Chinese banks' profits may take a hit as policymakers urge lenders to lower the refinancing costs on US$5.4 trillion (HK$42.1 trillion) worth of home loans, adding pressure on the sector to help revive the nation's flagging economy.
People's Bank of China official Zou Lan said that the central bank has encouraged lenders to renegotiate mortgage contracts or extend new loans - a move seen as negative for banks' margin and earnings by brokerages including JPMorgan Chase and China International Capital.
Zou's comments may "open the door for mortgage refinancing" and "eventually lower the lending rate for the existing mortgage book in China," JP Morgan analysts said. "In a worst case scenario that 100 percent of the mortgage back book is refinanced with a rate reduction of 60 basis points, the impact on 2024 net interest margin and earnings would be -7 basis points and -8 percent, respectively."
Some Wall Street analysts are also wary of growing risks associated with the debt-laden local government financing vehicles, with Goldman Sachs saying the lenders' exposure to LGFVs could hurt earnings and lead to lower dividend payouts.
"Large state-owned banks could suffer a bigger impact given their higher mortgage exposure of 28 percent of total loans," CICC analysts said.
