Five of China’s largest banks bore the scars of the ongoing property sector crisis, with bad debts related to real estate surging in the first half of the year, despite posting modest profits against the backdrop of an economic slowdown.
The first-half results come after the world’s second-largest economy narrowly avoided contracting in the second quarter due to widespread COVID-19 lockdowns and a sagging real estate sector, which severely harmed consumer and business confidence.
In exchange filings on Tuesday, China Construction Bank Corp and Bank of China Ltd reported a 68% and 20% increase in bad real estate debt in the first half of this year, respectively.
Meanwhile, Industrial and Commercial Bank of China Ltd, the world’s largest commercial lender by assets, reported a 15% increase in real estate sector soured debt during the same period.
“Affected by the epidemic and the economic downturn, the current operating environment of banks is complex and grim,” ICBC vice president Wang Jingwu said at a press conference following the release of results.
“It is difficult for some industries and customers to operate because of the epidemic and economic cycle,” Wang added.
ICBC, BoC, and CCB are the most recent banks to report rising bad debt in the real estate sector, following a bleak first half in which rising developer defaults halted housing projects, resulting in mortgage boycotts.
The warnings from Bank of Communications and Agricultural Bank of China Ltd were similar, as were the levels of soured loans.
According to Harry Hu, a senior director at S&P Global Ratings, the non-performing ratio of Chinese banks in the property development sector will rise to around 5.5% to 5.6% by year-end, up from a 2.6% sector-wide NPL ratio at the end of 2021.
Mortgage defaults are “not only a social stability problem but also a potential financial stability problem,” according to Hu, because mortgages are typically high-quality assets held by banks.
Furthermore, analysts warn that the housing market volatility is more likely to harm smaller lenders.
“Regional banks concentrated in those local markets are more vulnerable to the shock of a larger-than-average drop in housing prices,” said Moody’s banking analyst Nicholas Zhu.
“This could raise loan-to-value ratios for regional banks’ property loan portfolios, implying a weakening of collateralization and, as a result, a higher asset risk.”
Despite the bad loans in the real estate sector, only BoC saw a slight increase in overall NPL ratios, as bad debt in other industries slowed or remained stable for the lenders.
And, when compared to the prior year, all five reported net profit increases ranging from 4.9% to 6.3% in the first half.
Net interest margins (NIM) fell at BoCom, AgBank, ICBC, and CCB, a key indicator of bank profitability, and banks and analysts predict that NIM will continue to fall.
According to Hu, Chinese bank profits will remain under pressure as the falling LPR dampened banks’ interest income this year.
