Goldman Sachs: If mainland housing prices fall by 15% in the next two years, the domestic banking system is expected to generate 900 billion RMB in mortgage non-performing loans

Goldman Sachs published a research report indicating that reassessing the risks of the mainland real estate market on the Chinese banking industry is based on its China real estate team's forecast of a approximately 15% decline in mainland property prices from 2026 to 2027. It estimates that the industry's potential mortgage non-performing loan ratio will reach 2.4% by 2027, with covered and uncovered mainland banks predicted to be 2.1% and 3.4%, respectively. Assuming a non-performing loan coverage ratio of 100%, Goldman Sachs estimates that mainland banks will need to set aside an additional RMB 500 billion in provisions for potential new non-performing loans, which is expected to pose a profit risk.

Based on the baseline forecast of a 15% decline in property prices, Goldman Sachs estimates that the banking system may generate approximately RMB 900 billion in mortgage non-performing loans and RMB 1.1 trillion in real estate non-performing loans between 2025 and 2027. However, the bank believes that mainland banks have the capacity to absorb related losses using existing provisions during this period, and there will be no capital shortage, with expectations to continue paying dividends. Profitability is expected to be negatively impacted by about 9%, while the current forecasts for operating profit growth before provisions for 2026 and 2027 remain largely unchanged.

Goldman Sachs prefers large banks such as Bank of China (03988.HK) and China Construction Bank (00939.HK), giving them a "Buy" rating, while also selecting high-quality regional banks with improved asset quality, such as Ningbo Bank (002142.SZ)