Mortgage boycott risks manageable for China’s banking system, but small lenders vulnerable, experts say
- The value of mortgages involved in the boycott is nearly 1.1 trillion yuan, far less than the 7.5 trillion yuan loss that the banking system can bear before triggering a systematic risk, DBS says
- Smaller Chinese banks in less-developed regions that have large exposure to distressed home builders are particularly vulnerable to bad-loan risks, Fitch says
China’s banking sector has sufficient buffers to avert a blow out in non-performing loans, as the ongoing revolt by mortgage borrowers is limited to smaller cities, which can be tackled once financial regulators address the cause of their grievances, according to industry analysts.
The mainland’s banking system is capable of absorbing 7.5 trillion yuan (US$1.1 trillion) of loan loss before triggering a systematic risk, far more than the current value of mortgages involved in the boycott of nearly 1.1 trillion yuan, said DBS Group in a research report.
“Systematic risk [is] unlikely and earnings impact [is] not as big as thought,” said analysts led by Manyi Lu in the report released on Monday. “We expect the government to step in to solve this problem, as it may affect more than 3 trillion yuan of residential sales and about 4 million families.”
A state intervention could force banks to shoulder 30 per cent of the costs of fixing the problem, a base-case scenario projected by DBS. That could impact banks’ earnings by 4.4 per cent to 4.9 per cent annually from 2022 to 2024. In the unlikely worst-case outcome of banks bearing the full cost, the impact remains “manageable” at about 9.5 per cent, it added.
The sanguine forecasts are underscored by the Chinese banking regulator’s instruction over the weekend for lenders to loosen their credit taps to help beleaguered developers complete their homes. The move was aimed at addressing the central grievance of borrowers who were engaged in a mortgage boycott that involved more than 230 projects in around 86 Chinese cities.
Since last week, at least 15 Chinese banks have announced their exposure to the mortgages involved in the boycott, with most of them reporting around 0.01 per cent of their total mortgage lending.
