China’s major banks are grappling with a surge of non-performing loans (NPLs) since last year, largely driven by a weakening real estate sector.
As of the end of 2022, the NPL balance of 40 listed Chinese banks climbed by 8.84 percent to 1.81 trillion yuan (approximately $262.3 billion), while the NPL ratio slightly slid by 0.03 percent to 1.33 percent from the year prior, according to a financial analysis by PricewaterhouseCoopers (PwC), an international accounting and auditing service provider, published on April 20.
NPL is a bank loan in which the borrower cannot pay the principal amount or interest for a certain period of time. NPLs are a significant challenge for the banking sector as it reduces banks’ profitability, thus dragging down economic growth.
The overdue loan balance of these banks jumped by 12.6 percent to 1.88 trillion yuan ($272.5 billion), and the delinquency rate rose to 1.38 percent from the previous year, the PwC report said.
A branch of the Industrial and Commercial Bank of China (ICBC) in Beijing on Jan. 12, 2004. (Frederic J. Brown/AFP via Getty Images)
These 40 listed banks include China’s six largest state-owned commercial banks—Industrial and Commercial Bank, Agricultural Bank, Bank of China, Construction Bank, Bank of Communications, and Postal Savings Bank—eight joint-stock banks, and 26 urban and rural banks, accounting for 75.3 percent of the total assets and 83.59 percent of the net profit of commercial banks in China.
For the banks, many collaterals are houses, and bad debts will occur in cases where loans are uncollectible, Fang Qi, a U.K.-based senior financial analyst living, told The Epoch Times on May 10, pointing to the downturn in the real estate market, which has a pivotal impact on the banking industry in China.
With a weak housing market, many homes were left unsold. This has impacted the stock market, debts of property developers, local urban investment bonds, and local government finance, and will “lead to a bank crisis,” Fang said.
The increasing number of defaults among real estate companies causes the rise in NPLs.
Last year was not easy for the banking industry as the increasing NPL rate has posed a challenge, and “defusing real estate financial risk has become a pressing task,” said Zhang Jinliang, director of China Construction Bank, cited by Fang, a Chinese property information platform, in an April 6 report.
In 2022, Bank of China, the largest provider of property loans, saw a 61 percent year-over-year jump in NPL balances in the real estate sector, with the NPL rate reaching 7.23 percent, an increase of 2.18 percent from 2021, according to Fang.
Agricultural Bank, the second largest provider of real estate loans, had an NPL balance of 46 billion yuan (about $6.7 billion) in the housing sector last year, soared by 63.4 percent year-on-year; the NPL ratio was 5.48 percent, up 2.09 percentage points from the beginning of the year.
In addition, last year, the real estate industry’s NPL grew over 145 percent in banks such as Ping An Bank, Bank of Communications, Zheshang Bank, China Merchants Bank, Everbright Bank, and Construction Bank.
The real estate NPL ratio of Chongqing Rural Commercial Bank was as high as 7.28 percent, topping the listed banks, and its NPL balance surged by 100 times in 2022. This decline, according to the bank’s financial report, is attributed to the downturn in the real estate sector and the disruption of the capital chains of some real estate companies.
Real Estate Woes
Personal mortgage loans have long been regarded as one of the banks’ highest quality and most extensive assets. However, the balance of non-performing assets in personal mortgage loans accumulated a lot last year, according to Chinese real estate media.
At the end of 2022, six large commercial banks had NPL balances in the real estate sector totaling 197.76 billion yuan (about $28.7 billion), a 71 percent surge year-over-year. Of these, the balance of NPL for personal housing amounted to 116.5 billion yuan (about $16.9 billion), up 59 percent year-over-year.
Changshu Rural Commercial Bank and Minsheng Bank are also among the listed Chinese banks whose personal housing loan growth rate exceeded 60 percent last year.
Chinese official data showed that the real estate industry remained sluggish last year, with the sales area and sales volume of commercial properties falling 24.3 percent and 26.7 percent year-on-year, respectively. Residential housing sales saw a 28.3 percent drop.
A woman looks at the price tags of houses at a local real estate office in downtown Shanghai on Feb. 12, 2018. (Johannes Eisele/AFP via Getty Images)
In addition, commercial properties for sale in China climbed by 10.5 percent, while residential properties for sale increased by 18.4 percent year-on-year at the end of 2022 compared with the previous year.
The trend of shrinking sales area and swelling inventory of commercial properties have entered the first quarter of this year.
Affected Banks and Local Governments
The slow Chinese real estate market affects the country’s banking industry.
Last year, the sluggish increment and growth rate of mortgage loans lowered the overall assets yield of the banking industry, said Liao Lin, director of Industrial and Commercial Bank, at an internal meeting in March.
Moreover, Liu Jiandong, director of Bank of China, said at an internal meeting in March that banks’ investments in government assets were “more obviously affected by the real estate and the pandemic,” especially in places with weaker finance and higher liabilities, Chinese financial media Jiemian reported on March 31.
Mortgage Rate Cuts
In an attempt to boost sales in real estate, Chinese banks are looking to cut mortgage rates in many cities.
As of the end of March, 83 cities lowered the bottom line of the first home loan interest rate, and 12 cities abolished the lower limit, Zou Lan, director of the Department of Monetary Policy at the Bank of China, said in an April 20 press release.
Low-interest rates on home loans have prompted many homeowners to apply for “early mortgage repayment”—the phrase has grown popular on Chinese social media platforms, as reported by Beijing’s official mouthpiece People’s Daily on Feb. 15.
Despite the low rates, consumers are uncertain about buying a new home.
The behavior of home buyers who are eager to repay their loans as early as possible may allow banks to recover a large amount of money in a short period of time, but it will also affect the interest income of banks, said Zhao Xijun, co-director of the China Institute of Capital Markets at the Renmin University.
Fang believes the banks’ move to cut mortgage rates would only function as “a new [starting] point of revenue decline for the Chinese banking industry.”