Source: CICC Monetary and Financial Research
We believe that the recent increase in financial support for housing enterprises can ease the liquidity pressure on high-quality housing enterprises to a certain extent, but under the principles of “normal operation” and “marketization and rule of law,” loan investment is not “bottomless bailout,” but is based on the bank's substantive judgment on risk. We believe that promoting the stabilization of housing price expectations and the recovery of sales is the key to mitigating real estate financial risks. In addition to countercyclical financial policies (including credit support, interest rates, and down payments, etc.), securing buildings and stabilizing confidence through fiscal and quasi-fiscal methods is also conducive to improving the credit of housing enterprises. For banks, stabilizing the real estate market will help improve asset quality expectations, especially stock banks with a high share of development loans and major state-owned banks with a relatively high share of mortgages.
Financial support for housing enterprises has been further strengthened. Recently, the financial supervisory authorities held a symposium on financial institutions to further strengthen financial support for real estate policies, with special emphasis on support for private housing enterprises; several banks have held housing enterprise symposiums to support real estate companies' reasonable financing needs. Specifically:
1) Encourage increased investment in real estate loans. The financial institution symposium mentioned “do not hesitate to borrow, withdraw, or cut loans to real estate enterprises that operate normally”. Compared with the “don't hesitate to borrow, cut loans, and pressure loans” at the April 2022 financial symposium, more emphasis was placed on encouraging new issuance; it mentioned “two unwavering” and “treating them equally”, and placed more emphasis on support for non-state-owned housing enterprises.
2) Regarding loan forms, the symposium mentioned “meeting the reasonable financing needs of real estate enterprises”. Compared with “meeting the reasonable financing needs of real estate projects” and “distinguishing between project subsidiary risks and group holding company risks” in November 2022, the “Action Plan to Improve the Balance Sheet of High Quality Housing Enterprises” and the “Action Plan to Improve the Balance Sheet of High Quality Housing Enterprises” mentioned that “research banks will provide loans to high-quality housing enterprise groups to reasonably meet the liquidity needs of the group level”. Previously, it was stipulated that loans to housing enterprises could only be issued through development loans, not through liquidity Issuance of capital loans. Currently, due to strict regulations on pre-sale funds, the liquidity capital of housing enterprises is relatively tight. If liquidity restrictions are moderately relaxed, it will help improve the liquidity of housing enterprises, but since working capital generally lacks clear corresponding items, banks need to consider the credit status of the principal in issuing banks.
3) For specific support targets, the supervisory authorities drafted the “Action Plan to Improve the Balance Sheet of High Quality Housing Enterprises” at the beginning of the year, referring to the concept of “high-quality housing enterprises”. The standard is “focus on the main business, compliant management, good qualifications, and a certain degree of systemic importance.” Then, the central bank press conference mentioned that “there is no specific list of conditions for high-quality housing enterprises, and financial institutions can independently control them.”
We believe that the specific target of support depends on the bank's independent risk control, the credit status of housing enterprises, project quality, collateral, etc., and the supporters mentioned at the symposium are also “real estate enterprises operating normally,” so they may still be relatively cautious about supporting housing enterprise banks that have already taken risks and are not operating normally.
What are the results of financial support for housing enterprises? Over the past two years, the policy has introduced a series of financial policies from the supply side (support for public real estate) and the demand side (lowering mortgage interest rates and down payment ratios, abolishing purchase restrictions, and “housing approval without approval of loans,” etc.). At present, the growth rate of bank development loans has stopped falling and stabilized, but new loans are still not strong due to the small amount of land acquired. Banks are cautious about risk appetite for insured housing enterprises; negative mortgage growth is mainly hampered by weak residents' demand for home purchases and high early payments; and credit financing for housing enterprise entities is still weak. Specifically:
1) Funding sources for housing enterprises: As of the end of October, we estimate that sales payback accounts for 55%, loans from financial institutions account for 12%, and self-financing capital (including equity and bond financing, etc.) accounts for 33% of the sources of capital for housing enterprise development and investment. We estimate that since July 2021, funding sources (TTM traffic) for housing enterprises have declined by 8 trillion yuan (down 39%) from the highest of 21 trillion yuan. Among them, sales payback, loans, and self-financing have declined by 4.6 trillion yuan (39%), 1.0 trillion yuan (39%), and 2.4 trillion yuan (down 36%), respectively. The gap in declining sales repayment is the most obvious. Considering that the capital sources of housing enterprises still mainly rely on sales repayment and that loan contributions are low, we believe that the credit recovery and loan repayment of housing enterprises are fundamentally dependent on the resumption of sales.
2) Real estate loans: As of 3Q23, the balance of real estate loans (including mortgages and public real estate) increased by -0.2% year on year. Among them, the balance of development loans increased by 4.0% year on year and mortgages decreased by 1.2% year on year. The negative growth in real estate loans was mainly dragged down by mortgages. The year-on-year decline in mortgages was mainly due to residents repaying loans in advance; the year-on-year growth rate of development loan balances rebounded from -0.4% in 1Q22 to +4.0% in 3Q23, showing a clear recovery; development loans had a net increase of about 0.5 trillion yuan in the first three quarters of this year, a slight increase of about 0.1 trillion yuan over the same period according to a comparable scale, indicating that development loan growth has stopped falling and stabilized under the policy of “no withdrawal, continuous loans”, but due to the decline in the scale of land acquisition by housing enterprises, banks are still not strong. Risk appetite remains cautious. We believe that the growth of mortgage loans depends on residents' home purchases and early payment behavior. Residents' home purchases are affected by housing prices and income expectations. The main factors to consider in early repayment are interest rates on existing mortgages and the return on investment in financial products. According to the central bank's monetary policy implementation report for the third quarter, as of the end of September, the average reduction in stock mortgages of more than 22 trillion yuan was 73 bps (our estimate is equivalent to an average reduction of 42 bps for all stock mortgages), and the adjusted average interest rate on mortgages was 4.27%, which is expected to reduce early payment, but compared to the current expected return of fixed income investment products (average of about 3%-4% for debt and bank management, less than 3% for deposits), it is still not low, and the early repayment rate may be difficult to drop drastically.
3) Credit bonds: We estimate that the net financing scale of domestic bonds of housing enterprises once again turned negative in September-November this year. The financing of foreign bonds of housing enterprises has continued to be negative since the second half of 2021, showing that the credit conditions of housing enterprise entities are still weak, especially for non-state housing enterprises.
The financial support of Baojiao Building is progressing. 1) In 2022, the central bank launched two batches of special loans totaling 350 billion yuan to support the sale of overdue projects. The capital has been gradually implemented. For example, in February this year, Henan Province proposed the goal of delivering all of the first batch of special loan projects by the end of October and 50% of the second batch by the end of the year; 2) In 2023, it launched a 200 billion yuan “insurance building” loan support plan for six commercial banks to provide zero-cost capital support to commercial banks, but as of the end of September, the balance of this instrument was only 5.6 billion yuan; 3) The balance of the instrument was only 5.6 billion yuan; 3) The balance of the instrument was only 5.6 billion yuan; 3) The balance of the instrument was only 5.6 billion yuan; 3) the five national CAM800 million projects were launched Housing enterprises bailed out special reloans to support mergers and acquisitions of stranded real estate companies' projects, but as of the end of September, the balance of this instrument was still 0. Overall, since there is a certain risk of repayment in the bailouts of buildings and housing enterprises, commercial institutions are still more cautious in participating because they rely more on the support of policy financial institutions. Judging from the results, according to statistics from the Ministry of Housing and Construction up to the beginning of August, the “Baojiao Building” special loan project has delivered more than 1.65 million housing units, the overall resumption rate is close to 100%, and the housing delivery rate for the first batch of special loan projects is over 60%. Thanks to the policy support of Baojiao Building, the completed area of housing in the country increased 19.3% year on year by October, which is significantly better than the situation of new housing construction and sales area (down 3.7% and 23.6% year on year, respectively). We expect that the insurance exchange building will continue to advance steadily next year. For projects with insufficient remaining value and relatively high risk, more policy financial support will need to be provided by fiscal and policy banks. Commercial banks will provide supporting financing in accordance with the “Financial Regulations 16,” based on the principles of marketization and rule of law, while clarifying the sources of repayment.
Bank housing exposure estimates. From the perspective of financial institutions, we estimate that in the scale of real estate-related financial exposure up to the third quarter of 2023, bank account for 16% of the total assets of commercial banks, of which real estate loans account for 27% of bank loans; out of total financial exposures, personal housing mortgage loans account for 19% of bank loans, accounting for 64% of total financial exposure; we estimate that exposure to public finance accounts for 36%, of which loans to public real estate account for 7% of bank loans (see “Bank Real Estate Exposure Again”). Furthermore, we estimate that mortgages account for about 39% of loans from listed banks. Real estate is the most important collateral. Among them, non-mortgage mortgages account for about 16% of all loans. Fluctuations in real estate value may also have an impact on corresponding loans. From the perspective of housing enterprises, as of the end of 2022, the total debt of real estate development enterprises was 89 trillion yuan; in terms of debt structure, according to the central bank's statistics on 50 housing enterprises, public finance debt accounted for 31% (14% for development loans, 9% for domestic and foreign bonds, 8% for non-standard), upstream and downstream advances accounted for 30%, personal housing prepayments accounted for 32%, and delayed payment of taxes and fees accounted for 7%.
How to understand housing-related exposure risks? Mortgage loans account for a relatively high share of financial institutions' exposure, but the risk is low. The non-performing mortgage ratio of listed banks in the first half of 2023 was about 0.5%, which is significantly lower than the 1.6% non-performing ratio of all loans. Considering that the macro-debt level of Chinese residents is not high, mortgage LTV has a high margin of safety for assessed price reductions (see below for specific estimates), and “guaranteed housing” and deferred repayment policies, the risk of mortgage default is low, but we need to be wary of the tail risks of off-balance bank leverage, such as private loans and guarantees in the relatively low transparency of the residential sector; housing-related credit risks mainly come from exposure to the public. At the end of 2022, the bad rate of bank real estate loans on public loans is about 4.4%. In terms of payment order, development loan risk collateral is sufficient, and the order is higher than that of unsecured and non-standard loans Credit bonds, but buyers “insure the property” And after supply chain receivables. If the recovery in real estate sales is slower than expected, there may still be some pressure to repay development loans. If the cash flow of housing enterprises recovers better, the relevant debts can be repaid. For non-mortgage loans (including personal business loans, small and micro enterprise loans, etc.), fluctuations in collateral value may cause banks to require additional collateral or reduce risk exposure. Asset quality depends on the entity's operating cash flow, debt pressure, etc.
The impact of bond defaults on asset quality. The assessment of bad bank development loans takes into account a variety of factors, including whether bank development loans are overdue, repayment ability, collateral value, project sales and construction progress, etc. Under the new asset classification regulations, it is also necessary to consider the poor and overdue conditions of housing enterprises in the bank and the entire industry (the bank's non-performing ratio of more than 10% or the proportion of the industry overdue for more than 20% for 90 days must be considered bad, see “Interpretation of Financial Asset Risk Classification Methods”). Therefore, a housing enterprise's public bond default does not necessarily cause all of the group's loans to be classified as bad; banks need to consider the actual repayment situation, etc., to make a determination. If they are based on the principle of prudence, they may consider the relevant loans as a category of concern. Furthermore, the “16 Financial Rules” introduced in November last year and extended in July this year stipulate that stock housing enterprise financing due before December 31, 2024 is allowed to extend beyond the original regulations for 1 year without adjusting the loan classification. Therefore, stock development loans can also slow the impact on asset quality through extension, “time for space.” In the long run, the asset quality of exposure to public finance depends on the real estate sales situation and the extent to which the credit level of housing enterprises has recovered. If the degree of recovery falls short of expectations, it may eventually be determined that it is still bad and corresponding provisions are made.
Quantitative estimation of the impact of housing-related risks. As mentioned above, although short-term housing exposure credit risk may not be directly reflected as a deterioration in bank asset quality, considering the uncertainty of long-term housing companies' credit level recovery, we calculate the impact of potential losses on net profit through sensitivity analysis. The static assumption is that listed banks account for 6% of public real estate loans, 24% for mortgage loans, 5%/0.5% for public real estate and mortgage loans, respectively, and loss rates for public real estate loans and mortgage loans are 70%/50%, respectively. The corresponding losses are estimated to be equivalent to 13% of the net profit of listed banks and 1.5ppt of ROE. It is worth noting that banks have made sufficient provisions for existing failures based on prudential principles, so the above calculation does not represent an actual impact on bank profits.
Bank real estate exposure analysis. We believe that the recent round of financial support for housing enterprises will ease the liquidity pressure on high-quality housing enterprises to a certain extent, but the requirements of “normal operation” and “the principles of marketization and rule of law” mean that the relevant support is not a “bottomless bailout.” In fact, loan investment is still based on the bank's substantial judgment on risk. We believe that stabilizing confidence in the real estate market, particularly promoting the stabilization of housing price expectations and the recovery of sales, is the key to mitigating real estate financial risks. In addition to countercyclical financial policies (including credit support, lower interest rates, and down payment ratios, etc.), securing buildings and stabilizing confidence through fiscal and quasi-fiscal methods is also conducive to improving the credit of real estate entities. For banks, stabilizing the real estate market helps improve asset quality expectations, especially stock banks with a high share of development loans and major state-owned banks with a relatively high share of mortgage loans.