Property protests in China threaten to cut $220 billion in bank mortgages

HONG KONG, July 14 (Reuters) – Chinese banks could face steep write-downs in their mortgage business as a growing number of buyers threaten to halt loan repayments in protest at unfinished apartments that sold to them, analysts say.

Bad mortgage ratios for banks could rise three to five times as homebuyers stop mortgage payments, analysts say, adding that the protests will significantly increase lenders’ exposure to sector risk cash-strapped real estate.

The protests are further weakening the outlook for banks, which are already reeling from a slowing economy as the government asks them to provide support loans to businesses hit by COVID-19 containment measures. Read more

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Threats from homebuyers, mostly demanding government action before July or August deadlines, heightened investor concerns about the property sector, which accounts for a quarter of the economy. Investors are also worried about banks, which were rocked last year by developers’ lack of cash and the resulting numerous defaults.

Chinese investors dropped banking and property stocks on Thursday, with the CSI300 Bank Index (.CSI000951) falling as much as 3.3%.

Up to 1.5 trillion yuan ($220 billion) in mortgages are tied to unfinished residential projects in China, ANZ said in a report. That could come under threat if the protest by homebuyers, mostly focused on cities in central China, widens.

Mortgages represent nearly 20% of all loans.

Some big city projects are already affected.

The protests involved fewer than 20 developments at the start of this week but more than 100 by midweek, according to media and analysts, who expect the number to hit 200 by the weekend.

Developers involved in the unfinished projects include China Evergrande Group (3333.HK) and cash-strapped Sinic Holdings (2103.HK), according to analysts and media reports.

Evergrande declined to comment. Sinic did not immediately respond to request for comment.

‘PESSIMISTIC PERSPECTIVE’

Chinese authorities have held emergency meetings with banks after concerns that a growing number of buyers were refusing to pay mortgages on stalled projects, Bloomberg reported Thursday, citing people familiar with the matter.

Several local governments also met with homebuyers this week, analysts and local media said, without providing details.

“A major concern is whether this snub is spreading too quickly and more homebuyers are following suit just because their projects are moving slowly, or simply because of a gloomy outlook for the real estate industry,” said Shujin Chen. , equity analyst at Jefferies.

Although the banks hold the pre-sold apartments as collateral, they would likely suffer a loss as the assets are not completed. Waiting for completion could put banks at risk of a substantial decline in property values.

“It is difficult to sell the apartments under the current market conditions. Also, if there is a massive wave of real estate auctions, prices will fall,” said Xiaoxi Zhang, Chinese financial analyst at Chinese research group Gavekal. Dragonomics.

A fund manager also said banks would not recover any capital if they seized unfinished assets.

“It’s going to wipe out half of the bank’s existing equity; it’s worse than subprime,” he said, referring to the subprime mortgage crisis in the United States that began in 2007. The fund manager asked not to be named, due to the sensitivity of the issue. .

THE GREATEST EXHIBITIONS

The financial institutions most exposed to mortgages are the four major state-owned banks – Bank of China (601988.SS), Agricultural Bank of China (601288.SS), China Construction Bank (601939.SS) and Industrial and Commercial Bank of China (601398.SS)- plus Postal Savings Bank of China, China Merchants Bank (600036.SS) and Industrial Bank (601166.SS), according to Jefferies.

Banks such as the Agricultural Bank of China, the Construction Bank of China, the Industrial Bank and the Postal Savings Bank of China said on Thursday that their mortgage portfolios tied to unfinished or delayed real estate projects were relatively weak and the risk was controllable.

Bank of China, Industrial and Commercial Bank of China and China Merchants did not immediately respond to Reuters requests for comment.

Equity market participants said authorities would need to intervene early to resolve the crisis, as struggling property developers would likely be unable to resume construction in the near term due to their cash crunch.

“Both social stability and financial stability will be threatened in the worst case scenario,” said Zhang of Gavekal Dragonomics.

ANZ said authorities could step in to channel funds to ensure unfinished projects are completed, with banks and state developers playing a role.

“Policymakers will need to send a clear and strong signal that they stand ready to be the ‘rescuer of last resort’ to rein in systemic risks,” Morgan Stanley said, adding that plausible measures include stimulating demand. stronger and guarantees on quality developers. .

($1 = 6.7332 Chinese yuan renminbi)

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Reporting by Clare Jim and Xie Yu; Additional reporting by Samuel Shen in Shanghai and Albee Zhang in Beijing; Editing by Sumeet Chatterjee and Bradley Perrett

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