China's banking sector has sufficient buffers to avert a blow out in non-performing loans, as the ongoing revolt by mortgage borrowers is limited to smaller cities, which can be tackled once financial regulators address the cause of their grievances, according to industry analysts.
The mainland's banking system is capable of absorbing 7.5 trillion yuan (US$1.1 trillion) of loan loss before triggering a systematic risk, far more than the current value of mortgages involved in the boycott of nearly 1.1 trillion yuan, said DBS Group in a research report.
"Systematic risk [is] unlikely and earnings impact [is] not as big as thought," said analysts led by Manyi Lu in the report released on Monday. In the worst case scenario when banks need to bear all the bad debt, it will weigh on around 4 to 5 per cent of their full-year earnings this year, and in an unlikely worst case scenario, at a "manageable" level of 9.5 per cent, according to their estimates.
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The sanguine forecasts are underscored by the Chinese banking regulator's instruction over the weekend for lenders to loosen their credit taps to help beleaguered developers complete their homes. The move was aimed at addressing the central grievance of borrowers who were engaged in a mortgage boycott that involved more than 230 projects in around 86 Chinese cities.
Since last week, at least 15 Chinese banks have announced their exposure to the mortgages involved in the boycott, with most of them reporting around 0.01 per cent of their total mortgage lending.
However, experts pointed out this could pose risks to the banking system, which could possibly lead to hesitancy to lend to some key sectors and further add pressure on China's slowing economic growth, which grew by 0.4 per cent year on year in the second quarter. In such a scenario, small banks are particularly vulnerable, they said.
"Smaller and regional banks located in less-developed regions that have a large and concentrated exposure to distressed developers are likely to be the most vulnerable, as most home builders that have experienced distress since the second half of 2021 have projects in lower-tier cities in China's inner regions," said Fitch Ratings on Tuesday.
Smaller banks in China that have released their quarterly interim results so far have mostly reported lower non-performing loan (NPL) ratios.