Mortgage boycott risks are manageable for China’s banking system, but small lenders are vulnerable, experts say

China’s banking sector has enough buffers to avoid an explosion of non-performing loans, as the ongoing revolt of mortgage borrowers is limited to small towns, which can be combated once financial regulators address the cause of their grievances. , according to industry analysts.

The mainland’s banking system is able to absorb 7.5 trillion yuan ($1.1 trillion) in loan losses before triggering systematic risk, far more than the current value of the mortgages involved in the boycott of nearly 1 100 billion yuan, DBS Group said in a research report. .

“Systematic risk [is] unlikely and impact on earnings [is] not as big as expected,” analysts led by Manyi Lu said in the report released on Monday. In the worst case, when banks have to bear all the bad debts, it will weigh on about 4-5% of their full year. profits this year, and in an unlikely worst-case scenario, at a “manageable” level of 9.5%, according to their estimates.

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The upbeat forecast is underlined by the Chinese banking regulator’s instruction over the weekend for lenders to loosen their credit taps to help beleaguered developers finish their homes. The move was aimed at addressing the central grievance of borrowers engaged in a mortgage boycott involving more than 230 projects in about 86 Chinese cities.

Since last week, at least 15 Chinese banks have announced their exposure to mortgages involved in the boycott, with most declaring about 0.01% of their total mortgages.

However, experts have pointed out that this could pose risks for the banking system, which could eventually lead to reluctance to lend to certain key sectors and add even more pressure to China’s slowing economic growth, which has increased by 0.4% year-on-year in the second quarter. In such a scenario, smaller banks are particularly vulnerable, they said.

“Smaller and regional banks located in less developed regions that have large and concentrated exposure to struggling developers are likely the most vulnerable, as most homebuilders that have struggled since the second half of 2021 have plans in lower-tier cities in China’s inland regions,” Fitch Ratings said on Tuesday.

Smaller Chinese banks that have released their quarterly interim results so far have mostly reported lower non-performing loan (NPL) ratios.

Jiangsu Jiangyin Rural Commercial Bank saw a 0.34 percentage point drop in its NPL ratio to 0.98%, according to a report filed Tuesday.

Bank of Jiangsu’s NPL ratio fell 0.1 percentage point to 0.98 percent from a year earlier, according to an exchange report released on Friday. Wuxi Rural Commercial Bank, a lender based in the eastern province of Jiangsu, said its bad debt ratio fell to 0.87% in the first half from 0.93% a year earlier.

Bank of Nanjing, Bank of Hangzhou, Rural Commercial Bank of Zhangjiagang and Jiangsu Suzhou Rural Commercial Bank also posted slight declines of between 0.01% and 0.07%.

Most of the high-risk financial institutions identified by regulators are rural credit unions and city-level rural banks, accounting for 91.4% of the country’s vulnerable lenders in 2021, according to Dong Ximiao, veteran banking expert and researcher. chief at Merchants. Union Consumer Finance Company.

“Due to the global economic downturn and the impact of the coronavirus pandemic, risks in some regions and sectors have further accumulated. These risks are now spilling over to the real economy and the financial sector, [causing] a few financial institutions to turn into high-risk institutions,” he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice journal on China and Asia for over a century. For more SCMP stories, please explore the SCMP app or visit the SCMP Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.

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