Chinese homebuyers' refusal to pay mortgages on unfinished residential properties has become the latest risk, albeit a limited one, to weigh on the asset quality of Chinese banks, analysts said.
Some of the biggest banks in China said they have limited direct exposure to overdue mortgages on unfinished residential properties, after homebuyers reportedly stopped paying their home loans on at least 100 projects across 50 cities. Some builders in China, such as China Evergrande Group and Greenland Hong Kong Holdings Ltd., are struggling to deliver properties on schedule, as their liquidity crunch worsens amid limited access to fresh funding and falling home sales.
"At this point it doesn't look like the additional [nonperforming loans] could become a systemic threat to the banking system's stability," UBS said in a July 14 research note.
Chinese banks are facing a growing list of challenges on asset quality, loan growth and margins. The lenders' credit risk has been rising as more property developers default on their borrowings and the economy slows amid repeated pandemic-related disruptions. The recent discovery of irregularities at six private "village" banks in China may also trigger a flight of deposits and investment funds from smaller institutions, S&P Global Ratings said earlier.
"Listed banks' exposures to uncompleted projects are limited in monetary terms and therefore risk to their mortgage books will likely be under control," said Bruce Pang, head of research for Greater China at Jones Lang LaSalle. Banks are poised to tighten enforcement on presale funds handling again in order to "pamper homebuyers and restore market confident," Pang added.
UBS estimated that, in a worst-case scenario where all overdue mortgages totaling about 741 billion yuan become nonperforming, Chinese banks' aggregate NPL ratio could rise 43 basis points to 2.12%, while their provision coverage ratio could drop 40.7 percentage points to 160%, compared to figures as of the end of the first quarter.
More selective in lending
Banks are expected to step up scrutiny on mortgages as well as loan approvals for developers to manage their asset quality, especially to private developers, said Jin Jing, Shenzhen-based property analyst at Guosheng Securities Co. Ltd.
The China Banking and Insurance Regulatory Commission said it would support local governments in delivering property projects on time and guide financial institutions in managing risks, China Banking and Insurance News, an official media outlet of the banking regulator, reported July 18.
Beijing has been easing restrictions and lowering borrowing costs on home purchases to support the property market. Instead of direct lending or other forms of bailout, policies aimed at boosting housing demand would 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.
As of July 15, US$1 was equivalent to 6.76 Chinese yuan.