Slowing real estate puts high risks on banks

China's property market downturn may pose the biggest threat on profits and asset quality of the country's top-50 banks, Standard & Poor's said yesterday.

"A second wave of credit losses could be building up for China's top banks as the economy continues to slow," said S&P's senior director Qiang Liao. "Although banks' profitability has stayed satisfactory, loan quality continues to slip and capitalization remains under pressure."

He explained that the property downturn could be the biggest risk for banks because their direct lending to property and construction companies is significantly higher than reported, and 30-40 percent of corporate loans in China use property and land as collateral.

"The overall impact of the property market on China's economy is much wider and deeper than what property investment entails," Liao added.

The risks of asset quality for commercial banks in China is at the highest in four years as the non-performing loan ratio rose to 1.16 percent by the end of September, up 0.09 percentage points from the end of June, the latest China Banking Regulatory Commission data showed.

Profit growth of commercial banks in China is set to slow to single digit this year amid economic weakness and keen competition due to financial deregulation.

S&P said the credit quality of the top banks could further veer over the next two years amid a slowing economy, possible policy-driven consolidation across many manufacturing industries, and the push toward financial liberalization.

Smaller banks without a competitive niche are likely to be hardest hit by the weakening conditions, but S&P is confident a full-blown system-wide banking crisis is unlikely.

The National Bureau of Statistics last month said new homes sold nationwide fell 9.9 percent in the January-October period from a year earlier to 4.63 trillion yuan (US$753 billion).