China’s four largest banks have been hit by a more than 50% increase in delinquent property sector loans over the past year as the property market’s liquidity crunch spills over to the financial sector.

China’s major lenders – the Industrial and Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China and the Bank of China – announced combined delinquent property loans of Rmb 136.6 billion last week ( 20 billion dollars) at the end of June, compared to 90 billion Rmb at the same time last year.

The increase in bad loans due to the deterioration of the real estate crisis deteriorates the quality of assets in the Chinese banking sector by 367.7 billion yuan. Beyond bad loans, banks are also suffering from weaker demand for loans from their best corporate and retail customers as growth slows in the world’s second-largest economy.

“We see multi-year structures [return on equity] decline as banks pull back from the property sector amid stalled projects, mortgage boycotts and tightened regulations,” Macquarie analyst Dexter Hsu wrote in a note to clients.

China’s “big four” lenders are systemically important institutions and the backbone of China’s financial sector. They are among the largest banks in the world, holding around 36% of the country’s deposits and granting a third of its loans. Beijing depends on the groups to stabilize the country’s economy and trusts them to faithfully implement monetary policies.

The size and relatively stable health of the big four banks have given Chinese authorities confidence as they try to orchestrate a soft landing for failing companies in the real estate sector, which accounts for about 30% of the national gross domestic product.

However, Hsu said that while banks’ loans to developers account for 4% to 9% of their total loans, they are likely to become “the main source” of new non-performing loans over the next two years, driving up credit costs. . for banks.

“We believe that the actual exposure to developers could be much larger than expected, as they have provided credit to developers through proprietary investments and off-balance sheet credits such as wealth management products, fiduciary products, funds private and private obligations,” he added.

Compounding the gloomy picture, economic planners in Beijing have called on state banks to cut profits by offering lower interest rates to prop up homebuyers and businesses. They were also told to set aside more financial support and resources to help deliver unfinished homes.

A senior official at one of the Big Four lenders said the state of the property market meant banks had “no incentive” to increase lending to the sector despite pressure from Beijing.

“Our cost of capital is still too high. We have no incentive to strengthen lending even though the regulator has asked us to do so. The more loans we make, the more [non-performing loans] we will have. The performance of our lending business has declined significantly as NPLs take off,” the person said.

According to the exchange documents, the Agricultural Bank of China and the Construction Bank of China were the most affected, suffering increases in bad loans in the sector of 152% and 97% compared to a year ago, respectively. .

The underlying risks of mortgages, once considered one of banks’ safest assets, are also rising, in part due to the increasing pace of homebuyer defaults, including a boycott of home payments. nationwide on unfinished houses.

At CCB, delinquent mortgages related to the boycott reached 1.14 billion yuan at the end of July, said Li Jun, vice president of the bank. AgBank said it faced Rmb 1.23 billion in delinquent loans affected by the boycott, nearly double its previous estimate three months ago.

Despite the hit real estate sector, China’s largest banks posted modest first-half net profit gains of 4.9-6.3% year-on-year and were still among the most profitable listed companies in China at the end of the month. month of June.