Tuesday 22 November 2011

Loan fears hit Shanghai bourse

Mainland property and bank shares slip after banking watchdog tells lenders to boost supervision of loans to developers and increase provisions for bad loans

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Guanyu said...

Loan fears hit Shanghai bourse

Mainland property and bank shares slip after banking watchdog tells lenders to boost supervision of loans to developers and increase provisions for bad loans

Jane Cai in Beijing
19 November 2011

Mainland property and bank shares fell yesterday after the banking regulator urged lenders to step up supervision of developer loans and increase provisions for bad loans.

The China Banking Regulatory Commission (CBRC) has asked lenders to visit developers more often to better monitor risks and update valuations. The commission said in a third-quarter banking sector report that real estate sales had dropped in some cities, property prices were falling and developers generally faced tight cash supplies.

The Shanghai Composite Index ended down 1.9 per cent yesterday at the lowest level since late October, dragged down by property shares after official data showed that average home prices fell in October for the first time this year. Most bank shares retreated in Shanghai and Hong Kong trading.

The regulator asked lenders last week to step up asset sales and debt restructuring of unprofitable local government financing vehicles (LGFVs), which are struggling to repay loans.

“The Chinese authorities are expected to focus on controlling systemic risks, including those related to private banking and local government finance,” said Huang Yiping, an economist at Barclays Capital.

Problematic developers, LGFV loans and the growing private lending market are the main challenges facing the mainland’s banking sector. Rising bad loans are the unintended result of the nation’s stimulus package after banks helped the government pump massive amounts of funds into LGFVs and developer projects to revive the economy after the global financial crisis.

The private lending market has boomed as tighter monetary policies made it harder for small companies to access bank loans. However, the disappearance or suicide of several borrowers has generated widespread fears about financial stability.

CBRC’s new chairman, Shang Fulin, who replaced Liu Mingkang at the end of October, has adopted a tough stance on loans to developers, asking banks to be “prudent”. Shang urged lenders to increase bad-loan allowances as soon as possible, according to a bank source.

Liu said last week that banks could withstand a 50 per cent decline in property prices.

Economists widely forecast a 20 per cent price drop next year as a result of cooling measures introduced by the central government last year. But they are generally more worried than Liu as downturns in demand for cement, steel and other related building materials will hit banks in a chain reaction, and the value of properties, the collaterals for various loans, will decline accordingly.

At the end of September, the non-performing loan (NPL) ratio of commercial banks dropped 0.18 percentage points to 0.95 per cent over the first nine months, while NPL balance declined 25.8 billion yuan (HK$31.6 billion) to 407.8 billion yuan.

CBRC’s Shang has asked banks to raise provisions and write off losses “as much as they can” to reflect the true level of risks faced by the profitable lenders, according to the source.

Commercial banks’ net profit rose 35.4 per cent year on year in the first three quarters of this year to 817.3 billion yuan.

But Winnie Wu, of Bank of America-Merrill Lynch, said their best days may be behind them as they were unlikely to see profit growth in the next two years if they took proper bad-loan provisions.