokerage said.
Recent interest rate cuts, together with partial loosening measures for homebuyers in some municipals, are expected to boost mortgage demand, which in turn may improve developers’ fund flows and ease their liquidity crunch, analysts said.
"Housing policy easing is likely to be gradual, piecemeal, and city-specific," Barclays said, noting the government continues to emphasize its ‘housing is for living in, not for speculation’ principle.
Chinese banks' aggregate nonperforming loan ratio for the property sector surged to 2% in the first half of 2021 from 1.2% in 2019, according to an estimate by investment bank Natixis in January. Meanwhile, the overall NPL ratio in China's banking sector has declined as of end-2021 due to faster loan write-offs.
Monetary discipline
"The [People's Bank of China] will adjust liquidity when the system needs fine-tuning," said Iris Pang, chief economist of Greater China at ING Bank NV. Apart from traditional easing tools like lowering reserve requirement ratios and interest rates, there are other tools available to fine-tune monetary conditions such as reverse repo rates.
The one-year loan prime rate could be lowered to 3.2% by the end of 2022 from 3.7% currently, Pang estimated, and banks could mitigate the pressure on interest margins by increasing fee income from other business lines.
JPMorgan said in a March 6 research note it would not rule out another round of broad-based interest rate cuts in March. Credit and money creation will likely accelerate in 2022, the report added.
The average NIM of all Chinese banks has been hovering between 2.06% and 2.07% since the beginning of 2021, down from its recent high of 2.20% in the fourth quarter of 2019, according to data from China Banking and Insurance Regulatory Commission.