Considering the relatively low proportion of public real estate loans, only four listed banks have public real estate loans accounting for more than 10% of all loans, and 23 banks have a proportion of less than 5%. Moreover, the risk of mortgage loans is relatively low (with a current non-performing loan rate of only 0.3%), and the rise in real estate-related risks has a relatively small impact on the overall non-performing loan rate of the banking system, indicating that banks have ample resources to withstand risks.

Commercial banks' real estate-related business can be divided into two categories based on whether they bear credit risk. Those that bear credit risk are mainly real estate loans and financial investments on the balance sheet, and off-balance-sheet mainly include contingent credit, bank acceptance bills, guarantees, etc. Specifically, real estate loans include land development loans, operational property loans, merger and acquisition loans, and others in public real estate loans, as well as personal housing loans in retail business; financial investments mainly include credit bonds flowing into the real estate industry, commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (MBS), and other asset-backed securities business, as well as non-standard assets such as trusts and securities management plans of securities companies; real estate business that does not bear credit risk mainly includes net value-based financial management, entrusted loans, trust and fund sales managed by cooperative institutions, and main underwriting debt financing instruments, etc.

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Analysis of the scale and structure of listed banks' real estate exposure

The real estate exposure of listed banks is mainly in the form of loans on the balance sheet, with a relatively low proportion of financial investments and off-balance-sheet credit. Due to data availability, Caixin Securities selects banks that disclose relevant data as samples to qualitatively analyze the proportion of various real estate-related businesses in the total assets of banks.

Among the sample banks, by the end of 2023, the scale of real estate-related financial exposure was about 7 trillion yuan, of which the real estate exposure bearing credit risk was about 6.5 trillion yuan, accounting for 14.38% of the total assets of the sample banks; within the real estate exposure bearing credit risk, personal housing mortgage loans were 4.31 trillion yuan, accounting for 36.99% of retail loans and 9.36% of total assets; public real estate loans were 1.63 trillion yuan, accounting for 12.85% of public loans and 3.84% of total assets; the balance of financial investments and off-balance-sheet credit was 549 billion yuan, with an average proportion of total assets of 1.18%.

According to the above statistics, the real estate risk exposure of the sample banks is mainly in the form of loans on the balance sheet, and the proportion of assets bearing credit risk outside of loans (mainly financial investments and off-balance-sheet credit), as well as assets not bearing credit risk, are relatively low, with an average proportion of total assets of 1.17% and 1.32%, respectively. From an industry perspective, there are specific business structure differences among different banks, but there are no order-of-magnitude differences that can affect qualitative judgments. Therefore, the study of real estate exposure of listed banks should focus on real estate loans.

Shrinkage of personal mortgage scale and downward growth rate of public housing loans

According to data released by the People's Bank of China, by the end of the first quarter of 2024, the balance of RMB personal housing loans was 38.19 trillion yuan, a year-on-year decrease of 1.9%, 0.3 percentage points lower than the growth rate at the end of the previous year, and the year-on-year growth rate of personal housing loans has been negative for four consecutive quarters. Affected by changes in the supply and demand relationship of real estate and factors such as early loan repayments, by the end of 2023, the balance of personal housing loans decreased by 630 billion yuan year-on-year, showing a shrinking trend.

For A-share listed banks, by the end of 2023, the balance of personal housing loans was 34.43 trillion yuan (data for Zijin Bank is missing), a year-on-year decrease of 541.715 billion yuan. Looking at the types of banks, the balance of personal mortgage loans for state-owned large banks at the end of 2023 decreased by 518.253 billion yuan year-on-year, except for Postal Savings Bank, which increased by 76.228 billion yuan against the trend, the scale of personal mortgages for the other five major banks all decreased year-on-year; the balance of personal mortgage loans for joint-stock banks at the end of 2023 decreased by 10.905 billion yuan year-on-year, except for Ping An Bank, Huaxia Bank, Zheshang Bank, and CITIC Bank, which increased by 19.125 billion yuan, 3.591 billion yuan, 30.64 billion yuan, and 27.514 billion yuan, respectively, the scale of mortgages for the other five listed joint-stock banks all decreased year-on-year; the balance of personal mortgage loans for city commercial banks at the end of 2023 increased by 12.003 billion yuan year-on-year, with 10 out of 17 listed city commercial banks showing an increase in mortgage scale year-on-year, among which, Ningbo Bank increased by 23.008 billion yuan, ranking first in growth rate. The balance of personal mortgage loans for rural commercial banks at the end of 2023 decreased by 24.56 billion yuan year-on-year, except for the missing data of Zijin Bank, the scale of mortgages for the other nine listed rural commercial banks all decreased year-on-year.

State-owned large banks have a higher proportion of personal housing business. In terms of the structure of personal mortgage loan business, the average proportion of mortgage loans in all loans for listed banks in China is gradually decreasing in the order of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks, which are 24.21%, 14.86%, 12.01%, and 9.73%, respectively.Regarding individual stocks, six banks have a proportion of personal housing loans exceeding 20% of all loans, among which Postal Savings Bank has the highest proportion at 28.69%; eight banks have a proportion of personal housing loans between 15% and 20%; sixteen banks have a proportion between 10% and 15%; eleven banks have a proportion below 10%, with Changshu Bank having the lowest proportion at 5.87% among listed banks.

In terms of corporate real estate loans, joint-stock banks and city commercial banks have a higher proportion, with significant differentiation among individual stocks. According to data disclosed by the People's Bank of China, as of the end of March 2024, the balance of real estate development loans was 13.76 trillion yuan, with a year-on-year growth rate of 1.7%, which is a slight increase of 0.2 percentage points compared to the beginning of the year. However, since 2023, the year-on-year growth rate of real estate development loans has been generally declining against a low base.

For A-share listed banks, as of the end of 2023, the total balance of loans to the real estate industry was 7.39 trillion yuan, an increase of 3.97% compared to the end of 2022. In detail, the balances of real estate loans for state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 4093.8 billion yuan, 2411.1 billion yuan, 73.79 billion yuan, and 14.76 billion yuan, respectively, with year-on-year changes of 253.492 billion yuan, -21.665 billion yuan, 47.834 billion yuan, and 2.655 billion yuan, respectively. The overall balance of real estate loans for joint-stock banks showed a downward trend, while the balances for state-owned large banks, city commercial banks, and rural commercial banks all increased.

Among state-owned large banks, except for Bank of Communications, which saw a year-on-year decrease of 30.777 billion yuan in corporate real estate loan balance, the other five banks all increased; among joint-stock banks, except for Industrial Bank, Shanghai Pudong Development Bank, and China Zheshang Bank, which saw year-on-year increases in corporate real estate loan balance, the other nine listed joint-stock banks all reduced their corporate real estate loans to varying degrees; city commercial banks showed significant internal differentiation, with nine listed city commercial banks increasing their corporate real estate loans year-on-year, and eight banks decreasing; among rural commercial banks, Zijin Bank, Qingdao Rural Commercial Bank, and Chongqing Rural Commercial Bank saw a year-on-year decrease in corporate real estate loan balance, while the other seven banks increased.

Joint-stock banks and city commercial banks have a higher proportion of corporate real estate loans. The proportion of corporate real estate loans among listed banks is 4.59%, among which state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks' corporate real estate loans account for 3.77%, 6.33%, 6.23%, and 5.54% of all loans, respectively. In terms of individual stocks, four banks have a proportion of corporate real estate loans exceeding 10% of all loans, fifteen banks have a proportion between 5% and 10%, and twenty-three banks have a proportion below 5%.

The pressure on non-performing loans for corporate real estate loans is increasing.

Looking at the data disclosed by 22 listed banks, as of the end of 2023, the average non-performing loan ratio for personal housing loans was 0.3%, a slight increase of 0.02 percentage points compared to the end of 2022. In detail, the non-performing loan ratios for personal housing loans of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 0.46%, 0.34%, 0.24%, and 0.27%, respectively, increasing by 0.01 percentage points, 0.03 percentage points, -0.01 percentage points, and 0.07 percentage points compared to the end of 2022.

In terms of individual stocks, the non-performing loan ratios for personal housing loans of four city commercial banks and rural commercial banks were greater than 1%, which may be related to the decline in regional housing prices; seven listed banks had non-performing loan ratios for personal housing loans between 0.5% and 1%, and eleven listed banks had mortgage non-performing loan ratios below 0.5%. Overall, the non-performing loan ratio for personal housing loans is low, and the marginal change is stable, with better asset quality, still being a high-quality asset for banks at present.

On the other hand, the pressure on non-performing loans for corporate real estate loans is increasing, and there is significant differentiation among individual stocks. Looking at the data disclosed by 32 listed banks, as of the end of 2023, the average non-performing loan ratio for corporate real estate loans was 4.8%, an increase of 0.99 percentage points compared to the end of 2022. In detail, the average non-performing loan ratios for corporate real estate loans of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks were 4.9%, 3.4%, 3.23%, and 4.27%, respectively, changing by 0.32 percentage points, 0.6 percentage points, 0.5 percentage points, and -0.65 percentage points compared to the end of 2022. Except for listed rural commercial banks, the non-performing loan ratios for corporate real estate loans of the other three types of listed banks all increased, indicating that more banks are actively exposing risks in the real estate sector.

In terms of individual stocks, as of the end of 2023, four banks had non-performing loan ratios for corporate real estate loans exceeding 6%, all of which increased compared to 2022; twelve banks had non-performing loan ratios for corporate real estate between 4% and 6%, of which ten were national banks, and except for Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and Xiamen Bank, the rest of the banks all had increased real estate non-performing loan ratios compared to the end of 2022.In recent years, with the secular downward trend in the real estate industry, the real estate sector has become one of the industries with the greatest non-performing pressure on banks. For banks with more loan exposure in high-quality areas and core locations, there is a possibility of further risk mitigation; however, for real estate companies facing dual pressures from external financing and internal growth, and banks with insufficient exposure and provisioning in the real estate sector, they may face asset quality pressure in the future, squeezing profits.

At present, the real estate risk exposure mainly comes from the corporate side. According to the above statistics, in the real estate exposure of listed banks, mortgage loans have a high proportion but low risk. The average non-performing rate of listed banks disclosed at the end of 2023 is about 0.3%, which is lower than the overall loan non-performing rate of 1.17%, and the marginal change is stable. Under the continuous promotion of the "ensure delivery" policy, the default rate is low, and it remains a high-quality asset for banks.

The main source of credit risk faced by the banking industry comes from corporate exposure. As of the end of 2023, the average non-performing rate of corporate real estate loans disclosed by listed banks is 4.8%, up by 0.99 percentage points from the end of 2022. In terms of payment order, the risk mortgage of real estate development loans is relatively sufficient, after the "ensure delivery" of homebuyers and the receivables of the supply chain, but higher than unsecured non-standard and credit debts, and its asset quality is highly related to housing sales and the cash flow of real estate companies.

Due to China's unlimited joint liability system for individuals, after the house is auctioned for default, the loan must be repaid first, and the cost of default for residents is relatively high. At the same time, the bank's mortgage loans are mainly for the first house, and the demand for residential housing mainly reflects the autonomous demand for rigid needs and improvement. On this basis, as long as there is no extreme situation such as the risk of default that cannot be delivered or a cliff-like decline in house prices, the probability of a large area of mortgage loans defaulting is relatively limited. Therefore, the core of the asset quality of personal mortgage loans is to ensure delivery and stabilize house prices.

For ensuring delivery, all major provinces and cities have basically established a financing coordination mechanism. Under this mechanism, "white list" projects that meet the regulations have obtained financial support in a timely manner, meeting the reasonable financing needs of real estate companies, and playing a positive role in promoting the completion and delivery of projects, protecting the legitimate rights and interests of homebuyers, and stabilizing the real estate market. Under the real estate financing coordination mechanism, some real estate companies in danger have also benefited. For example, Country Garden, Sunac, Jinke, Greenland, Zhongliang, and others have successively disclosed the situation of their projects being included in the "white list". However, the requirements for "white list" projects are relatively strict, and the requirement that "the pre-sale funds of the project have not been diverted, or the diverted funds have been recovered in a timely manner" means that banks will still mainly use market-oriented methods when lending to specific projects, and the possibility of spreading incremental risks is limited.

According to the disclosure of the State Supervision and Administration, as of May 16, the loan amount of "white list" projects approved by commercial banks has reached 935 billion yuan. As of August 21, there are 5,392 real estate "white list" projects approved by commercial banks, with an approved financing amount of nearly 1.4 trillion yuan. After the "517" meeting of the four ministries and commissions, the speed of the financing coordination mechanism has obviously accelerated. Under the systematic bottom-line thinking and policy coordination and implementation, the risk of default for ensuring delivery is not significant.

For stabilizing house prices, our core concern is how much the decline in house prices will penetrate the balance sheets of residents, that is, the current mortgage loans' tolerance for house price fluctuations. Before the new real estate policy, the down payment ratio of newly issued loans was not less than 30%, so the mortgage ratio LTV (loan balance/house price) of newly issued loans did not exceed 70%. The mortgage LTV of banks decreases with the repayment of residents and the reduction of loan principal, and is also affected by house price fluctuations.

Some banks have disclosed the average LTV information of retail mortgages. As of the end of 2023, the LTV ratio of personal mortgages of China Merchants Bank is 32.93%, the LTV ratio of personal mortgages of Industrial Bank is 43.63%, and the LTV ratio of personal mortgages of CITIC Bank is 39%. Therefore, the current LTV ratio of personal mortgages of banks may be relatively low, and as long as house prices do not decline cliff-like, the safety margin is relatively sufficient.

Banks actively use non-performing asset securities to increase the efforts to remove non-performing loans from the balance sheet. For banks with non-performing asset securitization qualifications, they also use asset securitization methods to remove mortgages from the balance sheet, effectively resolving the risks of mortgage loans. Non-performing loan asset-backed securities are a special type of ABS product, and their underlying assets are subprime, doubtful, and loss loans in the five-level loan classification. Some banks have disclosed the data of personal mortgage non-performing asset securitization disposal, such as China Construction Bank issued 6 personal housing mortgage loan non-performing asset-backed securities in 2023, with an issuance scale of 7.882 billion yuan, and the principal scale of the pool was 16.002 billion yuan. The balance of non-performing loans for personal housing at the end of 2023 was 26.824 billion yuan.

In contrast, the core of corporate real estate loans is the debt repayment ability of real estate companies, and the main source of funds for real estate companies depends on sales repayments. According to the classification of the National Bureau of Statistics, there are seven sources of funds for real estate development investment: domestic loans, foreign capital utilization, self-raised funds, deposits and prepayments, personal mortgage loans, other funds in place, and various payables. Looking at the stages of real estate development, it is mainly divided into front-end land financing, middle-end development financing, and back-end sales repayment.In the realm of front-end land acquisition financing, in 2019, the China Banking and Insurance Regulatory Commission's "Document No. 23" restricted real estate companies from using trust and other non-standard channels for front-end financing. The method of leveraging up to acquire land became unsustainable, leading real estate companies to primarily rely on their own funds for land acquisition during this phase. In terms of mid-stage development financing, during the construction phase of real estate development, financing can be carried out through development loans, merger and acquisition loans, bond issuance, non-standard financing, supply chain financing (such as accounts payable for upstream and downstream construction payments), and other means. On the back-end sales collection side, once real estate companies obtain a pre-sale permit, properties can be pre-sold and funds can be collected through deposits and pre-receipts, personal mortgage loans, and other methods.

According to data from Tonghuashun IFinD, in 2023, the sources of funds for real estate company development investments included domestic loans accounting for 12.24%, self-raised funds (including equity and bond financing) accounting for 32.94%, foreign capital utilization accounting for 0.04%, deposits and pre-receipts accounting for 33.9%, and personal mortgages accounting for 16.86%. With the rise in housing prices and the tightening of financing channels, the proportion of sales collections has generally been on an upward trend in recent years, with the total back-end sales collection ratio reaching 50.75% by the end of 2023. Considering that real estate companies' funding sources still mainly depend on sales collections with less contribution from loans, the ability of real estate companies to repay debts and restore credit fundamentally depends on the stabilization of real estate sales.

Looking back at history, it is known that since 2018, the number of real estate companies defaulting on credit bonds has been increasing year by year, and in 2022, it reached a peak in defaults. However, in 2023, the number of newly defaulted companies for the first time dropped significantly, and the scale of bond defaults in the real estate industry also peaked in 2022, with a decline in 2023, mainly concentrated on companies that had already encountered risks.

So, how does bond default affect the quality of bank assets? A public bond default by a real estate company does not necessarily lead to all loans of the group being classified as non-performing. Banks consider various factors in the identification of non-performing development loans, including overdue time, credit records, repayment capacity, and the value of collateral. Furthermore, under the new asset classification rules, the identification of non-performing assets also needs to consider the industry-wide non-performing and overdue situation of real estate companies (if the industry-wide overdue ratio exceeds 20% for more than 90 days, it must be classified as non-performing).

With the gradual intensification of policies and under the bottom-line thinking, systemic shocks are limited. From 2022 to the present, real estate policies have gradually relaxed, focusing on the supply side, then on the demand side, with policies being implemented intensively, specifically reflected in the supply and demand relationship, mortgage interest rates, financing loans, land market, and property disposal.

In November 2022, the "Financial Sixteen Articles" supported the reasonable extension of real estate company loans, and since then, the three arrows of real estate financing have gradually relaxed. In January 2023, the People's Bank of China proposed the establishment of a dynamic adjustment mechanism for the interest rate policy of first-home loans. In July 2023, the Central Political Bureau meeting set the tone for "significant changes in the real estate supply and demand relationship," and for the first time did not mention "housing is for living, not for speculation," emphasizing the changes in the supply and demand relationship. In December 2023, the Central Economic Work Conference pointed out the need to "treat everyone equally and meet reasonable financing needs." In January 2024, the central bank indicated that for real estate development companies with standardized operations and good development prospects, operational property loans can be issued to repay related loans and public market bonds of real estate development companies. In the same month, the Ministry of Housing and Urban-Rural Development held a meeting on the urban real estate financing coordination mechanism, requiring localities to study and propose a list of real estate projects that can be supported by financing for specific projects, and then emphasized the need to "accelerate the implementation and effectiveness of the urban real estate financing coordination mechanism." In April 2024, the Political Bureau meeting proposed to "coordinate the study of policies and measures to digest existing housing stock and optimize the increase in housing," shifting the policy towards destocking. On May 17, regulatory authorities implemented a number of policy measures, "canceling the lower limit of commercial personal housing loan interest rate policies for first and second homes at the national level," "adjusting the minimum down payment ratio for the first home to not less than 15%, and for the second home to not less than 25%," and "establishing a 300 billion yuan guaranteed housing loan." On June 7, Premier Li Qiang of the State Council presided over the executive meeting of the State Council, once again emphasizing the need to "accelerate the construction of a new model for real estate development."

In the first half of 2024, the industry has not yet shaken off the cyclical downward inertia, and the reconstruction of the supply and demand relationship continues to have a multi-dimensional chain impact on residents' assets, corporate production, and economic development. The basic state of the real estate industry is "destocking and deleveraging." The market adjustment may still have a certain inertia in the short term, but with the advancement of real estate policies, the decline is expected to slow down. In the long term, the 2024 government work report pointed out the need to "improve the long-term mechanism for risk prevention and control and improve the basic systems related to commercial housing." The long-term reform direction of the real estate industry is clear, first, to expand the scale of guaranteed housing construction, ensuring that it runs parallel with the market; second, to carry out basic system reforms for commercial housing, such as the transformation of the pre-sale system to current housing sales, tax and financial system reforms, and accelerating urban-rural integration to release demand. The third plenary session of the 20th Central Committee pointed out the direction of industry development in the next stage, which is "to prevent risks and promote development," leaving relatively ample space for policy optimization and reform to accelerate the construction of a new model.

From the central government to the local level, there is a high-frequency emphasis on maintaining the bottom line of not occurring systemic risks, dynamically resolving risks, ensuring the stability and safety of the financial system, and the prudent and sustainable operation of banks has risen to the level of national financial security, which is related to the overall economic stability. Under the bottom-line thinking, systemic shocks are limited.

Assessment of Listed Banks' Real Estate Risk Exposure

Before external capital supplementation and rescue, the main resources available to banks to absorb losses and resist risks are the balance of non-performing loan provisions, net profits, and excess core tier-one capital. In addition, real estate corporate loans and mortgage loans are generally fully mortgaged. As long as housing prices do not experience a cliff-like decline leading to a significant shortfall in the value of the collateral, non-performing loans can be fully recovered through collection and disposal methods, with a collection recovery rate expected to be no less than 30% under pessimistic assumptions. Based on the performance report for the second quarter of 2024, assuming a non-performing loss rate of 70%, the ability of banks to absorb losses under different scenarios is calculated:Scenario One: Releasing excess loan loss provisions allows the provisioning coverage ratio to fall to the basic standard of 150%. Under this scenario, listed banks can absorb losses of 2.01 trillion yuan, resolving non-performing loans that account for 1.68% of total loans.

Scenario Two: Continuing to use the entire balance of loan loss provisions. Under this scenario, listed banks can absorb losses of 5.21 trillion yuan, resolving non-performing loans that account for 4.36% of total loans.

Scenario Three: Continuing to use the current year's net profit to absorb losses. Under this scenario, listed banks can absorb losses of 6.3 trillion yuan, resolving non-performing loans that account for 5.27% of total loans.

Scenario Four: Continuing to use excess Tier 1 core capital to absorb losses. Under this scenario, listed banks can absorb losses of 11.77 trillion yuan, resolving non-performing loans that account for 9.85% of total loans.

Based on the above calculations, listed banks can absorb a total of 11.77 trillion yuan in losses without relying on external channels. Under the pessimistic assumption of a 70% non-performing loss rate, they can resolve non-performing loans that account for 9.85% of total loans, which is 7.89 times the non-performing loan ratio of listed banks in the first half of 2024.

Considering the low proportion of corporate real estate loans, according to the above statistics, only four listed banks have corporate real estate loans accounting for more than 10% of total loans, and 23 banks have a proportion below 5%. Moreover, the risk of mortgage loans is relatively low (with the existing non-performing rate at only 0.3%), so the impact of rising real estate-related risks on the overall non-performing loan ratio of the banking system is relatively small, indicating that banks have ample resources to withstand risks.

As mentioned above, although banks have ample resources to withstand risks, the uncertainty of the recovery of credit levels in real estate companies will cause disturbances in asset quality, thereby eroding the profitability of the banking industry. Therefore, by calculating and analyzing the potential increase in non-performing loans, we can assess the impact of real estate non-performing loans on the performance of listed banks.

The proportion of corporate real estate loans in listed banks is 4.59%, among which, state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks have corporate real estate loans accounting for 3.77%, 6.33%, 6.23%, and 5.54% of total loans, respectively. Assuming that the non-performing loan rate for corporate real estate increases by 1%, 3%, 5%, and 10% respectively, with a provision for new non-performing loans at 25% and a tax rate of 25%, based on the financial data of listed banks for the year 2023, the negative impact on bank net profits is equivalent to 0.66%, 1.99%, 3.31%, and 6.62% of net profits. Looking at the segments, the risk of corporate real estate loans has a relatively small impact on state-owned large banks, followed by rural commercial banks, while the impact on joint-stock banks and listed city commercial banks is relatively larger.

The central government is clear about not allowing systemic risks to occur, and real estate policies are aimed at exchanging time for space, ensuring that banks can operate safely without worrying about the bottom line. However, the valuation and profitability of the banking sector are suppressed by real estate risks, and it is still necessary to pay attention to the expectations of banks under the marginal changes in real estate. Currently, bank stocks are still in a state of deep discount, and as of September 9, 2024, the price-to-book ratio (overall method) of the bank index is only 0.51 times. Reviewing the trend of the banking sector since 2022, market concerns about the real estate chain are one of the main factors suppressing bank valuations, and the stabilization of the real estate chain is key to the subsequent repair of bank asset quality.