China’s sputtering mortgage loans force banks into new businesses
Chinese banks are diversifying their income channels when growth of mortgage loans, a boost to profitability last year, is set to lose steam this year against housing tightening in major cities, analysts said.
Mortgage loans, the engine of growth for most mainland Chinese banks in 2016, are sputtering amid a government crackdown on residential sales and housing loans, forcing lenders to diversify their businesses in search of fresh income sources, analysts said.
Already, at least 40 mainland cities have implemented curbs and regulations to limit the number of apartments Chinese citizens can own. That’s putting a lid on mortgages, which soared 35 per cent, or by 4.96 trillion yuan, to a record 19.14 trillion yuan (US$2.77 trillion) at the end of 2016, according to the People’s Bank of China’s data.
“Just like investors won’t put all their eggs in one basket, banks are also trying to diversify their asset structure and seek more profitable businesses as the growth of mortgage loans are set to decline amid housing curbs in more cities,” said Chen Ji, a senior researcher at Bank of Communications. “Banks are seeking more options, which also includes use the housing as collateral for business loans for small business owners for higher margins.”
Signs of the slow down are already apparent. Middle- and long-term household loans, which are mainly mortgages, rose 450.3 billion yuan in March, a slower pace that the monthly average of 473 billion yuan last year.
Last year, such household loans accounted for 45 per cent of newly extended loans in the country.
Yet, the strong growth seen in 2016 is unsustainable this year, said Yang Yue, a banking analyst at China Zheshang Bank.
“The growth of mortgages and its contribution to newly added credit are both projected to decline this year, pointing to limited assets scale growth,” said Yang. “What’s more, mortgages are facing squeezed margins amid latest rising capital cost.”
Against the backdrop, it’s natural to see banks, especially those smaller ones, to seek more profitable business even though mortgages are widely deemed as relatively low-risk, good quality assets, he said, noting that the sizzling growth seen last year is put on brake due to housing tightening policies.
A credit officer at the Shanghai branch of one of China’s five largest banks said the lender is now promoting a new business that offers credits to small business owners, using their property as collateral, declining to give his name because he’s not authorised to speak to the media.
Last year, contribution to profits from retail banking rose at major listed lenders, due mainly to the rise of mortgages, said PricewaterhouseCoopers.
Of the 25 publicly traded banks that offer additional details of their lending, retail banking accounted for 34.2 per cent of pre-tax profits in 2016, up from 2015’s 30.9 per cent, according to PwC’s data.
At the nation’s six biggest state-owned banks, retail banking accounted for 36 per cent of pre-tax profits last year, up from 33 per cent a year ago, PwC said. At the smaller, second-string banks like China Merchants Bank and China CITIC Bank, the contribution was most apparent as retail banking accounted for 33.2 per cent of pre-tax profits last year, up from 24 per cent a year ago, PwC said.
The effect is trickling over to weigh on the CSI 300’s Financial Index, which tracks the performance of 66 publicly traded financial stocks in China, sending its two-year return down 17.5 per cent, performing even worse than the 14.7 per cent decline in the CSI 300 index during the same period.
This year, China’s listed banks are set to drive up their profits by expanding assets scale and fee-based services against shrinking interest spread, it added.
The net interest spread at 27 listed mainland lenders dropped by 25 basis points to 1.71 per cent at the end of 2016.