October 01, 2024 (MLN): The measures announced by the Chinese authorities in late September to support the economy will likely add to pressure on bank profitability, but it is unclear whether they will be sufficient to address factors that have contributed to weak credit demand, says Fitch Ratings.
The credit rating agency believes the authorities’ planned enhancement of common equity for the six state banks signals their commitment to keeping bank financial metrics stable, enabling these banks to play a key role in supporting the economy.
The package included cuts of 50bp to banks’ required reserve ratios (RRR), 20bp to the seven-day reverse repurchase rate and 30bp to the one-year medium-term lending facility rate.
Interest rates on existing mortgages will be brought closer to new mortgage rates, and down-payment requirements for second homes relaxed.
The People’s Bank of China (PBoC) also announced a CNY500 billion swap facility for securities firms, funds and insurance companies to support equity purchases, among other measures.
Fitch estimates that outstanding mortgages originated between 2018 and 2022 now carry an interest rate of around 4%, suggesting banks could cut existing mortgage rates by around 50bp to align with the weighted-average new mortgage rate of 3.45% in June 2024.
Chinese banks lowered rates for qualifying existing mortgages in August 2023 following regulatory guidance, but the latest announcement could signal greater pressure on banks’ net interest margins (NIM) and profitability if such cuts are implemented at scale.
The scope of mortgages affected remains unclear for now. Assuming 30%, 50% or 70% of existing residential mortgages are affected by a 50bp rate cut, without any corresponding deposit rate cut, estimating the sector's NIM to be compressed by 2bp, 3bp and 4bp in 2025, which translates to a 2%, 3% and 4% hit to net profit, respectively.
The impact would be greater on state-owned banks than smaller peers because of their higher mortgage loan exposure.
The effect of the mortgage rate cuts on NIM and profitability will be mitigated by reductions in RRRs and deposit rates, which will lower banks’ funding costs.
Meanwhile, the plans for capital increase in the six state banks could alleviate pressure on their capitalisation.
Cuts to mortgage rates and the loan prime rate could ease borrowers’ repayment burdens, with a modest positive influence on banks’ asset quality.
The extension of certain regulatory forbearance measures could also lower borrowers’ near-term default risk and delay recognition of non-performing loans (NPLs), albeit at the cost of obscuring underlying loan quality.
The broader effect on banks’ asset quality and credit costs will depend partly on how the stimulus affects property demand and economic growth. Significant obstacles to the housing market recovery remain, including weak consumer sentiment, and lacklustre income and employment prospects.
There has recently been a modest increase in residential mortgage NPLs due to subdued income prospects and property price declines, especially in lower-tier cites.
Fitch-rated banks’ mortgage loan portfolios generally have greater exposure to higher-tier cities than those of smaller regional banks.
The liquidity support for securities firms is unlikely to have a major impact on the credit profiles of our rated issuers.
The scale of funding is limited relative to the market’s free float capitalization.
Moreover, the agency does not think rated Chinese securities companies currently face a funding shortage and Fitch does not expect them to apply aggressively for the PBoC funding given regulatory limits on the size of proprietary trading positions relative to net capital.
Fitch also does not view the measure as signalling an increased policy role for securities companies, so the potential for extraordinary support from their respective parents should be unaffected.
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Posted on: 2024-10-01T13:14:54+05:00
