S&P: The banking industry's capital adequacy is sufficient, and losses on real estate loans are expected to be manageable

S&P Global Ratings today (22nd) released a report titled "China's Banking Sector Can Handle Downward Pressure from Real Estate Risks," indicating that the real estate risks in China's banking sector are not as severe as recent events suggest. Investors are focused on the liquidity issues of China Vanke (02202.HK) (rated SD, or selective default) and the potential chain reactions that could arise from further defaults.

Ming Tan, a credit analyst at S&P Global Ratings, stated that China's banking sector is well-capitalized, and the losses from real estate loans are manageable. Additionally, data from the structured finance market shows that the performance of housing mortgages in China is normal, and non-performing loans have not surged significantly.

S&P noted that under its baseline scenario, while pressures in the banking real estate sector have eased from high levels, they are alleviating, as most risk loans have been identified before they officially become bad debts. The performance of the Chinese economy has exceeded S&P's expectations, and the non-performing loan ratio in banks has also improved.

S&P stated that even with policy support, China's banking sector has remained cautious in providing loans to real estate developers. Lending institutions require additional collateral or guarantees to protect their downside and reduce losses in the event of defaults. This risk mitigation measure explains why, as of September 30, 2025, outstanding real estate development loans have decreased by 1.3% year-on-year. This decline contradicts S&P's expectation that loans would continue to grow after government-driven lending growth in 2024.

S&P also pointed out that reports indicate some banks are selling seized property collateral at significant discounts on auction platforms. This is not surprising, especially in cities with bleak recovery prospects.

Ming Tan stated that if banks have sufficient loan-to-value (LTV) buffers to cope with defaulted loans, they will not suffer significant losses even if seized properties are auctioned. The LTV ratios of collateral for rated banks range from 35% for real estate development loans to 70% for residential mortgages and inclusive loans for small and micro enterprises.

S&P believes that concerns that falling housing prices will lead to a large number of residential mortgages turning into non-performing loans (NPLs) are exaggerated. It does not believe that banks are concealing mortgage default situations. As of September 30, 2025, the non-performing loan ratio for housing mortgages at most Chinese banks is significantly higher than the 0.13% level reported by the Hong Kong banking sector.

S&P stated that domestic demand in China is expected to remain sluggish, and export growth may also slow. However, as actual GDP growth reaches the "approximately 5%" target set by Beijing last year against the backdrop of U.S. tariff reductions, it has raised this year's GDP growth forecast from 4% to 4.4%. At the same time, considering that the number of interest rate cuts in 2025 will be fewer than expected, it predicts that the banking sector's net interest margin will stabilize at 1.29% by 2027, slightly higher than the bank's previous forecast of 1.27%.

The agency believes that the challenges facing the banking sector are not yet over, but the scope of the pressure affecting the real estate industry is narrowing