A property market downturn is the key risk to a credit loss scenario for mainland banks over the next two years, Standard & Poor's (S&P) warned on Tuesday.

"Mainland banks' true level of direct credit exposure to property and construction is significantly higher than the reported numbers. We estimate that 30 to 40 percent of corporate loans on the mainland are against property and land as collateral," said Liao Qiang, senior director of financial institutions ratings at S&P.

But, he pointed out that direct loss of the depressed mainland property market is quite limited because of the low industrial mortgage rates. However, the biggest concern is the oversupply due to a bleak sales volume, which will lead to the default risk heading above water.

"Oversupply remains unfavorable to property developers and pressure on destocking will continue over the next year," Christopher Lee, Hong Kong-based managing director of corporate ratings at S&P said. "So, we predict that both real-estate prices and the sales volume will decline by another 5 percent in 2015."

The mainland property market's sales volume up to October fell by 10 percent compared with the same period last year, Lee said.

Data from Centaline - one of Hong Kong's four leading property agencies - showed that new home sales across 54 cities on the mainland rose by 8.9 percent month-on-month in November, representing the highest transaction record so far this year.

"Although the central bank's latest interest-rate cut in November has lifted market confidence, sparking a sales rebound in November and December, we expect the sales figure for the whole year to decrease by 5 percent year-on-year," Lee said.

As a result, Liao predicted that new non-performing loans among mainland banks will go up by 600 basis points in the next three years.

"Since banks' profitability has stayed satisfactory till now, the growth in bad loans will not exert too much pressure on mainland banks' performance," Liao said, adding that a full-blown system-wide banking crisis is unlikely.

However, Barclays Bank Plc's Hong Kong branch holds a relatively optimistic view of the mainland property market.

"We believe that the supply-demand dynamics in the mainland physical housing market is well on track for improvement, given the combination of increasingly friendly policy stance by governments, more supportive mortgage loan terms with easier access to loans at lower costs and recovering sentiment among homebuyers amid expectations of further monetary easing in the broad economy," Barclays said earlier this week.

gladdy@chinadailyhk.com

(HK Edition 12/10/2014 page9)