June Real Estate Non-Performing Loans at 48.8 Trillion Won
Could Increase to 165 Trillion Won by End of Next Year
Provision for Bad Debts of 738 Billion Won Needed
Amid a spreading chain default crisis in China's real estate development industry, there are forecasts that non-performing loans (NPLs) in the Chinese banking sector could increase due to the slowdown in the real estate market. It is observed that even large banks, which have applied relatively stringent regulations, can no longer feel secure in the face of the real estate crisis.
According to Bloomberg Intelligence (BI), a research institution under Bloomberg, on the 24th (local time), analysts including Francis Chan analyzed 11 major Chinese banks, including the four major state-owned banks: Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China (BOC). They reported concerns about the increase in their non-performing loans.
The research team explained that although these banks managed their non-performing loans (NPLs) well in the first half of this year, they may no longer be able to suppress credit costs in the second half of this year and next year.
Among the new non-performing loans increased from 2020 to the first half of this year, 77% were real estate-related NPLs, and 23% were non-performing mortgages (real estate-secured loans). The proportion of real estate-related NPLs is expected to rise further.
According to disclosed data, the weighted average NPL ratio of loans these banks extended to real estate developers increased from 3.1% in 2021 to 4.7% in June this year. In terms of amount, it reached 264 billion yuan (approximately 48.8 trillion KRW).
By bank, Agricultural Bank of China and Industrial and Commercial Bank of China each extended loans of 52 billion yuan and 51 billion yuan to real estate developers. Their NPL ratios were 5.8% and 6.7%, respectively. Bank of China lent 43 billion yuan, and China Construction Bank lent 40 billion yuan, with NPL ratios of 5.1% and 4.8%, respectively.
In a negative scenario assuming that the real estate NPL ratio triples from June to 14.8% by the end of next year, the scale of real estate NPLs for these banks could increase to 905 billion yuan by the end of next year. This corresponds to approximately 165.4 trillion KRW.
If this scenario materializes, it is estimated that ICBC will hold 204 billion yuan (NPL 18.4%), Bank of China 197 billion yuan (NPL 21.7%), Agricultural Bank of China 167 billion yuan (NPL 16.4%), and China Construction Bank 134 billion yuan (NPL 13.1%) in real estate NPLs.
Additionally, the research team predicted that if the real estate NPL ratio doubles from June to about 9.9%, the total real estate NPLs of the 11 banks would amount to 603 billion yuan.
The research team identified real estate loans and mortgages as the key factors threatening the asset soundness of these banks. Considering the decline in collateral value due to the real estate market downturn, they advised that the 11 banks need to prepare an additional 738 billion yuan in loan loss provisions by the end of next year.
The researchers analyzed that although Chinese authorities recently lowered housing deposit ratios and reduced loan interest rates to revitalize the sluggish real estate market, these measures alone are unlikely to resolve the market crisis.
They added that despite the real estate stimulus policies implemented so far in China, construction companies’ sales have not yet recovered significantly, and further regulatory easing may be expected.
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