camila July 22, 2021

HONG KONG (BLOOMBERG, REUTERS) – HSBC Holdings, Bank of China’s Hong Kong unit and at least two other major lenders stopped providing mortgages to buyers of China Evergrande Group’s unfinished residential properties in Hong Kong, the latest sign of dwindling confidence in the developer’s financial strength.

The lenders, which also include Hang Seng Bank and Bank of East Asia (BEA), suspended new mortgages for Evergrande’s two projects under construction in Hong Kong after re-evaluating the risks of such loans, people familiar with the matter said, asking not to be identified discussing private information.

Evergrande still has good relationships with many banks in Hong Kong, so its local operation will not be impacted, the developer said in a written statement while declining to comment on any action by individual banks.

It is sticking with plans for its Hong Kong projects, and is confident on delivering Emerald Bay II in August as scheduled. The developer said it will consider allowing buyers to delay transactions by 60 days if they are affected.

BEA declined to comment and representatives for the three other banks did not immediately comment.

Industrial and Commercial Bank of China (Asia) also halted providing mortgages to Evergrande’s unfinished flats, South China Morning Post reported, without citing anyone.

The unusual move by four of Hong Kong’s biggest mortgage lenders to act in unison underscores how dramatically perceptions of Evergrande have deteriorated in recent weeks.

Shares of the world’s most indebted developer have tumbled 28 per cent just this month and several of its dollar bonds have plunged to record lows. The company’s 2025 dollar note sank by about 6 cents on Wednesday to 49 cents on the dollar, suggesting investors are bracing themselves for a potential default.

A major payment failure by Evergrande would likely have severe repercussions for China’s financial system, eroding confidence in other highly leveraged property companies, shadow lenders and potentially even some banks.

Officials from China’s top financial regulator told Evergrande founder Hui Ka Yan at the end of June that he should solve his company’s debt problems as quickly as possible, emphasising the need to avoid major economic shocks, people familiar with the matter said earlier this month.

The mortgage halt “could be a fresh sign banks are protecting themselves as they’re increasingly worried about Evergrande”, Bloomberg Intelligence analysts Daniel Fan and William Hau wrote in a note on Wednesday.

The development may push Evergrande towards more “radical action”, such as selling a stake in itself to a state-owned Chinese company or pursuing more wide-ranging asset sales, the analysts wrote.

Evergrande has two projects in Hong Kong that are still under construction. The Vertex in Cheung Sha Wan area, which has more than half of the 414 units sold, is slated to finish by the end of October. Emerald Bay II is due to finish at the end of next month and has sold 97 per cent of its homes, according to mReferral Corporation (HK), a mortgage referral company.

HSBC, Bank of China’s Hong Kong unit and Hang Seng are the biggest mortgage lenders for unfinished residential projects in Hong Kong, with HSBC providing 25 per cent of the loans in the market in June, according to mReferral. Bank of East Asia ranked seventh.

Doubts about Evergrande’s finances have intensified amid a drumbeat of news about wary lenders and missed payments to suppliers. Bloomberg reported last month that several large Chinese banks have reduced their lending to Evergrande, though others were allowing the company to roll over portions of credit lines it has already tapped.

The developer, which reported more than US$300 billion (S$409 billion) of total liabilities at the end of 2020, has repeatedly said its relationships with creditors are normal and has made all of its payments to bondholders on time.

On Thursday, Evergrande said in a statement that it has solved legal disputes with China Guangfa Bank and that the two sides will deepen business cooperation.

A court in the eastern city of Wuxi this month ordered a freeze on a 132 million yuan (S$27.9 million) deposit held by Evergrande and a unit at the request of Guangfa. Evergrande had said on Monday its loan was not due until March and that it planned to take legal action against the lender.