(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 shore up the ailing real estate sector and revive economic growth.
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A Bloomberg Intelligence stock index of Chinese lenders fell 14% from this year’s peak in May through Monday’s close, wiping out $77 billion in market capitalization and leaving industry stocks on the cusp at their lowest valuations on record.
Already under pressure from monetary easing and lukewarm demand from China, banks are under renewed scrutiny after authorities told the sector to extend debt relief to developers while that the housing crisis in the country continues. Some Wall Street analysts also turned cautious, with Goldman Sachs Group Inc. taking a bearish view of the industry, a move that prompted a rare rebuttal from a state-run Chinese newspaper last week.
The Bloomberg Intelligence gauge of Chinese bank stocks is trading at 0.27 times book value, a hair’s breadth from the record high set in late October. This compares to 0.9 times for an index of global peers. The Chinese gauge was little changed on Tuesday after posting small gains early in the trading session.
Extending developer relief measures “will likely be more stimulative for investors without fundamentally allaying investor concerns about commercial bank credit risk on struggling developers,” wrote analysts at Citigroup Inc., whose Griffin Chan and Judy Zhang, in a note. Banks heavily exposed to mortgages could be more vulnerable, they added.
Regulators said late Monday they had asked banks to ease terms for property companies by encouraging talks to extend outstanding loans, a move that aims to ensure delivery of homes still under construction. Some outstanding loans – including trust loans due by the end of 2024 – will have a one-year repayment extension.
China’s real estate lenders’ risk exposure was about 20 trillion yuan ($2.8 trillion) at the end of last year, including loans and bonds, accounting for about 5% of their total assets, according to analysts’ estimates from China International Capital Corp. including Lin Yingqi. Meanwhile, the ratio of non-performing loans to home debt was around 4% at the time, they added.
The sector is also visibly the recipient of risk from the $9 trillion pile of debt among Chinese local government financing vehicles as the economic recovery falters. Concerns about the health of their balance sheet grew after Bloomberg News reported that major state lenders were offering LGFVs ultra-long-maturity loans and temporary interest relief to head off a credit crunch.
Goldman estimates that 34 trillion yuan of local government debt is on the balance sheets of the banks it covers. The combined assets of these lenders represent 61% of the banking system’s total, according to the brokerage.
The net interest margin of China’s commercial banks 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 practitioners industry deem necessary to maintain reasonable profitability.
Lenders have seen their margins squeeze as authorities urge them to provide 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 housing bubble deflates and businesses reduce investment.
“Since it is difficult for developers to improve their liquidity, banks still have to suffer the strong possibility that most of their loans will turn into bad debts,” said Shen Meng, director of the investment bank based in Beijing Song & Co. policy can only help banks defer their risk exposure.
(Updated prices and with more analyst comments)
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