UBS expects that by 2027, the number of negative asset units in mainland China will increase to 3.3 million, resulting in a loan loss of 232 billion RMB for banks

UBS published a research report indicating that the continuous decline in mainland property prices has raised market concerns about the default risks of mortgages secured by properties and operating loans for small and medium-sized enterprises (SMEs). It is currently estimated that the number of negative equity properties in mainland China will increase from approximately 700,000 units this year, accounting for 10% of annual new home sales, to 1.8 million next year and 3.3 million by 2027, with the proportion of new home sales rising to 28% and 55% respectively. The net loss from related mortgage loans is expected to increase from RMB 34 billion in 2025 to approximately RMB 232 billion in 2027.

UBS currently believes that under the regulatory risk prevention and control mechanism, the likelihood of a vicious cycle between real estate and the banking system, as well as systemic risks in China, remains relatively low. It believes that while current risks are on the rise, they are still at a controllable level, with the impact of operating loans for SMEs likely to be greater than that of mortgage loans. It anticipates that the supply of foreclosed properties and second-hand homes will increase simultaneously, which may exacerbate downward pressure on property prices.

The bank expects that the impact of related risks on the banking industry will be differentiated but controllable. Assuming a non-performing loan pressure level of 3%, with mortgage loans and SME loans at 1.6% and 4.8% respectively, it is expected that the average additional credit cost for mainland banks over the next four years will be approximately 7 basis points, similar to UBS's previous estimates. Among them, joint-stock and large state-owned banks, due to their higher proportion of related loans, will need to make additional provisions of 10 and 11 basis points respectively. Based on the value of negative equity assets, UBS estimates that large state-owned banks will need to make additional provisions equivalent to an average of 2.6% of the expected pre-provision profit for 2027 within two years, while joint-stock banks will need to make provisions of 1.4%. Postal Savings Bank (01658.HK) is expected to be the most affected, while Huaxia Bank (600015.SH) is expected to be the least affected