Fitch Ratings Inc has called real estate the “biggest threat” to Chinese banks as surging loans tied to properties coincide with defaults and falling sales.
Corporate loans backed by buildings have grown almost fivefold since 2008 and residential mortgages have more than tripled in the period among lenders rated by Fitch, the company said yesterday. That has seen property loans held by China’s four biggest lenders soar to a total 2.26 trillion yuan (US$363.8 billion), according to their annual reports.
“Collateral is supposed to reduce bank risk — but the rise of property collateral in corporate loans may actually increase the chance of bank failure,” Fitch analysts Jack Yuan and Grace Wu said in the report. “This is because the widespread use of such collateral has lowered the perceived risks of lending, fueling China’s credit build-up and spreading real-estate risk to other sectors of the economy.”
Alarm bells sounded last month when Kaisa Group Holdings Ltd (佳兆業集團) became the first Chinese developer to default on offshore bonds, putting more scrutiny on a sector that made up a third of the nation’s economy in 2013, according to Gavekal Dragonomics. Property prices in 70 Chinese cities have fallen for more than a year, the worst losing streak in at least a decade, while sales have dropped for 11 of the past 24 months, Bloomberg-compiled data show.
Loans backed by properties now comprise 40 percent of all facilities held by Fitch-rated banks, according to the report. Total credit to real estate could be as high as 60 percent if other types of financing besides direct loans are included, Fitch said.
“The property market is usually one of the main revenue contributors to the state,” Schroder Investment Management Ltd head of credit research for Asia Raymond Chia said. “With the weakness in the sector, especially with excess inventory overhang as well as weak earnings by developers, economic growth will be affected.”
Industrial and Commercial Bank of China Ltd (中國工商銀行), the world’s biggest bank by assets, held 443.5 billion yuan of real-estate loans, or 6.6 percent of all facilities, at the end of last year, according to its annual report. The portion for Bank of China Ltd (中國銀行), the nation’s second-largest, was 714.6 billion yuan of advances, or 8.4 percent of its credit book.
China Construction Bank Corp’s (中國建設銀行) property loans were reported at 520.1 billion yuan, or 5.5 percent of overall facilities. Agricultural Bank of China Ltd’s (中國農業銀行) real-estate loans stood at 581.1 billion yuan, or 11.3 percent.
There are still reasons for optimism on Chinese property, helped by the People’s Bank of China (PBOC) cutting the lenders’ reserve requirement ratio twice this year, Australia and New Zealand Banking Group Ltd Singapore-based credit strategist Owen Gallimore said.
“The recent data on property sales has shown improvement, especially for the biggest developers,” he said in an interview. “And with the PBOC aggressively easing, it’s hard to be bearish on Chinese property.”
Banks and developers will be hoping the bulls are correct. Chinese loans secured by real estate have increased 400 percent since 2008 at lenders rated by Fitch, compared with a 260 percent rise in facilities overall, according to Fitch.
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