[NEW YORK] China’s big banks are accelerating a drive to write off soured property loans to clean up their balance sheets as they heed calls by policymakers to back the world’s second-largest economy.
Financial regulators have urged lenders, including Industrial & Commercial Bank of China, in recent months to prioritise the disposal of non-performing real estate loans, according to sources familiar with the matter. Some banks have this year doubled the annual quota at their local branches to write off such debt, the sources said, asking not to be identified discussing a private matter.
The instruction underscores the growing anxiety among policymakers as the years-long property crisis risks further eroding balance sheets and hampering the ability of banks to support areas more desired by Beijing. The banks are already struggling to eke out profits with record low margins and growing piles of bad debt. Officials are also working on plans to recapitalise all the biggest lenders.
China’s financial industry disposed of a record 3.8 trillion yuan (S$702 billion) in bad assets in 2024, according to the banking regulator. While the official data did not give a sector breakdown, analysts said loans to property developers account for a lion’s share.
Fitch said the Chinese banks it covers had about 6 to 7 per cent of their outstanding credit in property development loans, with the non-performing loan (NPL) ratio in that segment relatively stable at 4 to 5 per cent in the past few years. A faster reduction in these loans means lenders will be able to free up resources to engage in other businesses, said the sources.
“In the long run, the move should result in cleaner and healthier balance sheets for banks, release some provision resources and allow them to focus better on expanding new businesses,” said Elaine Xu, director for Asia-Pacific financial institutions at Fitch.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
But for lenders with relatively low provision coverage for bad loans, a rapid increase in write-offs could potentially hit their profits and capitalisation in the short term, Xu added. “Overall, it’s net positive.”
Banks typically remove bad debt from their balance sheets by writing them off or selling them to bad asset managers. Write-offs have become mainstream in recent years, making up half of the total bad loans, while sales to bad banks account for 30 to 40 per cent, according to Fitch. Developers would still be responsible for any charged off debt, which banks can attempt to recover or engage third-party debt collection firms.
In September last year, Chinese policymakers pivoted to stimulating growth, giving a boost to consumption, investments and industrial production. But the real estate market remains under pressure with both new home sales and property development investment dropping in the first two months, official data showed.
Bank of Communications, one of the nation’s largest state-owned banks, cautioned last week on more bad loans from the property sector. Fitch expects the property NPL ratio at banks it monitors to remain stable at 4 to 5 per cent this year, as the emergence of more bad loans will offset any efforts on speedier disposals.
“The cash flow of some developers has not yet fully recovered, and the sales of their projects have not yet fully picked up,” said Gu Bin, Bocom’s vice-president, at its earnings briefing. “Some loans in this sector still face the pressure of being downgraded to non-performing loans.”
Bank of China reported a 2.6 per cent rise in profit for 2024 as a drop in impairments helped offset pressure from falling interest rates.
The latest development will hopefully push down the property NPL ratio at banks, in a bid to restore homebuyers’ confidence in the real estate sector, the sources said.
An acceleration in property NPL write-offs would also help drive faster debt restructuring and asset sales by developers, which typically precede the sector’s bottoming out, according to Raymond Cheng, head of China property research at CGS International Securities Hong Kong.
“The fact that China’s authorities and financial institutions are determined to do this shows they are facing up to the reality and are confident the situation is manageable,” said Cheng. “So it’s going in the right direction. For investors, this probably also sends a signal that the property industry is not far from the bottom.” BLOOMBERG
