(Bloomberg) — Investors in Chinese bank stocks are getting a painful reminder of who is likely to bear the brunt of the government’s efforts to prop up a beleaguered real estate sector and revive economic growth.
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The Bloomberg Intelligence stock index of Chinese lenders is down 14% from this year’s high in May through Monday’s close, wiping $77 billion off market value and leaving industry stocks on the cusp of their lowest valuations ever.
Already under pressure from Chinese monetary easing and tepid demand, banks are facing renewed scrutiny after authorities asked the sector to extend debt relief for developers as the country’s housing crisis continues. Some Wall Street analysts have also turned cautious as Goldman Sachs Group took a bearish view on the industry, a move that drew a rare rebuttal from a Chinese state-run newspaper last week.
A Bloomberg Intelligence measure of Chinese bank stocks is trading at 0.27 times book value, far from a record low in late October. This compares to 0.9 times that of the global peer index. China’s gauge was little changed on Tuesday after posting slight gains early in the trading session.
Extending relief measures to developers “is likely to provide a further boost to investor sentiment without primarily easing investor concern about commercial banks’ credit risk to distressed developers,” Citigroup Inc analysts including Griffin Chan and Judy Zhang wrote in a note. They added that banks with higher mortgage risks may be more at risk.
Regulators said late Monday that they have asked banks to ease conditions for real estate companies by encouraging negotiations to extend outstanding loans, a move aimed at ensuring delivery of homes still under construction. The repayment of some outstanding loans — including trust loans due by the end of 2024 — will be extended by one year.
Chinese lenders’ exposure to property risk was about 20 trillion yuan ($2.8 trillion) by the end of last year, including loans and bonds, accounting for about 5% of their total assets, China International Capital Corp. analysts estimated. Including Lin Yingqi. Meanwhile, the non-performing loan ratio for real estate debt was around 4% at the time.
The sector is also clearly on the receiving end of the $9 trillion debt pile among China’s local government financing vehicles as the economic recovery falters. Concerns about the health of their balance sheet grew after Bloomberg News reported that the nation’s top lenders were offering LGFV loans with very long maturities and temporary interest relief to prevent a credit crunch.
Goldman estimates that 34 trillion yuan of local government debt is on the balance sheets of the banks that cover it. According to the brokerage, the combined assets of these lenders account for 61% of the total banking system.
China’s commercial banks’ net interest margin fell to a record low of 1.74% in March, according to data from the National Financial Regulatory Commission, below the 1.8% threshold that analysts and industry practitioners consider necessary to maintain reasonable profitability.
Lenders have seen their profit margins shrink as authorities urged them to offer cheap loans to small businesses and homebuyers to help prop up the economy. However, demand for loans from businesses and households has weakened as the real estate bubble shrinks and companies scale back their investments.
“Because it is difficult for developers to improve their liquidity, banks still have to suffer from the high probability that most of their loans will turn into non-performing loans,” said Shen Ming, director of investment bank Chanson & Co. in Beijing. Policy can only help banks postpone their exposure to risk.”
(price updates and with more analyst comments)
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