Chinese banks could see their bad loan ratio of property loans more than double by the end of 2021 from the middle of the year, S&P Global Ratings said, as headwinds in the Chinese property sector intensified in the second half.
The non-performing loan (NPL) ratio of property loans at Chinese banks may rise to 5.5% by the year-end from 2.5% in mid-2021 and 2% at the end of 2020, S&P said in a research note on Wednesday.
The stresses in the property sector, in which about one-third of developers are estimated to be in financial trouble, will also contribute about 20 basis points to the overall 1.75% NPL ratio for 2021, S&P said, potentially diluting the profitability of lenders.
Banks with aggressive risk appetites or high geographic concentration could be left with thinner collateral buffers, and thus likely to experience greater strain, S&P said.
China’s banking and insurance regulator has repeatedly warned of lingering pressure on banks from non-performing assets, with outstanding non-performing loans in the banking sector at 3.6 trillion yuan by end of September.
Some lenders have recently adjusted their lending practices to reflect the latest central bank guidance of “meeting the normal financing needs” of the sector while the authorities have yet to publicly give any signal that they will relax the “three red lines” – financial requirements introduced by the central bank last year that developers must meet to get new bank loans.
“The key policy direction remains unchanged,” said S&P, which expected nil growth in property development loans in 2022 and modest growth over 2023 and 2024.
• Reuters with additional editing by Jim Pollard