Despite Chinese government efforts to rein in property prices, mortgage lending will continue to drive growth in property-related exposures at China's largest banks, say experts.
The total value of lending exposure to homebuyers as well as commercial and residential real estate developers at Industrial & Commercial Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. rose to 13.009 trillion yuan as of June from 11.584 trillion yuan at the end of 2015, according to data compiled by S&P Global Market Intelligence.
Total real estate loan exposure at the four banks in the first half grew 12% from the end of 2015, a rate that was higher than the previous five halves.
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CCB had the highest real estate exposure out of the four at the end of June, at 3.588 trillion yuan.
After a subdued housing market in 2014, the central government rolled out policies to stimulate the sector, which along with loose credit trends helped fuel the subsequent surge, said Zhang Hongwei, research director at Tong Ce Real Estate.
Residential property sales in China jumped 43.2% year over year in the first nine months of 2016, according to data from China's National Bureau of Statistics, and mortgage lending now accounts for about two-thirds of these property-related loans at the big four banks, according to separate estimates by Chen Shujin, a banking analyst at DBS Vickers (Hong Kong), and Andy Leung, a banking analyst at KGI Securities.
By the end of the third quarter, Chinese banks had issued 3.63 trillion yuan of new home loans to individuals, accounting for 35.7% of total new loans across all sectors, according to the People's Bank of China.
The China Banking Regulatory Commission has stepped in to curb mortgage lending and launched inspections at banks in 16 major cities, Shanghai Securities News reported Nov. 12.
The watchdog examined, among other areas, mortgage and real estate development loans and looked into whether wealth managers have been channeling funds into nonstandard credit assets, including loans to property developers.
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Since early October, Beijing, Shanghai, Shenzhen, Xiamen and at least 16 other cities have begun requiring higher mortgage downpayments and other restrictions.
In Shenzhen, for example, second-time homebuyers now need to pay 70% of the purchase price, compared to 40% previously. Nonlocal buyers in Shenzhen are limited to purchasing one unit per family and are only eligible to purchase homes if they have paid social insurance in the city over the past five years.
"The recent moves to regulate mortgage lending is mainly to prevent the rise of property prices rather than to curb systemic risks to the banking system," said DBS Vickers' Chen, who noted that the proportion of property-related loans made by Chinese banks is still relatively low compared with developed countries.
While these loans accounted for 30% of the total loans at the country's big four banks in the first half, property-related loans account for 50% of U.S. banks' loan portfolios, S&P Global Market Intelligence data shows.
Furthermore, these loans are unlikely to pose a systemic threat to China's banking system in the near term given that nonperforming loan levels are relatively low, KGI Securities' Leung said.
The combined NPL ratio for property-related lending at Chinese commercial banks was 0.81% as of the end of 2015, lower than the overall 1.67% NPL ratio for the commercial banking sector.
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Growing exposure to continue
"The regulatory moves may slow the pace of mortgage lending, but overall, it will continue to rise," Leung said.
In the past, smaller banks often preferred to focus on corporate lending because they tended to offer higher yields than mortgage lending, Chen said. However, a role reversal is taking place as China's economy slows and commercial lending looks less attractive. Chen expects mortgage lending to have grown even faster in the second half of 2016.
Nevertheless, residential property sales in most cities saw a month-over-month decline in November, according to property data provider Centaline Group, suggesting that the latest regulatory curbs have worked.
It could be the beginning of a short-term contraction. "Home sales are expected to cool because the measures have lifted the threshold for first-time buyers and should significantly tame demand of home upgraders," said Oriental Securities analyst Zhu Jing.
But he believes that in the mid to long term, home sales and prices will remain resilient to government action in some major cities such as Shanghai.
Some residential housing investors are also unlikely to be deterred by the rule changes. "It is hard to dampen the Chinese enthusiasm for buying real estate," said Mizuho Securities analyst Alan Jin.
As of December 14, US$1 was equivalent to 6.90 Chinese yuan.
The article is authored by Jolie Ho, Megan Zhao, and Eazaz Khan of S&P Global Market Intelligence
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