Banks See Profit Erosion from Beijing's Housing Market Rescue

Profits of China’s commercial banks may fall victim a bit to the government's real estate market support policies, and the banks are showing reluctance to introduce their own rules related to housing lending in the future. Meanwhile, warnings on credit risk from bank supervisors show that they do not want to see a speculative bubble in the real estate market triggered by a relaxation of lending policies.

The People’s Bank of China (PBoC), the central bank, issued new regulations on October 22, to go into effect from October 27, setting interest rates for individual housing loans at 0.7 times of the benchmark interest rate and adjusting the minimum down payment to 20% from 30%, measures meant to stimulate buying in the real estate market. However, PBoC only determined the floating range, leaving appropriate pricing to the loaning institutions.

The Agricultural Bank of China (ABC) was the first to release detailed rules on October 28, but later the same day removed the press release on receiving notice from a supervising department. The China Banking Regulatory Commission (CBRC) issued an urgent circular restating that preferential interest and down payment policies can only be applied to first-time home buyers, excluding second-home loans and others. Although ABC’s detailed rules reappeared without change on its website, the twists and turns indicate CBRC alertness on the mortgage risk of commercial banks. Former PBoC deputy governor Wu Xiaoling on October 30 noted that the implementation of high down payment for other than first housing mortgage is the key to controlling real estate froth and that commercial banks must be aware of such risk.

The reluctance of commercial banks to post the release of detailed rules comes from fears of profit erosion brought on by the New Deal, and they are waiting to observe competitors�responses. Insiders say that the change in interest rates is in effect giving subsidies to home buyers from banks�interest margins. The China International Capital Corporation (CICC) forecasts that the interest rate adjustment will shrink commercial banks�profits by 15% in 2009.

For commercial banks, mortgage loans are high-quality assets, and the non-performing mortgage loan rate is less than 1%, even in Shenzhen where housing prices have plummeted. To attract retail customers, commercial banks will tend to adopt uniform standards in loan stock and interest rates.

However, some note it is best to adopt a conservative strategy now regardless of the standards of horizontal competitive banks. Without profit being generated, the larger the loan, the greater the risk. Logically, new loan growth will offset the negative effects of interest rate reduction with a real estate market rebound. But a week after the release of the New Deal by PBoC, second-hand housing turnover was flat in Beijing, while trading volume decreased in Shanghai. As the New Deal is only a framework policy, and the introduction of local rules will be more meaningful, buyers and sellers continue to wait-and-see.

Property analysts predict that there will be a short-term real estate rebound after November, but most prices will continue to decline in the next six months due to current oversupply. It is possible, some claim, that there will be a warmer spring for the property market from March next year.