by (Bloomberg) – Investors in Chinese banking stocks are being painfully reminded of who is likely to bear the brunt of government efforts to prop up the embattled real estate sector and revive economic growth.
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A Bloomberg Intelligence stock index of Chinese lenders is down 14% from this year’s high in May through Monday’s closing price, wiping out $77 billion in market cap and putting industry stocks on the eve of their lowest rating ever.
Already under pressure from China’s monetary easing and lukewarm demand, banks are under renewed scrutiny after authorities asked the industry to extend debt relief to developers as the country’s housing crisis continues. Some Wall Street analysts have also turned cautious, with Goldman Sachs Group Inc. took a bearish stance on the sector, a move that received a rare rebuttal from a Chinese state newspaper last week.
The Bloomberg Intelligence gauge of Chinese bank stocks is trading at 0.27 times book value, just a fraction of its late-October low. That compares to 0.9 times for an index of global peers. The China gauge changed little on Tuesday after making slight gains early in the trading session.
The expansion of developer support measures “is likely to provide more of a sentiment boost to investors without fundamentally alleviating investor concerns about the credit risk of distressed developers from commercial banks,” wrote Citigroup Inc. analysts including Griffin Chan and Judy Zhang in a note. Banks with high mortgage exposures could be more vulnerable, she added.
Regulators said late Monday they have asked banks to ease conditions for real estate companies by encouraging negotiations to make outstanding loans, a move that aims to ensure delivery of homes still under construction. Some outstanding loans – including trust loans maturing at the end of 2024 – will have a one-year deferral for repayment.
Chinese lenders’ risk exposure to real estate was about 20 trillion yuan ($2.8 trillion) at the end of last year, including loans and bonds, accounting for about 5% of their total assets, according to analyst estimates from China International Capital Corp. including Lin Yingqi. Meanwhile, the non-performing loan-to-loan ratio of real estate debt was about 4% at the time, they added.
The sector is also conspicuously on the receiving end of risks from the $9 trillion mountain of debt under China’s local government financing vehicles as the economic recovery falters. Concerns about the health of their balance sheets have increased after Bloomberg News reported leading government borrowers are offering LGFV loans with ultra-long maturities and temporary interest rate relief to stave off a credit crunch.
Goldman estimates that 34 trillion yuan in local government debt is on the balance sheets of banks it covers. According to the brokerage, the combined assets of these lenders represent 61% of the banking system’s total.
According to data from the National Financial Regulatory Commission, the net interest margin of China’s commercial banks fell to a record low of 1.74% in March, below the 1.8% threshold that analysts and practitioners consider necessary to maintain reasonable profitability.
The lenders saw their margins squeezed as they were urged by authorities to provide cheap loans to small businesses and home buyers to support the economy. However, demand for loans from businesses and households has softened as a real estate bubble deflates and companies scale back investments.
“Because it is difficult for developers to improve their liquidity, banks still face a high risk of the bulk of their loans turning into bad loans,” said Shen Meng, a director of Beijing-based investment bank Chanson & Co. policy can only help banks postpone their risk exposure.”
(Prices update and with more commentary from analysts)
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