Chinese bank earnings threatened by early mortgage payments

INTERNATIONAL DESK: Chinese banks are facing a new earnings challenge as growing numbers of homebuyers pay off their mortgages ahead of schedule, threatening lenders with the loss of years of anticipated interest income.

The scale of mortgage repayment activity and the ultimate revenue impact is hard to glean from official data, but anecdotal evidence suggests that it has been increasing in recent months as borrowers cash out of disappointing investments or raise funds by taking out lower-rate business loans.

Bankers are signaling their concern by coming up with strategies aimed at slowing down the repayment rush and keeping mortgages on their books — at least for a little while longer.

“I’ve not heard of early repayment of similar scale before,” said Ding Shuang, chief economist for greater China and North Asia at Standard Chartered. “It will certainly have a negative impact on the banks’ revenue.”

A director at China Merchants Bank in eastern Jiangsu province said there was “an obvious spike in early mortgage payments after Chinese Lunar New Year” in late January. To cope, he said his bank was asking customers to schedule appointments if they wanted to discuss early repayment.

A banker at a branch of China Construction Bank in the southern city of Guangzhou said the lender shut down early repayment functions on mobile phones after a rise in such requests. Customers need to wait “a few months” to book a time slot at a branch so they can make such payments, the banker said.

A 35-year-old employee of an education company in Beijing, who identified herself as Ms. Zhang, told Nikkei Asia that she had been waiting more than two months to repay her mortgage debt of about 2 million yuan ($290,000) even though she had raised the required funds.

Early payments of residential mortgages benefit Chinese banks in the sense that they eliminate the possibility of credit losses. But they also eat into one of the more reliable streams of interest income for lenders.

Such loans are “one of the safest” for banks, Dan Wang, chief economist for Hang Seng Bank China, wrote in a recent blog post for the Financial Times’ Chinese edition. Less than 0.7% of loans to individuals, which include mortgages, are classified as nonperforming, about the same as before the pandemic.

Mortgages in China are typically offered at rates a little higher than the five-year loan prime rate (LPR). The five-year LPR has fallen from 4.8% in late 2019, when Chinese authorities were trying to cool off an overheated property market, to 4.3%, bringing mortgage rates down, too.

As a result, borrowers with older mortgages pay higher interest rates than those with more recent loans. “People feel it’s unfair,” said the director at the China Merchants Bank branch in Jiangsu province.

Borrowers have been responding by using a variety of strategies to pay off their mortgages.

Some are redeeming wealth management products, which lost value last year as COVID-19 restrictions held down economic activity. Zhang, the education company employee, said the “poor performance” of her investments was one of the factors that prompted her to cash out and repay her home borrowings.

Others repaying their mortgages take out lower-rate loans meant for other purposes, such as business expansion, even though Chinese authorities forbid such activity.

These borrowers are taking advantage of Beijing’s efforts in recent years to encourage banks to lend to small- and medium-size businesses. Since big banks dominate the mortgage business, smaller banks have been competing aggressively for business borrowers, pushing down rates.

A banker at a Rural Commercial Bank’s branch in the city of Foshan told Nikkei Asia that the bank offered loans for business purposes to individual consumers at an interest rate lower than 4%.

Banks do not publish early mortgage repayment figures, but overall mortgage balances slipped from 38.9 trillion yuan ($5.67 trillion) at the end of September to 38.8 trillion yuan at the end of last year, according to the People’s Bank of China.

Meanwhile, average home prices in 70 major Chinese cities have fallen year-on-year for 10 months straight, starting in April 2022, the National Bureau of Statistics says.

“People who buy houses as an investment have disappeared utterly in the past two years,” said a sales agent surnamed Luo who sells apartments in Guangzhou’s suburbs. (NA)