Chinese banks’ earnings at risk as bad debt ratios soar, JPMorgan warns

Chinese bank's earnings may decline by as much as 10% in 2024 if bad debt ratios surge on defaulting developers, according to JPMorgan analysts.

Analysts predicted that the developers' nonperforming loan ratio for banks is expected to rise to 7.5% from 4.5% as of the first half of 2023.

Also read: China Evergrande shares suspended, China may have some learnings from US, India says Uday Kotak

The non-performing ratio may go up to 13% of all privately-owned builders and “low quality” state-owned developers were to go into distressed status, pushing earnings down by 10%, they said.

In a bid to boost demand in the property sector in China, the Xi Jinping government directed large cities to cut down payments for homebuyers and encouraged lenders to lower rates on existing mortgages in August. Beijing had announced that nationwide minimum down payments will be set at 20% for first-time buyers and 30% for second-time purchasers. This has hurt the Chinese lenders' earnings.

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Besides, liquidity issues of the developers and slow debt restructuring progress have also heightened investor concerns over banks’ financial health.

Also read: China property stocks slump; lose $55 billion value as debt woes escalate: Report

Moody's last week downgraded China's property sector outlook to negative from stable, saying weaker growth was impacting homebuyers' spending. The major setbacks faced by Country Garden and Evergrande are further weakening the real estate sector.

China's CSI 300 Banks Index has slumped 10% from a May peak and is trading at just 0.54 times the price-to-book ratio, lower than its regional and global peers.

As per the report, Ping An Bank Co. and China Minsheng Banking Corp. have larger developer exposure and may see more pressure on their earnings.