Prospect of bad prop­erty loans stalk China’s banks

Irish Independent - Business Week - - COMMERCIAL PROPERTY - Sumeet Chat­ter­jee and Pat­turaja Mu­ru­ga­boopa­thy

CHINA’S top banks are lend­ing more to home-buy­ers and de­vel­op­ers than at any time since at least the global fi­nan­cial cri­sis, mak­ing them vul­ner­a­ble to a prop­erty mar­ket down­turn as prices over­heat and real-estate firms strug­gle with a grow­ing debt bur­den.

China’s top five banks had mort­gages and loans to the sec­tor of 12.4 tril­lion yuan (€1.7 tril­lion) at end-2015, up 11pc over the year, and rep­re­sent­ing 28pc of to­tal loans, an anal­y­sis of their bal­ance sheets shows.

That is the big­gest ex­po­sure on their books, more than to man­u­fac­tur­ing or trans­porta­tion, and it ex­ceeds 40pc, up from about 26pc seven years ago, if all loans se­cured on prop­erty are in­cluded.

And as banks in­clud­ing In­dus­trial and Com­mer­cial Bank of China and Bank of China in­crease their ex­po­sure, prop­erty prices in China’s big cities have soared, form­ing what some fear is a bub­ble wait­ing to burst.

“There are two con­cerns - the reliance on prop­erty col­lat­eral to se­cure loans has in­creased, and prop­erty prices have also in­creased to a level that some may ar­gue is over-heated,” said Jack Yuan, as­so­ci­ate di­rec­tor for fi­nan­cial in­sti­tu­tions at Fitch Rat­ings.

“If there is a very sharp fall in prices, then the con­se­quences could be quite se­ri­ous,” he said, adding that the author­i­ties do have tools to try and avoid such a tum­ble.

Many de­vel­op­ers are al­ready sad­dled with debt from China’s most re­cent real-estate bub­ble - an eight-year frenzy that left many with un­sold and un­com­pleted projects when prices turned lower in late 2013.

As China’s econ­omy stut­ters to its weak­est growth in a quar­ter of a cen­tury, and the prop­erty mar­ket re­mains sub­dued out­side the larger cities, the build-up in debt is con­tin­u­ing.

De­vel­oper Yang Guang is among those tak­ing on more. It said last week it would bor­row an ex­tra 300 mil­lion yuan on top of its ex­ist­ing 6.1 bil­lion yuan li­a­bil­i­ties, though its rev­enues halved in 2015. On cur­rent cash­flow it would take 17 years to clear its debts.

The com­pany did not re­spond to a re­quest for com­ment.

Stan­dard and Poor’s in March flagged the risks to Chi­nese de­vel­op­ers’ credit rat­ings, as many were plough­ing more cap­i­tal into land and con­struc­tion, in­creas­ing lever­age de­spite fall­ing prof­itabil­ity.

Those buy­ing ex­pen­sive land in tier-1 and tier-2 cities could be par­tic­u­larly at risk if prices dropped, it said.

There are also grow­ing risks to banks from home­buy­ers.

A study by Natixis showed buy­ers took out 1 tril­lion yuan in new mort­gages in the first quar­ter this year on home sales of 1.6 tril­lion yuan, im­ply­ing a loan-to-value (LTV) ra­tio of 62pc.

That re­mains a com­fort­able cush­ion for lenders, but the di­rec­tion of travel is re­mark­able, jump­ing from 28pc the pre­vi­ous quar­ter.

In April av­er­age home prices in tier-1 Chi­nese cities rose at their fastest in four years, fu­elled by six in­ter­est rate cuts since 2014 and eas­ier down pay­ments.

Shen­zhen and Shang­hai were the hottest spots, with prices up 62.4pc and 28pc over the year, ac­cord­ing to govern­ment data.

“It’s a par­a­bolic surge be­fore the burst. It doesn’t re­flect the real econ­omy,” said Roshan Padamadan, an eq­ui­ties fund man­ager with Singapore-based Lu­mi­nance Global Fund.

“The prop­erty mar­ket may cause a se­ri­ous desta­bi­liza­tion of the Chi­nese bank­ing sec­tor,” he said, adding his fund had re­cently built up some short po­si­tions in Chi­nese banks.

The sit­u­a­tion still ap­pears much less threat­en­ing than it was in the United States lead­ing up to the global fi­nan­cial cri­sis, when banks’ real estate-re­lated loans in­creased from 42.6pc to 56.5pc in the five years to March 2007.

But there are ques­tion marks over the qual­ity of Chi­nese com­mer­cial banks’ bal­ance sheets.

De­faults in the prop­erty sec­tor were once un­think­able, but that changed when de­vel­oper Zhe­jiang Xin­grun failed to pay its bank loans in March 2014, and Kaisa Group de­faulted on its dol­lar bonds 10 months later.

Banks’ non-per­form­ing loans are al­ready at an 11-year-high, or nearly 2pc of the to­tal, ac­cord­ing to China’s bank­ing reg­u­la­tor, and many an­a­lysts be­lieve the sit­u­a­tion is much worse, as some banks are slow to rec­og­nize prob­lem loans or park them off bal­ance sheet.

Bro­ker­age CLSA thinks the real fig­ure is be­tween 15pc and 19pc, while RBS says 15pc is its most op­ti­mistic es­ti­mate and 35pc its least.

At ICBC, China’s big­gest lender by as­sets, new im­pair­ment losses on loans to real estate de­vel­op­ers tripled in 2015 from a year ear­lier, its lat­est an­nual re­port showed.

ICBC said in the re­port it had “strength­ened risk man­age­ment” of the sec­tor and en­hanced mon­i­tor­ing and anal­y­sis of out­stand­ing prop­erty loans.

The big five banks did not re­turn re­quests for com­ment. China’s cen­tral bank, which is re­spon­si­ble for fi­nan­cial sta­bil­ity, did not im­me­di­ately re­spond to re­quest for com­ment. (Reuters)

China’s banks are fu­elling swathes of de­vel­op­ment across the coun­try

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