Chinese banks are likely to report profit growth of around 10 per cent for the third quarter, as strong income from fees and steady loan growth more than offset any exposure to the embattled property market.
While the liquidity crunch at troubled developers such as China Evergrande, Fantasia Holdings Group and Sinic Holdings Group will probably start to show up on their loan books, most analysts said the exposure of banks to the sector remains limited and therefore unlikely to weigh on their non-performing loan (NPL) ratios.
Leading state-owned lenders including Bank of China, China Construction Bank, Agricultural Bank of China and Bank of Communications, will report their third-quarter earnings on Thursday and Friday.
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Although China’s economic growth slowed to 4.9 per cent in the three months to September, from 7.9 per cent in the second quarter, loan growth remained resilient at 11.5 per cent, according to data the banking regulator disclosed this month.
Banks will report strong growth in their income from fees derived from wealth management products and mutual fund distribution, said Cindy Wang, an analyst at DBS.
“Retail customers have shifted their money from the property sector to the financial markets, thereby benefiting banks’ fee income due to stronger sales in wealth management products,” said Wang. “Overall, we expect this to help banks’ revenue growth.”
Many Chinese banks are creditors to troubled developers such as Evergrande and Fantasia, which have missed some payments to bondholders. Banks are exposed to the sector through direct loans to the developers as well as residential mortgage loans tied to projects they build.
Based on calculations that DBS performed on 13 Chinese banks that it covers, the NPL ratio for the property development sector had climbed to a 10-year high of 2.17 per cent as of June this year, up 139 basis point from the same period of 2020. Still, such loans account for less than 8 per cent of total bank loans in China, indicating the overall risk is manageable.
“We don’t expect any huge jump in NPLs during the third quarter caused by Chinese property developers. If these developers’ repayment problems continue into the fourth quarter, then NPL for the fourth quarter may rise by a few basis points,” Wang said.
Mortgage loans accounted for about 23 per cent of the banking sector’s loan book. Chinese banks have been taking a prudent approach, requiring high down-payments from borrowers, typically between 30 per cent and 40 per cent of a property’s value, according to Chen Shujin, an analyst at Jefferies.
“The high down-payment requirement means Chinese banks’ mortgage loans are less risky and will not be significantly affected by a moderate drop in property values,” said Chen.
The larger the down-payment, the lower the mortgage loan amount approved by the bank relative to the property’s value, which reduces the riskiness of the debt. If a borrower’s outstanding mortgage loan exceeds the value of the property – a situation called negative equity – a bank is likely to bear losses in the event that the borrower defaults.
“But if the government does not exit from the current policies that hinder property developers from refinancing their existing debt, then banks’ NPL ratio from their exposure to the property sector will increase in 2022,” said Chen. The banking sector’s NPL at the end of June stood at 1.76 per cent.
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