China’s property lifeline exposes banks to big losses, job cuts

SHANGHAI – China’s escalating push to have its banking behemoths back up

struggling property firms

is adding to a maelstrom of woes for the US$57 trillion (S$76 trillion) sector.

Already stung by soaring bad loans and record-low net interest margins, lenders like the Industrial and Commercial Bank of China (ICBC) may soon be asked for the first time to provide unsecured loans to developers, many of which are in default or teetering on the brink of collapsing.

The risky lifeline threatens to exacerbate an already bleak outlook. ICBC and 10 other major banks may in 2024 need to set aside an additional US$89 billion for bad real estate debt, or 21 per cent of estimated pre-provisions profits in 2024, according to Bloomberg Intelligence. Lenders are now weighing lowering growth targets and cutting jobs as among the possible options, said at least a dozen bankers who asked not to be named discussing internal matters.

China’s banks have been caught between the opposing demands of providing “national service” by supporting the property sector and distressed local governments, and their obligation to run a sound business. Boosting profits has almost become mission impossible for some.

Beijing ratcheted up pressure on the lenders even more last week to reverse the housing meltdown. Regulators are working on a draft list of firms eligible for bank support, while weighing a plan for lenders to offer developers unsecured loans for the first time. This is on top of a recent order for the banks to roll over local government debt at favourable terms to avert a crisis in that US$9 trillion market.

This week, the central bank pledged to press lenders to lower rates on concern that deflation has effectively pushed up borrowing costs in price-adjusted terms. The People’s Bank of China also said it will guide banks to coordinate their lending to smooth out volatility in credit growth between year end and the start of the year.

The demands have been taking a toll on finances and operations. Net interest margins slumped to a record low of 1.73 per cent as at September, data showed. This is below the 1.8 per cent threshold regarded as necessary to maintain reasonable profitability. Bad loans, meanwhile, have hit a new high, and a revenue growth streak since 2017 for some of the nation’s largest state banks may snap in 2023.

Shares of the big four state lenders, including ICBC, are trading near record-low valuations of 0.3 times book value in Hong Kong. This is about the same levels that United States banks were trading at during the global financial crisis.

Challenges ahead

Some small lenders have moved to slash jobs, with one planning to cut 50 per cent of 400 positions at its lending department in 2023, people said.

Lenders operating nationwide are now boosting lending to rural areas they have typically neglected to meet targets on small business loans, people familiar with the matter said.

Unlike most Western banks, Chinese state-run banks are subject to government directions on how much to lend and to what sectors, especially during economic downturns. Apart from public demands, the authorities often summon bank executives for impromptu meetings to give verbal instructions, known as “window guidance”, to nudge lending towards desired areas or restrict certain businesses.

Other firms try to play ball by lending to local government financing vehicles (LGFVs), despite the high risk of default. About 80 per cent of new corporate loans at one big lender’s local branch in Sichuan province in 2023 were extended to these LGFVs, an official said, betting that they can earn interest while delaying default risk via loan extensions.

The authorities have offered some relief to the banks, guiding them to trim deposit rates three times in the past year to ease margin pressures, and slashing reserve requirements twice in 2023 to boost their lending capacity.

Those changes will not be enough to offset the lending rate cut and arrest a margin slide, according to Fitch Ratings. Bloomberg Intelligence expects the margin squeeze to deepen into 2024 and weigh on earnings, capping the profit growth at a low-single-digit at best.

Goldman Sachs said China’s latest guidance for banks to step up financing for builders could push up their bad loan ratios for the sector by 21 basis points. JPMorgan Chase & Co warned that the push to extend unsecured loans “would be a risky move” and raises concerns about their national service and credit risks.

At most risk may be the nation’s myriad of regional banks, though. S&P Global Ratings warned in a recent report that those banks could incur a capital hit of 2.2 trillion yuan (S$415 billion) from the debt crisis among municipalities.

The real estate support may be so risky that some analysts say the banks may push back, just as they have for much of this year. Despite government exhortations since late 2022 for them to lend more, bank loans to property firms fell year on year in the third quarter – the first time ever.

To assuage their concerns on issuing, regulators may exempt bankers from being held accountable for bad loans, given the high risks involved, people familiar said last week, adding that deliberations are ongoing and subject to change.

“The government wouldn’t want material volatility in the big lenders’ operations, and it’s unlikely that banks will be asked to save the property sector or LGFVs at any cost,” said Ms Vivian Xue, director of financial institutions at Fitch Ratings. “After all, the big banks are all owned by the central government, and they’re a key source of fiscal income.” bloomberg