MNI: China's Lower Home Prices To Pressure Bank Disposals

China’s banks will accelerate the disposal of foreclosed property to free up capital and hedge risks from further house-price declines, which will continue to pressure property-backed loans, economists and analysts told MNI, noting lenders are set to cut real estate-related lending and pursue further consolidation to contain risks.

Several large state-owned and city commercial banks are selling properties through online platforms, while some small and medium-sized lenders have listed thousands at prices 10-30% below market levels. Song Ke, deputy dean of the Shenzhen Research Institute at Renmin University of China, said these properties mostly stem from defaults on individual mortgages and business loans, acquired by banks after unsuccessful judicial auctions, debt-settlement properties obtained through corporate loan restructuring and debt reorganisations, and inventory houses held or acquired through restructuring with developers or debt-to-equity swaps.

The downturn in the real-estate market is expected to squeeze lenders’ profits and capital further, while falling house prices will increase the number of their non-performing loans (NPL), he added. Weaker homebuyer demand and slower mortgage growth will also undermine their ability to replenish capital, he warned, pointing to the rising risks associated with the reduced value of bank collateral and prolonged NPL disposals.

Non-performing real-estate loans totalled about CNY480 billion at the end of September, corresponding to around 24,000 properties, Song said, noting that the NPL ratio for real-estate development loans has climbed from 2.8% in 2022 to over 5%. The ratio for the overall individual mortgage loans has also exceeded 3%, well above historical averages, Song cautioned. (See MNI: Relaxed Policy To Drive PBOC Over Next Five Years - Advrs)

ACCELERATING SALES

Vivian Xue, director of Asia-Pacific Financial Institutions at Fitch Ratings, told MNI that such disposals help recover funds and ease profitability and capital pressures that have weighed on lenders since 2022, as net interest margins have fallen and asset-quality risks have risen. Accelerating sales also reflects banks’ expectations for housing prices, she added, noting a cautious outlook is driving banks to hasten asset disposals.

In its latest outlook for the Asian banking sector, Fitch marked China’s banking sector as “deteriorating”, citing persistent headwinds from trade tensions and domestic property weakness that are weighing on business generation and asset quality. The agency noted that regulatory forbearance for small businesses and developers may mitigate near-term default risks and limit credit costs, but could raise medium-term asset-quality risks.

Xue said the property market outlook remains unclear, with improvements mainly in core cities, and that subdued household income prospects will continue to weigh on demand, which would cause a gradual rise in mortgage NPL ratios. (See MNI INTERVIEW: China’s Growth To Slow Without Model Changes–Wu)

Since industry-wide mortgage NPL data is not disclosed, Xue estimated – based on the ratios of large and medium-sized banks in Fitch’s coverage – that it had risen to about 0.7% from 0.3% before 2021, still low compared with the industry-wide NPL ratio of around 1.5%, and far below the corporate real-estate NPL ratio of 4.5%, up from less than 2% in 2021.

However, she warned that the real-estate sector’s impact on asset quality is more pronounced for small and medium-sized banks, particularly those in less favourable regions where the property supply-demand matrix is worse, and developers and borrowers face greater repayment pressures.

POLICY SUPPORT

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said more banks are expected to dispose of foreclosed properties through direct sales, and that policy support – such as reducing or exempting transaction-related taxes and fees – could help banks accelerate disposal. Efforts should be made to broaden non-performing asset disposal channels for commercial banks, especially small and medium-sized institutions, and to diversify disposal methods and tools, he added.

Song noted banks will continue to reduce exposure to high-risk developers and make greater use of debt-to-equity swaps, while reinforcing capital adequacy through instruments such as perpetual bonds and tier-2 capital transactions.

Xue added that from both loan-demand and risk-control perspectives, the share of real estate-related lending has declined over the past few years, with more funds flowing into manufacturing, technology, and green sectors. Consolidation among small and medium-sized banks will accelerate, particularly for those with weak asset quality and limited access to capital markets, she concluded.