As the government struggles to shore up the sector, the pain is starting to reveal in the banks’ loan books, with potential implications for the health of the overall financial system.

Ronshine China Holdings, a midsize developer listed in Hong Kong, warned on Tuesday that its net loss for the first six months would be between 4.3 billion and 4.8 billion yuan (US$627 million and US$700 million), a nosedive from its 684.5 million yuan profit a year ago.

Chairman Ou Zonghong, in a statement to the stock exchange, blamed “the tough business environment in the real estate industry and the continued impact of the Covid-19 pandemic”.

On top of impairment charges on certain unnamed projects, Ou said a severe drop in property sales and slowdown in construction had hit the Shanghai-based company particularly hard. During the first seven months, the company’s contracted sales dipped by 53% to 46.3 billion yuan.

Ronshine is far from alone. Zhenro Properties Group, another Hong Kong-listed, Shanghai-based developer, is expecting a net loss of up to 3 billion yuan in the first half, slipping from a net profit of 1.16 billion yuan a year ago. Central China Real Estate, a midsize homebuilder from the northern province of Henan, said its net loss could be as large as 6 billion yuan.

Many others barely avoided net losses. Yuzhou Group Holdings, which defaulted on its offshore bond coupon payment in March, said its net profit for the first six months is in the range of 55 million yuan to 65 million yuan, a 92% to 94% drop from a year ago. Country Garden Holdings and Times China Holdings have alerted investors that their respective net profits could drop by 99% year on year.

Developers’ litany of losses and profit warnings speak to just how serious their financial standings are. Kelly Chen, senior analyst at Moody’s Investors Service, said the latest announcements are “credit negative”, even though their results were largely within her expectations.

“We believe that these developers’ revenue growth and profit margins have declined in the first half and will continue in the rest of 2022, in view of the tough operating environment and difficult funding conditions,” she said.

Margin pressure is coming from sharp discounts that these developers are offering to customers, Chen said, explaining that it is one of the few remaining ways to support their dwindling liquidity as “weak investor sentiment has constrained their access to funding, especially in offshore bond markets, since the beginning of the year”.

She hinted that a “reassessment” of credit standings for some developers could be in order if there are any signs of worse-than-expected deteriorations in financial and liquidity positions in their official midyear earnings announcements, which are supposed to be made by Wednesday.

Beijing, meanwhile, has been casting about for ways to shore up the property sector.

One of the latest moves came from the People’s Bank of China, which on Aug 22 cut one-year loan prime rates by 0.05 percentage points to 3.65%, and the five-year loan rate 0.15 percentage points to 4.30%.

On the same day, Yi Gang, the central bank governor, encouraged banks to “sufficiently take the initiative and act as a backbone” to prop up the lagging economy, specifically mentioning the need to “guarantee reasonable financing demands in the real estate sector”, among other steps.

The rate cuts put the PBOC at odds with its global peers, who are almost universally raising rates to tackle inflation.

But Ting Lu, chief China economist at Nomura, believes the impact on the property sector will be “small”, pointing out that many banks have already slashed their loan rates much deeper as overall demand for mortgages has diminished.

And rates, he added, are only a small piece of the puzzle. “The main factors behind slumping new home demand are declining trust in developers’ commitment to delivering homes, slowing income growth, rising unemployment, and heightened uncertainty due to the zero-Covid strategy.”

With little relief in sight for the property sector, banks are feeling the sting – and are bracing for more pain. A number of Hong Kong-based banks with exposure to mainland Chinese borrowers, including HSBC and Standard Chartered, have reported substantial write-offs for their loans to the real estate sector during the first half.

The impairment charges for HSBC were US$1.1 billion, a sharp turnaround from a US$700 million positive reversal a year ago. Standard Chartered’s total credit impairment charges for the period came to US$267 million, nearly all of which came from the Chinese commercial real estate sector.

Dah Sing Banking Group, a midsize Hong Kong lender, said on Wednesday that its credit impairment losses for the first six months increased 160% to 305 million Hong Kong dollars. “A relatively large part” of that was related to mainland Chinese real estate, according to Nicholas Mayhew, the bank’s deputy chief executive.

He stressed that total exposure to the sector is relatively small – at “a low single-digit percentage of our total loan book” – but added that the bank will remain vigilant. “The sector still looks uncertain, and therefore, we would need to be prepared for further impairment charges,” he said.

The impact has been spotted in a few mainland banks as well. Postal Savings Bank of China, one of the largest lenders by assets, said its non-performing loans (NPL) to the real estate sector stood at 1.79 billion yuan at the end of June, an 82-fold increase from last December. That figure stands out all the more given that the bank’s overall NPL value dropped by 19%.

China Merchants Bank’s NPL to property developers doubled over the same period to 11.20 billion yuan, pushing up its overall level of bad loans by 11%. The bank reported 22.79 billion yuan of credit losses of loans during the first half of the year, a 58% jump from a year ago, mainly due to undisclosed “certain real estate customers”.

A number of mainland banks, including the four largest state-owned and smaller regional lenders, are expected to disclose their results by Wednesday. Despite repeated comments from Beijing on the overall soundness of the banking sector’s asset quality, the details in their results may reveal damages in their loan books.