The stimulus announced yesterday by China's central bank will likely squeeze Chinese banks. We believe the measures could strain lenders' net interest margins (NIMs) and mortgage quality.
The steps will test banks' management of funding costs and their underwriting ability, with some institutions likely to show lower profitability and diminished asset quality. This should be particularly apparent for regional banks in lower-tier cities due to their exposure to some of the country's weaker property markets.
What's happening
The central bank said it will cut interest rates on existing mortgages by 50 basis points (bps) on average, as part of a set of steps aimed at stimulating the economy. The central bank could also further lower benchmark lending rates by 20 bps-25 bps. The cuts will squeeze banks' asset yield. However, a reduction in the reserve requirement ratio of at least 50 bps will reduce this effect at the margin.
In addition, downpayment requirements on second homes will be lowered to 15%, on par with those for first homes, from 25% previously.
Why it matters
We estimate on a static basis, these measures could reduce banks' NIM by about 20 bps. This would hit Chinese lenders' returns on assets by about 14 bps. The average deposit rate would need to fall by about 25 bps to neutralize the impact.
On a dynamic basis, the mortgage measures could slow prepayments and reinvigorate investment demand. Mortgage loans are low-risk assets that consume less capital. The stabilization of banks' mortgage balances would help their capital ratios.
Meanwhile, Chinese banks have also been moderating loan growth and capital consumption to mitigate the hit on profitability from lower interest rates. Accordingly, we consider all these effects on banks' capital and earnings when assessing ratings.
What comes next
We expect banks to lower deposit rates to cushion the impact from lending rate cuts. This could be challenging for some banks with a weaker deposit base, or lower funding and liquidity regulatory buffers.
- The Chinese lenders are also likely to reduce mortgage downpayment ratios to increase low-risk assets on their balance sheets. This could stress their asset quality if housing prices continue to fall.
- Having said that, we believe the unemployment rate, household income and household savings are more relevant than property prices in affecting residential mortgage loan performance.
- Banks' underwriting ability will be tested, especially on second-home buyers in lower-tier cities (see "Your Three Minutes In China Bank Mortgages: Risks To Rise In Lower-Tier Cities," May 27, 2024).
Related Research
- Your Three Minutes In China Bank Mortgages: Risks To Rise In Lower-Tier Cities, May 27, 2024
- China Banks Brace For Tide Of Bad Property Loans, April 14, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Ming Tan, CFA, Singapore + 65 6216 1095; ming.tan@spglobal.com |
| Secondary Contact: | Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.