China's banks downplay risks after Evergrande misses payments

Developer has 30-day grace period before it is declared a defaulter

Construction under way at Evergrande Cultural Tourism City in Jiangsu province. Reuters
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At least 10 of China’s publicly-traded banks have rushed to assuage investors' concerns over the deepening crisis at China Evergrande Group.

They told investors over the past two days that they had sufficient collateral for loans to the developer and that the risks were controllable.

China Minsheng Banking Corp, which topped the list of Evergrande’s principal banks at the end of last year, said on Thursday that its exposure to the firm had dropped by about 15 per cent from June last year and most of the loans had land, properties or projects under construction as collateral.

China Zheshang Bank said Evergrande's borrowing amounted to 3.8 billion yuan ($588 million). Industrial Bank said it had gradually reduced exposure to Evergrande and fully strengthened risk management on existing business with the developer. China Everbright Bank said its outstanding loans to Evergrande amounted to 5.4bn yuan and the lender had already made provision charges to avoid a major hit in the worst-case scenario.

The world’s most indebted developer’s cash crunch has become a key focus for global investors. Risky assets plunged around the world on Monday amid fears that an Evergrande collapse might spark financial contagion and curb growth in the world’s second-largest economy, where 27 per cent of the loans are for the real estate sector, more than any other industry.

Evergrande missed interest payments due on Monday to at least two of its largest bank creditors, people familiar with the matter had said, taking the cash-strapped developer a step closer to one of the nation’s biggest debt restructurings. Banking shares tumbled on the mainland on Wednesday as China’s financial market opened after a two-day public holiday.

HSBC, one of the biggest international banks in China, has yet to report any direct impact from the escalating problems at Evergrande, chief executive Noel Quinn said at a Bank of America conference on Wednesday. HSBC’s asset management arm has been among large holders of Evergrande debt, along with the likes of BlackRock and UBS. According to data compiled by Bloomberg, HSBC held a little over $200m of Evergrande’s dollar bonds.

Evergrande has borrowed about 572bn yuan from banks and other financial institutions including trusts. Nearly half are due in less than a year, according to its latest financial statements.

“Evergrande’s default crunch and its contagion impact present a potential systemic risk to China’s financial system,” Citigroup analysts led by Judy Zhang wrote in a note. They estimated that about 41 per cent of the banking system assets were either directly or indirectly associated with the property sector by the end of last year and any plummet in property prices may lead to a knock-on effect on banks’ asset quality due to higher default rates in related sectors and lower collateral value.

Chinese banks, with 50.8 trillion yuan of outstanding loans to developers and homebuyers, have already been hit by surging defaults as authorities escalated their curbs on the real estate sector in recent months. These curbs include controls on financing for developers.

In late August, ICBC said that its non-performing loans to real estate companies almost doubled in the first half of the year, while troubled loans to the sector at China Construction Bank jumped by 28 per cent. China Merchants Bank recorded an almost four-fold jump in bad loans to real estate.

The Evergrande financial crisis explained

The Evergrande financial crisis explained
Updated: September 23, 2021, 1:02 PM