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China's biggest banks, which include the world's four largest lenders by assets, look set to further cut their exposures to the real estate sector as the country's property market challenges persist.
The aggregate exposure to the real estate sector of the five China-based global systemically important banks (G-SIBs) — Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. Ltd. — fell to 28.73% of total loans in 2023 from 36.64% in 2020, according to S&P Global Market Intelligence data.
Comparatively, the aggregate real estate exposure of China's banking sector declined to 25.9% from 32.3% in the same period, according to Market Intelligence data.
The country's biggest banks have shifted their lending to other sectors largely due to the risks associated with the current challenges facing the property sector, analysts told Market Intelligence.
"Chinese banks reported lower exposures to both home mortgages and property developer loans," said Iris Tan, Shenzhen-based senior equity analyst at Morningstar.
At China's G-SIBs, mortgage loans as a proportion of total loans declined 2 to 4 percentage points year over year in 2023 amid increasing early mortgage repayments and contracting property sales, Tan noted. Developer loans as a percentage of total loans slipped 0.1 to 1 percentage point year over year as these banks are cautious of rising loan risks in the struggling real estate sector.
This trend is expected to continue, Tan said, although not necessarily at the same speed.
"We expect mortgage loan shares of banks are likely to decline in 2024 at a slower pace, while developer loan shares in G-SIBs are likely to remain stable due to the government's supportive stance toward quality developer financing," Tan said.
Looking beyond
Chinese banks' direct exposure to the real estate sector is largely in the form of loans to developers and home mortgages. Historically, large state-owned banks, including G-SIBs, have had higher-than-average exposure to the country's property sector.
Most banks in China have stepped up lending to other sectors as the property market, which accounts for nearly a quarter of GDP, faces an extended downturn.
The real estate sector drag poses a particular challenge to the country's 2024 GDP target of about 5% growth — a target that comes after the economy grew 5.2% in 2023. The Real Estate Climate Index, which is reported by the National Bureau of Statistics, slipped to a record low of 92.01 in May. The index peaked at 102.01 in September 2018.
Since September 2023, government authorities have gradually relaxed restrictions on residential housing purchases in a bid to boost the sector — and thus encourage banks to increase their lending. In early February, thousands of development projects became eligible for bank financing under the government's whitelist financing program.
Still, many banks are not willing to step up lending to the real estate sector from an asset portfolio management standpoint, Gary Ng, senior economist at Natixis, told Market Intelligence.
Banks' real estate exposure will likely decline in percentage terms as they tend to keep such exposure, especially to developers, "very flat," Ng said in a July 5 interview. At the same time, "other components in their loans books will stay growing."
NPL ratios
Overall nonperforming loan (NPL) ratios among the five G-SIBs ranged from 1.27% at Bank of China to 1.37% at China Construction Bank in 2023. Real estate NPL ratios, meanwhile, ranged from 4.99% at Bank of Communications to 5.64% at China Construction Bank, according to Market Intelligence data.
The aggregate NPL ratio of China's banking sector was 1.59% in the first quarter, according to the National Financial Regulatory Administration. That of large commercial banks was 1.25%.
Property developer NPL ratio could get as high as 8% for some banks, Tan said. Falling property sales and financing difficulties faced by private developers are two of the biggest risks to banks' asset quality, according to the analyst.
"For mortgages, it's a bit hard for the government to force banks to lend if households did not want to buy, and therefore there may be a slight uptick in the NPL ratio, but I don't think that will edge up too aggressively," Natixis' Ng said.