China's Regional Banks Struggle as Real Estate Market Reels

China's regional banks are selling off non-performing real estate loans amid government efforts to boost the housing sector. By mid-2024, bad industrial loans hit 2 billion yuan, a significant increase from previous years. Smaller banks, heavily reliant on real estate, face increasing financial pressures impacting loan quality and profits.

In the face of a declining property market, China's regional banks are increasingly offloading non-performing real estate loans despite governmental measures aimed at stimulating the housing sector. As of June 2024, non-performing industrial loans at local banks neared two billion yuan—a 5% rise from December 2023 and a staggering 78% increase from 2022 numbers.

On Wednesday, the Bank of Zhengzhou in Henan province announced a deal to sell 10 billion yuan (approximately USD 1.4 billion) in assets to an asset management firm, according to Nikkei Asia. These assets, primarily loans to real estate developers and construction projects, have depreciated to about two-thirds of their original 15 billion yuan value. Consequently, banks nationwide find themselves compelled to sell off non-performing assets to mitigate losses.

Nikkei Asia's report highlights that 31 Hong Kong-listed Chinese banks collectively hold 302.2 billion yuan in bad real estate loans. This marks the first half-year decline since 2021, spurred by the substantial default of China Evergrande Group. Small and medium-sized banks, particularly those in regions heavily dependent on real estate, have sold off substantial portions of their property debt. Real estate conditions are deteriorating, as evidenced by a 0.6% drop in new-home prices in July across 70 major cities, the 14th consecutive month of decline.

Further complicating efforts to improve loan quality is the pressure from authorities to boost lending. The National Financial Regulatory Administration reported that banks' net interest margin hit a record low of 1.54% by the end of June, a drop of 0.15 points since the end of 2023. Jiangxi Bank, located in the southeastern province of Jiangxi, experienced a 48% year-over-year decline in net profit, down to 623.25 million yuan. The bank's net interest income fell by 11%, while impairment losses surged by 50% to 3.67 billion yuan.

Additionally, Jiangxi Bank witnessed a 22% increase in non-performing loans, reaching 8.87 billion yuan by June's end, with bad loans to the property sector nearly quintupled to 1.68 billion yuan in the first half of the year.

(With inputs from agencies.)