China Bank Property Lending Caps to Curb Concentration Risks
New regulatory caps on banks’ lending exposure to the property sector are consistent with government efforts to contain risks associated with excessive borrowing among property developers and home buyers, but could encourage some banks to increase lending to other sectors in order to maintain credit growth, says Fitch Ratings. Changes in lending patterns driven by the regulation will be influenced by banks’ risk appetite and scope to increase non-property lending.
The regulations are set to impose caps on the exposure to property and to mortgage lending, but there will be a transition period of two to four years provided for banks to enforce the change. For the six state-owned commercial banks and China Development Bank (A+/Stable), property lending is not to exceed 40% of the total, and mortgage lending 32.5%. Requirements will vary for smaller banks, with caps being generally lower.
Fitch believes that the new restrictions will curb property lending growth. Banks that currently exceed the caps will be likely to see a steeper deceleration in property lending than the sector as a whole. Individual institutions will decide whether to slow overall credit growth or increase lending to riskier non-property sectors, based on the risk/reward profile of potential lending opportunities. The reform comes against a background of sector-wide capital pressures that we believe will prevent a significant acceleration in gross loans growth in the medium term.
The restrictions on bank lending are consistent with the authorities’ “3 red lines” window guidance introduced in 2020 to limit property developers’ ability to increase borrowings. The impact of these policies should be manageable for the majority of Fitch-rated Chinese homebuilders, as these companies have significant flexibility over their cash outflows and can reduce leverage by cutting back on land acquisitions, speeding up presales, or selling assets. However, a small number of low-churn or highly leveraged homebuilders may face higher liquidity or refinancing risks, resulting in negative rating pressure. Meanwhile, we view the new constraint on mortgage lending posed by the policy as consistent with our assumption that contracted sales for residential housing in 2021 will be flat or slightly negative compared with 2020.
Banks may respond to the new policy by moving more mortgage lending off balance sheets via securitisation. Overall securitisation as a funding source only accounted for less than 3% of banks’ outstanding home mortgage balance as of 3Q20. Nevertheless, regulators would still need to approve RMBS issuance quotas, and may be reluctant to allow issuance on a scale that would weaken the impact of the new measures in reducing bank exposure to property – especially since most RMBS are ultimately held by banks.
We believe it is likely that banks affected by the new caps will adjust their incremental loan mix by cutting property-related lending. If they opt to increase issuance of loans for consumption, manufacturing and SMEs to maintain credit growth, this may add to asset-quality and capital pressures in the near term, given that these loans generally have weaker collateral and higher risk weights than home mortgages.
However, the impact should be limited, given the transition period and likelihood of rising yields on property-related loans due to the shifting dynamic between the supply and demand for such credit. In the medium to long term, the new policy may be credit positive as it stems concentration of loans in property-related sectors and helps to contain financial system risks associated with potential exposure to property-market volatility and excessive leverage among developers and home buyers. Issuer Default Ratings for Chinese banks will continue to be support-driven, based on the rating of the Chinese sovereign (A+/Stable).
Source: Fitch Ratings