China banks' mortgage loans are outpacing aggregate loans

Loan growth hit 201.%.

According to CCB International Securities, mortgage loans growing faster than aggregate loans while pricing has picked up. Mortgage loan growth was 20.1% in March 2014, much higher than ordinary loans (13.9%).

The weighted mortgage loan rate has improved steadily since September 2012 reaching 6.7% by end-March 2014, 2.3% above the benchmark loan rate.

Here's more from CCB International Securities:

Big-4 banks still like mortgage lending in contrast to the smaller banks. Rapid mortgage loan growth is being fueled by the state-owned banks as mortgage loans are capital saving and come with a 50% risk weighting. However, due to the relatively lower pricing of mortgage loans, smaller banks with higher funding costs have shifted credit resources away from mortgage loans to micro lending, which carry a risk weighting of 75%.

Our proprietary credit survey in June suggests the banks will not increase mortgage lending despite the PBOC’s call for more supportive issuing and pricing of mortgage loans. The banks argue that enough support has already been given to mortgage loans.

Our mortgage loan profitability analysis explains the divergent views between the big banks and the smaller. Our test indicates that ROA for the mortgage business is only 0.63% for the smaller banks compared with 0.98% for the state-owned banks, and much lower than the ROA of the banking sector as a whole (1.27%). Interest rate liberalization has increased lending appetite for higher priced micro loans.

Three ways to promote mortgage lending: loosening credit quotas, mortgage securitization and freer pricing. As the regulator has become more open to asset securitization, we expect more mortgage securitization ahead, which would release more credit resources to support bank mortgage lending. In the meantime, the weakening property market may reduce mortgage loan demand making mortgage loans less difficult to access.

Bank shares likely to benefit from monetary loosening. The selective RRR cut, the PBOC’s relending facility and the forthcoming loosening of LDR regulations all point towards monetary loosening. Further loosening, including broad RRR and rate cuts, are likely if the economy continues to slow. Loosening would likely stabilize the asset quality of the banks driving up share prices.