Analysts see greater risk in mainland mortgages
The huge exposure of mainland banks to the domestic property market presents a far greater financial risk than their investments in US subprime mortgage securities, analysts said yesterday.
Mainland banking stocks have posted record declines this week on reports losses tied to high-risk US mortgages will be larger than expected. But rising inflation, interest rate increases, a credit squeeze on high-end properties and tumbling stocks are expected to make loan repayments more difficult both for households and property developers.
'Except for BOC, the concerns about subprime investments are pretty overblown as their exposure is very small in relation to the overall size of the banks. The bigger issue is to what extent they are making good credit decisions for the corporate sector and households,' said Charlene Chu at Fitch Ratings.
Bank of China, which holds US$7.95 billion in US subprime mortgage securities, is by far the most exposed of the big mainland banks. In comparison, outstanding mortgages nationwide stood at about US$395 billion at the end of the third quarter last year.
'The strength of the economy and substantial stock market gains have [largely prevented] problems with mortgage repayments. But with the stock market tumbling, there could be a few dark months around the corner,' Ms Chu said.
Banks issued 1.17 trillion yuan in new mortgages from the start of 2006 to the end of September last year, including loans issued by housing reserve funds, accounting for 18 per cent of total new loans.
Another 25 per cent of new bank lending in the past two years went to property development separate from mortgages, estimated Arthur Kroeber, director of Beijing-based economics consultancy Dragonomics.
'The issue is not so much mortgages as loans to real estate developers investing in high-end properties who will be caught by the government's credit squeeze,' he said.
House price acceleration has slowed since the government increased mortgage interest rates, restricted loans to developers for luxury projects and introduced a 40 per cent down payment requirement for second homes last year. Dragonomics expects high-end house prices to weaken, raising fears that property developers who took out loans betting on the rapid appreciation of luxury projects will struggle to repay.
'The banking industry's non-performing loan ratio and volatility risk in the capital market are both rising,' Beijing Normal University economist Zhong Wei told the Financial News yesterday. The newspaper, which is run by the central bank, said small and medium-sized lenders were facing the most pressure.
Individual mortgage borrowers are also feeling the pinch. 'I borrowed money from relatives to pay off my mortgage because it would be hard to bear the higher interest rate,' said Qin Jing, research assistant at a British consultancy in Beijing.
Mainland exposure
From 2006 to the end of September last year, new mortgages totalled, in yuan 1.17tr