Chinese Banks Face Another Blow From Mortgage Refinancing Push

(Bloomberg) — Chinese banks’ profits may take a hit as policymakers urge lenders to lower the refinancing costs on $5.4 trillion of home loans, adding further pressure on the sector to help revive the nation’s flagging economy.

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People’s Bank of China official Zou Lan said during a briefing on Friday that the central bank has encouraged lenders to renegotiate mortgage contracts or extend new loans, a move seen as negative for banks’ margin and earnings by brokerages including JPMorgan Chase & Co. and China International Capital Corp.

Zou’s comments may “open the door for mortgage refinancing” and “eventually lower lending rate for existing mortgage book in China,” JPMorgan analysts including Katherine Lei wrote in a note. “In a worst case scenario that 100% of the mortgage back book is refinanced with a rate reduction of 60 basis points, the impact on 2024 net interest margin and earnings would be -7 basis points and -8%, respectively.”

Shares of Chinese banks have slumped as the sector bore the brunt of government efforts to shore up the embattled real estate sector, including extending loan relief for developers. A Bloomberg Intelligence stock index of the nation’s lenders has tumbled 11% from this year’s high in May, before trading little changed on Monday.

The policy push is likely to weigh on banks’ earnings as net interest margin narrows and loan demand remains tepid. Some Wall Street analysts are also wary of growing risks associated with the debt-laden local government financing vehicles, with Goldman Sachs Group Inc. saying the lenders’ exposure to LGFVs could hurt earnings and lead to lower dividend payouts.

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“Large state-owned banks could suffer a bigger impact given their higher mortgage exposure of 28% of total loans,” CICC analysts including Lin Yingqi wrote in a note. They estimated banks’ net income to be reduced by 9% assuming the interest rates of all outstanding mortgage loans are cut by 70 basis points.

The latest batch of data showed China’s post-Covid recovery lost further steam, with the economy growing at a slower than expected pace last quarter and consumer spending easing notably in June. Home prices also resumed their decline following a brief rebound earlier this year, underscoring deep challenges in reviving the ailing industry.

To be sure, analysts at JPMorgan believe the actual impact on banks from lower refinancing costs “will be smaller” than the worst-case scenario as the brokerage expects less than 50% of mortgages will be refinanced. The development will be a drag on banks’ performance in the near term, but the negative impact “has been partially priced in,” they added.

The outstanding amount of individual mortgages rose to 38.9 trillion yuan ($5.4 trillion) at the end of March, according to central bank data. The PBOC hasn’t yet released the figures for June, but said the overall amount of mortgages has decreased slightly.