Banks in Shanghai may face combined losses of 5 billion yuan (US$732 million), or 8 percent of their pre-tax profits in 2009, if property prices drop 30 percent, the local banking regulator said yesterday.
The bad loan ratio on individual mortgage loans may rise to 1.58 percent from 0.36 percent in Shanghai if home prices lost 30 percent, the Shanghai Bureau of the China Banking Regulatory Commission said, quoting the so-called pressure test to assess the impact on banks' assets of property fluctuations.
If prices fall, buyers are left paying mortgages on properties they are unable to sell to recoup their investment, raising the risk of loan defaults.
"Even as home prices are under high pressure, banks are facing limited impact of bad loans," the local banking regulator said.
At the end of April, non-performing property loans dropped to 4.69 billion yuan, down 160 million yuan from a month ago. The bad loan ratio on property loans dipped to 0.56 percent from January's 0.72 percent.
The overall sour loan ratio at major banks in Shanghai may increase to 1.41 percent from 1.04 percent under these circumstances, the regulator said.
In April, the State Council, China's Cabinet, raised down-payments on second-home mortgages to 50 percent from 40 percent. An extra 10 percent interest rate must be applied for a second mortgage.
The Cabinet also said that banks can stop offering loans to third-home buyers in places where prices grow too rapidly.
Property loans have fallen in Shanghai in the first four months.
New property loans sat at 40.6 billion yuan, 16.6 billion yuan, 16.3 billion yuan and 15.4 billion yuan respectively for the months between January and April.