China Banks Drop Amid Doubts on Property Loans: Street Wrap
Published 24 November 2023, 04:25:26.931 GMT
By John Cheng, Ishika Mookerjee and Xinyi Luo
(Bloomberg) --
Chinese banks providing unsecured loans to qualified developers “would be a risky move,” according to JPMorgan analysts, who said they “have not been able to confirm the speculation with banks.” Some fund mangers and analysts are also skeptical about the impact of such effort.
Chinese financial stocks listed in Hong Kong fall, with China Construction Bank and China Merchants Bank down more than 1.7%. A Bloomberg Intelligence index tracking Chinese property developers fluctuates, after rallying 15% in the previous four days.
ANALYST COMMENTARY
JPMorgan
* Implementation of such regulation “would be challenging, as banks could circumvent such guidance due to credit risk concerns,” analysts including Katherine Lei and Karl Chan write in a note
* “But if such measures were to be strictly enforced (especially if more unsecured loans were provided to distressed POEs), we think it would be negative for banks as it would raise concerns about national service risk and credit risk in the medium term”
* Suggests to short banks and long property if the media reports are true; continuous positive news flow may support property shares in the short-term, but it may not be sustainable
* Although more financing support may be selectively and conditionally provided to private developers, it won’t be a game changer
Kamet Capital Partners
* “We need more details on how potential bad loans flow through the profit and loss of listed banks,” portfolio manager Sze King Chong says, adding that this could be a negative for them
* Because liquidity tends to have a lagged impact on the capital markets, authorities will probably need to over-inject till they see enough market momentum
Farro Capital
* “The details of the support are not clear - how big it will be, who will get the working capital loans and what will be the strings attached; we don’t know the exact details so whether that will put the floor under the crisis, only time will tell,” portfolio manager Hamza Ayub says
* “Who loses will depend on who will be liable for these loans eventually, if banks are the ultimate owners of this liability, then obviously it is negative for banks. However, it could also be that the government will backstop it”
* “It’s possible it’s not a zero sum game if the government takes it on its balance sheet. If it creates enough stimulus, it could more than offset the unintended distressed costs of these loans if it puts a floor under the crisis”
* Aside from the real estate sector, consumers and households could win as their wealth is closely tied to the property sector
Lucror Analytics Pte
* The latest policy move including requesting banks to provide unsecured short-term funding is “a big step forward to support developers,” but “may still not be a game changer to prevent further defaults,” senior credit analyst Leonard Law writes
* The move depends on the extent of funding, the scope of implementation and the willingness of banks to carry it out: Law
* “Banks could remain reluctant to lend to high risk developers in the absence of clear requirements or direct funding from the central government”
CreditSights
* “The authorities are trying all they could to restore the market in China assets as well as consumer/homebuyer sentiment,” senior analyst Zerlina Zeng says
* “This would improve the short-term funding conditions for developers within the ‘white list’ as the banks have likely received liability waivers for extending loans to these developers”
* The non-defaulted privately-run developers would likely benefit, according to Zeng, while the state-linked ones are already enjoying favorable funding, so the marginal impact is more limited
GAM Investment Management
* “The property developer debt issue will be solved sooner or later, in my view. If this measure is not enough, we will see more support next year,” said fund manager Jian Shi Cortesi
* “Solving developer debt issue is a ‘win-win’; the developers on the support list tend to have a liquidity issue but they have more assets than debt on the balance sheet”
* “They could survive the downturn if the short-term liquidity issue is resolved. If you let them go down, that will be ‘lose/lose,’ including for banks”
* Such a move “creates opportunities in markets for property management companies” as they are stable cashflow businesses and some of these stocks have been dragged down by the issue at the parent companies, which are developers
Stocks to watch:
* Banks: China Construction Bank down as much as 1.7% in Hong Kong, China Merchants Bank -3%, Bank of China -1%, Agricultural Bank of China -2%
* Developers: Shimao Group drops as much as 10% in Hong Kong, CIFI Holdings -7.5%, Country Garden Holdings -7.6%
--With assistance from Charlotte Yang and Jeanny Yu.