S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining S&P Global Ratings live webinar and Q&A today titled China Banks: Impact from Lockdown, Property Development and Other Pressures. My name is Ming Tan, Director and Lead Analyst for China Financial Institutions Ratings, and I'll be moderating this webinar. Before we begin, let me take you through the web console on your screen and some housekeeping notes. This webinar comes with audio and presentation slides. You can submit questions at any time via the Q&A box on the left-hand side of your screen. Also on the left is the resource bar where you can download a copy of the presentation, along with related research, published by us. Additionally, we invite you to complete a short survey at the end of the webinar. We would love to hear your feedback to help us continue shaping relevant content for you. Please also note that this presentation is not intended for and must not be distributed to retail clients in Australia. Finally, some of our speakers are participating in this webinar remotely, as many of you probably are, too. So please excuse any unforeseeable technical disruptions during this live session. If you face any technical issues, please let us know via the Q&A box. Now joining me today at this webinar are my colleagues from the FI Ratings team. They are Phyllis Liu, Director; Yiran Zhong, Director; and Xi Cheng, Director. Phyllis will first give a presentation on our recent China BICRA changes and updated views on asset quality, potential downside scenario and risk in property and small business lending. Yiran will then give a brief update on the securities firms in China. And Xi will lastly take us through the impact of BICRA changes on the Chinese finance companies before we go to Q&A. Now without further ado, I shall now hand over to Phyllis to kick off today's webinar. Phyllis?

Thank you very much, Ming. While S&P Global Ratings have recently revised the economic risk trend on Chinese banking sector to stable from positive, in the meanwhile, we also revised the outlook on 3 China-based banks, including Bank of Communications, China CITIC Bank and China Minsheng Bank. The revision on the economic risk trend is mainly because the tough COVID restrictions in China, along with some other domestic and actual factors, have dampened the improving trend in loan quality of the country's banking sector. While supportive financial policy could alleviate some of this burden, the spread of the virus is difficult to predict and the tough COVID restrictions, including city lockdowns, could take a further toll on the slowing economy. Well, in the next couple of slides, I'm going to touch on the key risks that hurt the recovery of Chinese banking in turn, such as the COVID restrictions, property crackdown and small business pressure. Despite those negative factors and uncertainties, we still believe that Chinese banks as a whole have sufficient buffers to weather an economic downside. Can we go to the next slide. First of all, China's dynamic zero-COVID policy, while it protects life, is hurting the economy. From an industry angle, despite the improvement of reported asset quality in Chinese banking sector last year, we believe that a new wave of forborne loans will be carried out this year given China's tough COVID restrictions, most notably the recent lockdown in Shanghai. We estimated the new forborne loans to reach about RMB 1.1 trillion this year, roughly 0.6% of the sector's total loans. The damage to the loan quality due to Shanghai lockdown will ripple beyond Shanghai as it is a hub for commerce and finance, high-end manufacturing and logistics. Although the city is gradually reopening recently, the disruption of global supply chain and transportation can also gradually recover. It will take even longer time for the confidence of consumption to recover. In our base case, when China's GDP growth rate is 4.2% in 2022, our projected nonperforming asset ratio will worsen to 6.5% by end of this year. Our nonperforming assets include nonperforming loans, forborne loans and a portion of special mention loans. The pressure on asset quality largely stemmed from the stressed property sector and the loans to the MSE, i.e., the micro and small enterprises. Well, I'm going to cover these 2 particular segments in a bit more detail later on. Can we go to the next slide. Well, in our downside scenario if the restrictions on people's mobility are extended to another economically important city, China's GDP growth rate could fall further to 3.5% this year. In that case, we estimate the sector-wise NPA ratio to reach to 7.3%, a similar level to 2020 at the onset of the pandemic. Nevertheless, we still believe that the banking sector should withstand the downside scenario as we expect the sector on average has sufficient buffers given its long-held conservative provisioning coverage. However, the polarization of the sector will intensify, i.e., weaker and more aggressive banks could face more risk. Can we go to the next slide? Well, in terms of the property segment, in our view, stresses in the property development loans remain elevated with an L-shaped recovery. Although the policy crackdown on China's residential housing market has bottomed, it will take at least a few quarters for the regulatory easing to feed through to the physical market. We now believe that 40% of the property developers were in financial trouble at the end of last year, higher than our previous estimate of 1/3. Property development loans account roughly 6% to 7% of the total loans in the banking sector with smaller banks typically having a higher percentage. However, the reported NPL ratio for this sector was only 2.6% at the end of last year. We believe that this number does not fully reflect the underlying risk of the segment as the majority of the stress is still captured in special mention loans or even in normal loans. We estimate that the sector NPL ratio to continue to rise to 5.5% by end of this year before improving next year. Our estimates take account of the spillover stresses from last year and continued loan reclassifications into the weaker categories. Can we go to the next slide. Lastly, in terms of the MSE segment, we believe that this segment is hit hardest during the economic downturn as their profit margins are squeezed by weaker domestic demand and higher input costs due to the high commodity prices. We project the NPL ratio for the MSE segment to continue to increase in the next year, and this segment will also drive the most of the new forborne loans. MSE lending accounted for more than 10% of the banking loans in China, and their share has grown quickly under the policy guidance. The regulator also pushed the banks to increase the proportion of unsecured lending to this segment, which could also result in higher write-offs for the segment in the future years. Well, that's all about my part. Now I will hand over to my colleagues. Thank you.

Thank you, Phyllis. This is Yiran. Hi, everybody. Moving on to the next slide, please. Let me just provide a brief update on the Chinese securities firms anchor as we've recently affirmed the anchor rating for Chinese securities firms at BB with stable trend. While the Chinese securities companies are also exposed to the economic slowdown highlighted by Phyllis just now, we think that the direct impacts from higher credit risk in the economy is less prominent compared to that on banks. And on the other hand, we continue to think that the securities firms remain exposed to risks associated with their more prominent exposure to the equity market as compared with banks. So we knew that these factors are sufficiently reflected in the current anchor level for Chinese securities firms, which is one notch below that for the banks. And with that, there is no direct rating impact in our rated portfolio for the securities companies. I'll pass on to Xi for an update on the anchor for the Chinese finance company.

Thank you, Yiran. Thank you, Phyllis. Thank you, everyone. So this is Xi. I'm going to talk about the China finance companies, or in short, finco. We now see limited prospect to the finco anchor in China, and we have revised the trend on the anchor from positive to stable. This follows the economic risk trend revision in China, and we believe that Chinese finco sector faces similar economic risk with the banking sector. This trend revision does not bring direct rating actions in our portfolio. This is mainly because most of the rated fincos are subsidiaries of state-owned enterprises, including bank and non-FI groups, and those subsidiaries benefit from very high parent support. Nevertheless, the revision could reduce the upgrade prospect for companies whose issuer credit ratings are sensitive to their standalone credit profile, of which the single anchor is a part. As such, we adjusted the upside scenario for Far East Horizon, a leasing company in our portfolio. Now the company needs to maintain a higher capitalization ratio of over 10% sustainably to be considered for an upgrade. We also revised the outlook for 3 leasing companies, which is -- which are BOCOM Financial Leasing, BOCOM Leasing Management Hong Kong and Minsheng Financial Leasing to stable from positive to be aligned with their banking group because those companies are deemed as core subsidiaries of the respective banking groups. So this is a quick summary of the adjustments we have made to the fincos following our outlook change on China's credit conditions. I'm happy to discuss any detail in the Q&A session. Over to you, Ming. Thank you.

Thank you, Xi, Yiran and Phyllis. We are now going to turn to the questions submitted from the audience. I would like to remind the audience that you can send us questions any time throughout this session via the Q&A box on the left side of your screen. Given there's quite a fair bit of presubmitted questions over the last few days and there are some overlapping questions among the presubmitted ones, I've split up some of the questions and grouped them with others. So let's go through the first question. Now the first question we have here is what impact does lockdown policy have on the bank business. So maybe, Phyllis, can you help to answer this one?

Sure. Thank you, Ming. Well, this is a really big topic. Well, a direct impact on the lockdown policy that we can see is the pause of economic activities that will result in weaker loan demand, and this also disrupt the bank's original planned lending pace. However, what we feel more concerned is that the continuing shutdown of cities and towns will ultimately hurt the economies, and thus, it hit the borrower's financial health and repayment capability. This will add more pressure to the bank's asset quality and profitability. In our base case, our projected NPA ratio will worsen to 6.5% by end of this year when the GDP growth rate revised to 4.2%. Maybe let's take Shanghai lockdown as an example. Shanghai makes up 7% of China's GDP and 6% of commercial bank loan nationally. What is worse? The damage to the loan quality will ripple beyond Shanghai, given Shanghai is a hub for commerce and finance, high-end manufacturing and logistics. To help with the situation, PBOC Shanghai branch actually announced the loan forbearance measures in April this year. We believe that a new wave of forborne loan will be carried out national-wide given China's tough COVID restrictions. And we estimated the new forborne loan to reach about RMB 1.1 trillion this year, so roughly 0.6% of the sector's total loans. In addition, more supportive financial policy are likely to come out later this year to help alleviate the burden of the economy as well as the banking sector. The overall impact will still take some time to see. Back to you, Ming.

Thank you, Phyllis. Just to supplement here. Now besides the loan demand being weakened, it also does mean that rate cuts are being less effective. So this does create some pressure on the system. Now the next question is what measures could banks take to avoid such impact? Maybe, Xi, can you help to take this one?

Yes. Ming, thank you. I suppose such means the lockdown restrictions. So actually, what we have observed that is that the most imminent impact of the lockdown measures is the disruption of operations. And we also hear from financial institutions deepened digital transformation so that without client facing, operations won't be stopped. And this is especially important for corporate banking business, where some banks so far are not so digitalized yet and some key steps still require face to face [indiscernible]. So for personal banking, this is less of an issue because over 90% of the services can be already realized through mobile banking. So that will be a short answer. Thank you, Ming.

Thank you, Xi. Maybe I can also supplement here. Now on the demand side, the banks are also trying to balance the risk-reward equation here. They are definitely directing loans to some of the policy-favored segments like small business lending and green finance, where preferential central bank policies, such as targeted RRR cuts and relending funds, for instance, this help the banks to lower their funding costs. On the property side of things, banks are also working with local governments through debt committees to ensure that the property projects are completed. So unlike what we see, we've developed bonds at the project level. Debts are still being serviced off escrow funds, for instance. So the picture may not be as dire as what the bond prices are suggesting. Over to the next question. Which industry sector is most likely to be impacted. Maybe, Xi, can you take this one again?

Yes. As Phyllis also mentioned, lockdown disrupt business and also consumer activities. So in our view, sectors that require physical presence will be mostly impacted. This includes, for example, dining and entertainment, logistics, retail and tourism and also, to some extent, transportation. For example, in Shanghai, where we had multiple weeks of restrictions and they just got released like recently, those sectors together account for about [ 15% ] of total loan balance by our estimation. So apart from that, the lockdown measures may also delay the recovery of the property market. This is because when the restrictions are implemented, people cannot go to see the house and new apartment sales can also be slowed down. And in terms of client type, I would think that micro and small businesses are the most vulnerable to stresses such as the lockdowns and also commodity inflation. This is because those MSE businesses have weaker pricing power [ and ] margin. And also, they have limited financial resources to withstand those operation disruption. Weaker consumer activity and also confidence of the consumer and also weak demand could also weigh on revenue generation going forward. Yes, that's all. Thank you.

Thank you, Xi. This question we have is how does S&P interpret the regulatory guidance for credit easing? And how do we quantify the impact and weight the pros and cons from a credit perspective? Xi, can you take this one?

Yes. So in terms of credit easing, actually how we quantify the impact. For our analysis, we actually factor in loan size growth in 2022, which is quite similar to the level in 2021. This considers the regulator's guidance to maintain a relatively high credit expansion in 2022, which was already expressed at the year beginning. And after that, we actually see some volatility in loan growth year-to-date. January was quite strong, and then February down and this is partially also due to the Chinese New Year holiday impact. And then March up again. And then in April, we saw a sudden drop. That was actually meeting market expectations. So the Central Bank explained that the sharp drop in April was due to the pandemic impact in some areas and also the lockdown restrictions, combined with increasing commodity prices. Due to those factors, corporate, especially the small companies, experiencing some operational difficulties and also the demand was weakening. So after that, in May, PBOC and also CBIRC organized a meeting with the largest Chinese banks, I think, more than 20 of them, and encouraged them to speed up the credit granting. In addition to that, we have also been a continuous decrease in the lending rates along with the LPR decrease. So all of those policies should decrease corporate financing costs, increase your accessibility to credit resources and also help them [ flow ] during the uncertainties from both domestic and actual changes. We expect those policies and the others on the property sector and also the fiscal policies, such as the tax reduction, to support the economic rebound. Nevertheless, there may be a time lag between the policy implementation, and finally, when the market confidence can come back and also the economic recovery. So during this time, I think banks will not be so easy actually because, on one hand, they need to weigh in risk appetite and also be more selective on the transactions in an economic slowdown to manage the credit risk. But on the other hand, the weak loan demand from both the operations coverage and also the consumption makes it actually increasingly difficult to find good assets and projects. So from the credit perspective, going forward, we need to monitor the economic growth and how the policy guidance and implementation will finally translate into loan growth numbers in the following quarters. It's not only about the total growth numbers, but also about the growth structure such as how much of the proportion coming from the mid- to long-term loan and also how much is the discounted bill, how much is the manufacturing, et cetera. In addition, we also expect the credit divergence between the big banks and small banks to continue. Yes. That will be all from my side. Thank you, Ming.

Thank you, Xi. Maybe I can also supplement a little bit here. To some extent, we think that the regulators are navigating a tricky environment here. As mentioned earlier, rate cuts are constrained by rising interest rates globally, potential capital outflows and inflation. At the same time, as mentioned by our speakers, demand is weak and hampered by COVID restrictions. So we do think that the regulators are quite realistic and not flooding the system with liquidity. Lending has been directed to segments that are most in need. We expect China's private sector debt-to-GDP to rise 5 points to 190% this year. But the government's longer-aim target is to actually align it with normal GDP growth. So we could improve our view of economic risk for the Chinese banks if the government shows a track record in keeping the macro leverage ratio stable. At the bank level, as Xi mentioned, some asset quality risk has been pushed back and banks are also derisking, which manifests in more lending to government and infrastructure projects as well as discounted bills. And the flip side of this, however, is that the NIM and profitability is under pressure. Now going to the next question, which I would take is this one, which is do we see more downside risk? It seems like the market has already priced in worst-case scenario with the big 4 banks trading at 0.4x price to book. Now as for this question, from our perspective, it is quite difficult to say that the worst is over now given that the virus and infections are quite difficult to predict. Our economies have a GDP downside scenario of 3.5% if another important city is locked down like Shanghai. So we do have to wait for the pandemic to be over and observe that the asset quality has stabilized and for bond loans are being cured before we can be really confident that the worst is over. So that's a short one from me. The next question we have actually comes in 3 parts, so I'll split this up. The first part is what are the Chinese regulators' main focus these days? Maybe, Phyllis, can you help and take this one?

Sure. Thanks, Ming. We actually observed that the regulatory tightening has been softened these days, right? And the economic downturn regulator is encouraging the bank to enhance their support to the real economies while maintaining the stability of the system. Therefore, on one hand, we can see that the regulator is encouraging the banks to speed up their lending pace, particularly pushing lending to MSE segment. In addition, a new round of forbearance policy is carried out for micro small business for sectors and cities that are disrupted by the COVID-related lockdowns. However, on the other hand, the regulator still requires the bank to improve their quality of expected credit loss model, the ECL model, strengthening loan quantification, enhancing corporate governance, et cetera. In addition, some existing regulations, for example, on the wealth management product transitions, crackdown on the shadow banking and limitations on the real asset sector's concentration, et cetera, are still there. So to sum up, the regulator has to balance between the growth and stability and this is not an easy job for them. Yes, back to you, Ming.

Thank you, Phyllis. Just to supplement here, we do see regulators continue to focus on strengthening the financial system as well. We saw that they have introduced this last year. They have finalized the TLAC rules this year. They have also come out with new provisioning rules. So I think, overall, if you look at this in the broader context, they are trying to strengthen the financial system, especially as there are so many headwinds that the Chinese economy is facing right now. They are also working on setting up a stability fund for the sector. And lastly, as you might have seen from the news flow, regulators continue to be very vigilant in supervising the banks on issues such as governance, anticorruption and adhering to the new asset management rules. The next part of the question is, are there any specific areas that the Chinese banks are trying to invest in or develop in the current environment? Phyllis, can you take this again?

Right. Well, there are still quite a few areas the banks are looking to develop or invest in the current environment, for example, the green bonds and MSE lending, both of which have actually shown higher than system average loan growth rate over the past few years. Well, in addition, as with the speed up of issuance of special bonds by the local governments, infrastructure lending and investment can be another area that commercial banks can focus on this year. In addition, some commercial banks do have the target to become a retail-focused bank specialized in the wealth management, and they continuously invest in the fintech with a target of spending rate less than 3% of the total operating revenue on this area. So I think these are all the key areas that banks can continue to develop and invest in current environment. Yes, just gave a short answer.

Thank you, Phyllis. Now the third part of this question is how are the Chinese banks' wealth management subsidiaries positioned in terms of their revenue and profit contribution to the overall bank groups? Xi, maybe you can help to take this one?

Yes. Thank you, Ming. Yes, and just Phyllis also mentioned about the wealth management business. Actually, I think strategic-wise, those wealth management subsidiaries are quite important because they actually complement the banking group's traditional deposit lending services for the personal and retail clients. And also this would also increase client stickiness. Given the growing wealth of China's middle class and also people's increasing demand for asset management services, wealth management service is actually an area that banks have to develop and compete, and also over the time, establish their brand and specialty. In fact, not only banks, other institutions, such as the securities firms, mutual funds, trust companies, they all compete in this field. we think that commercial banks still have their edge because they have the most extensive network and also client base. And also in terms of numbers, we have seen a steady AUM growth of the WMP balance over the past 2 years even when the transition period for the new asset management rule was touching the finishing line in 20 -- at the end of 2021. So strategy-wise, we think it's very important. Nonetheless, so far in terms of the revenue and also profit contribution, actually, interest income is still the dominant component for Chinese banking sector. It accounts for about like 80% of total revenue. And we saw a quick growth in fee income related to the wealth management products, especially in 2021. Some commercial banks even -- almost doubled their income base in this field, but this was really from a low -- a relatively low base. In addition to that, this income is less stable because it is related to people's demand in buying and holding this investment product and which is also influenced by the market returns. So on one hand, we think that banks still need to fine-tune their investment strategy in those WMP products to better meet the market's demand. On the other hand, investor education is also a long journey to go and it will take time for investors to accept returned volatility during a second downturn. So yes, I think that will be my answer for it. Thank you, Ming.

Thank you, Xi. Now let's turn to the NBFIs for a while. The next question we have is the impact of COVID-19 on the asset management companies. This question maybe, Phyllis, can you help to take this one?

Sure. Thank you, Ming. Well, there actually is a 2-side effect of the COVID on the AMC. On the next new side, the pandemic brought some pressure -- more pressure, actually, on the profitability and asset quality of the AMC. For example, in their traditional type distressed asset business, net market conditions will have negative impact on the fair value of their acquired assets. In addition, it will take longer time for those AMCs to dispose those acquired nonperforming assets, which will also negatively influence the ARR of this business segment. Well, in the restructured type distressed asset business, the quality of underlying assets or the collaterals is likely to further deteriorate, which can be shown in their asset quality metrics. As a result, more provisions are likely to be made, which will also, in turn, hurt the net profit growth for the AMCs for the year. However, on the positive side, we can see that it will provide more business opportunities for the AMCs in the economic downturn. We expect the supply of the NPL transferred out from the banking sector to increase in the next 1 to 2 years. In addition, AMCs are able to step in more troubled entities, including the distressed real asset developers, corporates enter the debt resolution committee, et cetera. Well, for the big 4 AMC, they will also play a very important policy role as a financial stabilizer given their dominant positions in the distressed asset market. We believe that the state will continue to make use of this player to resolve the NPLs in the financial system and carry out other specific government mandate, especially in this economic downturn. So we anticipate that such policy function could persist over a foreseeable future for the big 4 AMCs. Yes, that's all for me.

Thank you, Phyllis. The next question is on the trust sector. Is there any systemic ways from the trust sector given the heavy exposure in commercial real estate. Yiran, can you help to take this one?

Yes, sure. Thanks, Ming. Yes, we do observe that the trust sector overall is facing persistent pressure from worsening macroeconomic conditions and credit risk space, especially by the property developers. We do observe the credit quality has deteriorated for many property developers that collaborate with the major trust companies in China. And this worsened operating environment puts the trust companies' policy to test. And we also view as an important window to observe how these companies can manage these pressures. So on paper, I mean, legally, trust companies have no legal obligation to make good on the asset management products and inclusive support of these products is prohibited under the asset management rule. But the sector still faces pressure to make whole on the customer investments loans like actively managed trust products become nonperforming. So we do remain vigilant on the risk associated with these. Having said this, though, I think the pressure is differentiated between sector constituents. So the stronger and more prepared trust companies should be experiencing less pressure than the rest. I'll stop there. Thanks, Ming.

Thank you, Yiran. While we have you, there are a few questions on the securities as well. How does the year-to-date market weakness impact securities funds in China?

Yes. So as mentioned in my earlier remarks, the securities firms are unique in their high exposure to equity markets. So we do -- we are vigilant on the risk associated with this exposure. And we do know that the Chinese capital markets, including the equity markets, are facing some weakness year-to-date and this includes collection in the equity market indices, lower levels of average trading turnover compared to last year and lower sales of mutual funds, for example. And this has also resulted in weak Q1 financial results for the listed brokers as mainly sharply lower gains or even losses in their top investment portfolio was a main drag. On the other hand, and I think there was an audience question on the capital market reform as well, so I mentioned it here, the domestic market seems to have bottomed since April and the CSI 300 Index, for example, rebounded by more than 10% from the trough and that's amidst the rest of policy easing mentioned earlier. At the same time, we think that some of the structural trends for the Chinese securities firms still hold and this includes the capital market reform, including most prominently the measures of the registration-based IPO system and enhancing regulatory framework and this includes capital requirements, funding and liquidity tracking and risk control. And so we expect these trends to persist despite the weakness in the domestic capital market thus far this year. Hand over to you, Ming.

Thank you, Yiran. Now let's go back to the banks again. The next question we have here is, does China still have loan relief measures in place for borrowers? If yes, what is the banking system level loans under moratorium as a percentage of total loans in China? Xi, can you help to take this one?

Yes. So about the loan relief measures, yes, China still has these measures in place. Actually, I think Phyllis also mentioned that in Shanghai, the Shanghai PBOC branch also encouraged banks to roll out these measures. And it is reported that Shanghai provided more than CNY 70 billion relief loans to sectors such as dining, retail, tourism since March. But nevertheless, there is no sector level number on the moratorium loans balance from the regulator. For our analysis, we expect the forborne loans balance and also the forborne loan ratio to go up in 2022, especially in areas with strict lockdown measures. By our estimation, the new wave of those forborne loans in 2022 could reach CNY 1.1 trillion in all. This is about 60 basis points of the total loans in the sector. And this is also partially why we revised up our NPA forecast by the end of this year to 6.5% from 6%, yes. Thank you.

Thank you, Xi. Now adding the CNY 1.1 trillion to the forborne loans from previous waves of COVID infections, we estimate at the system level about 1.4% of total loans will be under loan relief measures this year. Now the next question is essentially few similar questions so I grouped them here. What is S&P's view on the impact on bank's earnings and asset quality due to the recent lockdowns in FY '22? What is the expected growth in second half in 2023 and the forecast for the rest of FY '22 for the Chinese banks? So I'll clump these together. And basically, from our perspective, the lockdowns have led to our lower GDP forecast this year and there's a downside pressure as presented in our 3.5% GDP growth scenario. So this creates downward pressure on both earnings and asset quality. Now revenues are impacted basically by weak loan demand, NIM compression and cuts to fee charges to support the businesses. And we are expecting loan growth to average around 10.5% per year over this year and next. Now with top line under pressure, how banks manage their costs will basically determine their bottom line. And from our perspective, for strong banks with high provision coverage, we do think that their earnings will be more resilient by releasing coverage through lower credit costs. Whereas for the weaker banks with low-quality book and coverage ratios, they should be still under provisioning pressures, which could lead to elevated credit cost and bigger earnings hit. I'll take the next question again here. The question is how much should we be concerned about the asset quality of the Chinese banks following the recent COVID outbreak as well as continued property sector slowdown? The double impact of COVID and property slowdown, thus, create downside pressure on asset quality as discussed earlier. But we also do note that the sector has withstood the shock in 2020 when GDP was 2%, given that the cushion has been built over the previous years. We do think that the sector as a whole has the provision coverage to withstand the impact. Phyllis has earlier mentioned some of the figures. And if you look at our appendix, for instance, the coverage of NPL plus SML ratio is actually reasonably high. This is why despite a weaker asset quality, we do see credit cost as a whole declining as coverage is released. Regulators have also been asking the stronger banks to do so. And the bulk of stressed property loans are classified as normal or SML and these do require very high levels of provisioning. As such, we do think that the stable economic risk trend remains reasonable at this point. In fact, stabilizing property prices is a long-term credit positive for the sector, which earlier underpinned our positive economic risk trend before lockdowns neutralized this trend. We do expect lockdowns to hit small business hard, and this exposure is growing and we are monitoring very closely. And as in our forecast, we have really baked in some of the new pressure in terms of forborne loans. So this is really a Tier 1 risk that we are watching down the road. As for the property sector, as mentioned earlier by some of our speakers, easing has begun and we have to wait a few quarters for measures to boost confidence and feed into the fiscal market. We expect property price to 4%, 5% this year and stabilize next year. So the collateral value should remain sufficient to cushion the banks and limit their losses. Now the next question is quite broad and touches on several subsectors. The question is which financial institutions are most at risk of negative rating actions? I will stay on the banks first before passing to Yiran on the non-bank FIs and Phyllis can maybe comment on the AMCs as well. For the Chinese banks, we now have a negative outlook on Bohai Bank and Ping An Bank. In Bohai's case, it faces asset quality pressure. As we look at year 2021 results, they do have higher Stage 2 loan ratio and lower provision coverage. So that is why we do think that they do seem to face a bit more pressure than the banking sector. Ping An Bank is also a negative outlook, but this one is more driven by the group rather than the bank itself. The bank is a core subsidiary of Ping An Insurance, and we expect rising counterparty risk and increased investment market volatility to weigh on the group's capital and earnings position. I'll pass to Yiran to comment on the nonbank FIs.

Sure. Thanks, Ming. For the NBFI space overall, we have negative outlook on our long-term ratings on the big 4 AMCs, except for China Cinda. And for fincos, as mentioned by Xi just now, most of our rated fincos are subsidiaries of state-owned enterprises and including the banks and some non-FI groups and those subsidiaries benefit from the parent support. So in many cases, the outlook on their rating mirrors that of their parent's. On the broker space, there is one entity with negative outlook, which is Dongxing securities, and that's also a similar case because we view it as a highly strategic important subsidiary of China Orient AMC. And the outlook of Dongxing Securities mirrors that of the China Orient, the parent company. Phyllis, maybe you can add more details for the AMC in terms of the negative outlook.

Sure. Thanks, Yiran. For the big 4 AMC, apart from Cinda, the outlook on the other 3 AMCs are still negative. So although the big 4 AMC continue to benefit from the regulatory regime, we believe that the benefit is diminishing. So the next year outlook on that actually reflects this. And the net new outlook on Huarong also reflects the view that the company's leverage is still under the pressure. Despite the negative impact on the AMC's profitability and asset quality due to the pandemic, as I said earlier, there are still 2 side effects of the COVID on the AMC. On the positive side, can see that they will provide more business opportunity for the AMCs in the economic downturn. So that's all my part for the AMC.

Thank you, Yiran and Phyllis. Now going on to the next question here. Also just to correct myself earlier, Ping An Bank is now a core subsidiary of Ping An Insurance, it is a highly strategic subsidiary. So just a correction here. The next question we have, we have several similar questions here on the real estate sector. So maybe Phyllis can help to take this one. How are the easing policies for the real estate sector affecting the banks? And how are the banks implementing this policy relaxation? Do the Chinese banks intend to increase their exposure to the real estate market? Over to you, Phyllis.

Thank you. This is a very good question. Well, the policy easing so far have been -- we have seen that has been more on the demand side rather than the supply side. For example, the government has eased the mortgage costs through cost of interest rate. The 5-year LPR was furthered lowered, the second time in May this year by another 15 basis points. The government also relaxed some rules on the ownership of multiple properties. Local authorities in major cities, such as Chengdu and Hangzhou, also lift some restrictions on the household or in more than one residential property just to encourage the home purchase. With all of these efforts, we expect the mortgage loan to rebound after slowing down in recent months. However, the rebound is likely to be modest and offer a limited boost for the overall lending as many homebuyers may still stay on the sidelines. For the loan to the property developer, we expect that the growth rate to be flat this year and has no increase in 2023 and 2024. Well, by end of March this year, the property development loans accounted for 6% to 7% of the total loans in the banking sector, while the mortgage loan accounts for roughly [ 1/5 ] of the total banking loan in China. Back to you, Ming.

Thank you, Phyllis. The next question we have, I guess, I'll take this one. What is the view on China's economic growth for the midterm and long term? And what's the upside risk for the banks' asset quality? Our economists now project China's GDP growth at 4.2% this year before rebounding to 5.3% next year. In the medium term, we see China GDP growth at 4.8% in 2025. There is actually more downside risk than upside until the health crisis is over since the COVID infections are quite difficult to predict, as Shanghai is an example of that. So what could potentially surprise us on the upside is perhaps in the cure rate of loans under moratorium. Forborne loans from the initial pandemic shock in 2020, for instance, they were not actually as high as we were projecting, especially for the bigger and stronger banks. So that's the short answer. The next question is quite long here, so I'll go through them here. What are China's lockdowns -- when are China's lockdowns expected to ease? When do you expect China's new currency platform between Eurasian countries and BRICs to launch? To what extent are the lockdowns a reminder to the West, obviously, dependent on the Chinese supply chain? Will the lockdowns accelerate a shift to onshoring? And if so, when will this investment materialize? Now some of these questions are quite tricky and pertain to some of our other teams in S&P. So I'll take a crack of them here. In terms of the lockdowns when they are expected to ease, the unofficial consensus is things could change after the 20th Party Congress. But we also do note that other considerations need to be taken into account, and this includes the elderly vaccination rate in China as well as the status of health care system, such as equipment availability. Now as for the new currency platform between Eurasian countries and BRICs, this could be difficult while the Russia-Ukraine conflict is ongoing and Russia remains sanctioned. We do think that not just China, but many countries will be very mindful of potential secondary sanction reserve from the U.S. government. And lastly, in terms of onshoring, we think that China has a critical role in some industries like tech and auto. So I don't think it will be that easy for it to happen. Some lower value-added activities have been onshored. And to some extent, this is probably not betting for China as it moves up to the value chain. So we could potentially see some of this continuing. But in terms of the linkages, the system is pretty interconnected now, and we do think that some industries it could take longer and could be more difficult for it to happen. Plus the fact that China has a large domestic market to support demand, so we do think that that's also the consideration in terms of foreign investment in China. So despite some of the data suggesting that there's capital outflows in China, foreign investment data seems to be still quite okay. We still are seeing quite a fair bit of questions here. So let me look at maybe this one. Any high-frequency data to monitor SME loan asset quality? Phyllis, can you take this one?

Sure. Well, there's actually no frequent official data for SME loan asset quality. But the CBIRC do report sector-wide SME loans balance, right, on a quarterly basis. In addition to that, some listed banks, particularly those mega banks, report the asset quality ratios for its SME segment in their annual report, outstanding annual reports. And they are also the major player for the SME segment. So we normally can take that figure as a reference. Yes. Just give a short answer. Back to you.

Thank you, Phyllis. Maybe you can help with this one as well. Can you update the small bank situation in China, especially from the rising rates and property default?

Yes. Sure. So actually, the [ core ] to the property sector is different from bank to bank. And you can also refer to the Appendix 2 and 3 in our presentation material. Here, we collect the data of 32 listed banks in China on their loan to property developer and mortgage and also their corresponding NPL ratios. While generally speaking, the property developer loans remains well collateralized in the -- with real assets, limiting the pressures for the banks to write off problem loans. However, as I said in my presentation, the polarization of the banking sector has been intensified, i.e., the weaker and more aggressive banks were facing more risk. Especially for some reason that we can see the steeper price drop, banks with aggressive risk appetite and high geographic concentration could be left with thinner collateral buffers. So -- and this will add more risk for these type of smaller banks. Yes, back to you, Ming.

Thank you, Phyllis. We have a question here that is asking, we now believe 40% of property developers were in financial trouble at end 2021. Is this a percentage of total loans or offshore bonds? Now the 40% figure we have just to -- just for your reference, the way we define financial trouble is basically we look at the property developer's financial statements and look at their cash to short-term debt coverage. So when the cash to short-term debt coverage is less than 1x, we define them to be in financial trouble and we look at the top 100 companies, top 100 property developers in the sector. So that's how we came to a rough estimate of potential problematic property developers in China. So that's the short answer here. Now let's go on to the next question here. Maybe, Phyllis, can you help with this question here, which is what do you think is the longer-term impact of the lockdown and economic slowdown on the SMEs. Do you think support from authorities is enough to support SMEs in the longer term or whether NPLs and defaults will increase after the support turns off? Phyllis?

Sure. So the SME segment is hit hardest by the lockdown during the pandemic. So that's why we expect another new wave of forbearance policy is going to carry out this year to temporarily help relieve the burden of these SME lendings. And it is estimated that another CNY 1.1 trillion new forborne loans will be carried out, which is roughly around 0.6% of the total loan of the banking sector. Well, the forbearance policy actually is just a temporary solution, right? So I think the long term still depends on how -- for the long term, the asset quality depends on how long the pandemic will last and also the strict -- the tough COVID restrictions implemented by the Chinese government. For our previous round experience that we can see that when the forbearance policy ends, they do some migrations of some normal loan or SMLs to the NPLs. However, some banks already take some preempt methods. They already actually classify some of this forborne loan into the NPLs or SML and take corresponding provisions. So this can also be seen from some banks of relatively higher Stage 2 assets than the SML. Well, as I said, that the long-term asset quality conditions of this forborne assets still depends on the policy and also the economic conditions. So the Chinese government just wants to take in this temporary solutions to giving enough room for the recovery of the overall economies in China. Back to you, Ming.

Thank you, Phyllis. One more for you here. Which banks are more conservative in terms of NPL classification for property loans? Yes. So maybe you can help this one.

Yes, sure. So before taking that question, maybe let's talk generally about the loan classifications for the banks in China. Well, actually, we used to take some analysis of -- compared with the Stage 2 and 3 assets versus NPL plus SMLs. We actually find there are disparate loan classifications between different banks. Generally speaking, the mega banks have much stringent classifications and joint stock commercial bank, which is even better than some of the city or rural commercial banks in China. I think the similar situation may also happen in the property loan classifications. There are several reasons for some of the stressed property -- property developer loans after you classify special mention or normal loan. First of all, banks normally classify those loan overdue for 90 days into the NPL. Some of the recent defaulted cases, the property developer may still not overdue for more than 90 days, so still quantify as normal or special mention. And the second reason is that some of the cases after you enter the debt resolution committees and the quantification of this loan are actually consensus for the whole sector wise. However, as I said during my presentation, when time went by, especially it comes to this year, some of the problem loan likely to overdue for more than 90 days. By that case, we believe that there will be more NPL recognitions on this sector. So that's why we predict the NPL ratio for the general property sector will increase to 5.5% this year before improving next year. So that's all my answers. Back to you, Ming.

Thank you, Phyllis. We have the questions here. Are finance companies more exposed to real estate sector than banks? Xi, I'm not sure whether you're back. If you're not, maybe Yiran can help with this.

Maybe I'll take this one. So yes, so on finance companies, at the sector level, we believe the finance company sector faces similar economic risk of banks. In fact, the financial -- finance companies is quite broad and diverse and some subsectors can focus on their specialties and have quite different exposures. In China, we have leasing companies, consumer finance companies, auto loan companies, micro-lending companies and distressed asset management companies. So I guess consumer companies and auto loan companies are more exposed to the consumer demand and household income and leasing firm can be quite different. Some focus on shipping, aviation, equipment leasing. Some specialize in serving small- and medium-sized corporate. Among our rated leasing firms, these -- their exposure to the real estate sector is quite limited. For the distressed asset management companies, we do see some concentration risk to the real estate sectors from collaterals and direct exposure, and this is reflected in our negative matching adjustments when assessing their risk position. The regulator has asked AMCs to decrease their concentration in real estate sector in recent years. But in terms of percentage, the percentage remains high at about 40% to 50% in the restructured DAM book. I'll stop then. Back to you, Ming.

Thank you, Yiran. We are at the hour here. So maybe I'll take one last question here. This question is actually on the net interest margin trend in China. What is the trend for the banking sector, especially when we consider the banking groups that are more vulnerable because this -- after factoring the interest rate and lending to SMEs. Maybe, Phyllis, can you help to take this one?

Sure. Generally speaking, the net interest margin will be on a declining trend. Well, as I said, there are several rounds of LPR costs and also the country's continued efforts to lower the financial burdens for the real economy, particularly the SME, the yield on the interest-earning asset is declining. Well, on the liability side, the cost of wholesale funding is also on declining trend in current low interest rate environment. Although the cost of deposit is also declining, but the intensity for deposit competition is still there. Deposit is usually elastic in nature. So the decline in the funding side is not enough to offset the decline in the [ SLU ]. So net on net effect that the net interest margins will be on the downward trend for the whole sector. Back to you, Ming.

Thank you, Phyllis. We are 2 minutes past the hour, so we do have to stop here. So I'm afraid we're out of time and can't cover all the questions you have submitted. Now we will endeavor to get in touch with you after this webinar to address some of your questions. And so this brings us to the end, and we hope you find the content insightful. Thank you to our speakers and to you, our audience, for your time and attention. A replay of this session will be emailed to you later today. Please contact us if you have any questions or comments. In addition, do remember to complete our short survey. We also invite you to refer to our website at spglobal.com/ratings for our latest events, research and insights. Thank you, and goodbye.