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[SINGAPORE] Chinese banks, already the largest issuers of bonds to build capital buffers, are looking beyond the savings of the nation's 1.4 billion people for more funds as they grapple with mounting bad loans.
The nation's banks may account for about half of at least US$100 billion in dollar notes sold by Asian lenders to meet new capital rules over three to five years, according to Barclays Plc. China's lenders need to sell as much as US$222 billion of notes in any currency that comply with Basel III rules and US$379 billion of securities that meet rules unveiled by the Financial Stability Board last month, Commerzbank AG estimates.
The Asian issuance "would be too large a size for domestic markets to absorb," said Avinash Thakur, managing director of debt capital markets for Barclays in Hong Kong. "That's why these banks in the next phase will start coming to look internationally." Chinese lenders are struggling with the biggest pile of bad loans since 2008 as the weakest economic growth in a quarter century fuels defaults. The banks will face pressure in the near term to issue more so-called Additional Tier 1 funds that count toward the new capital rules as they grapple with "ongoing balance-sheet growth and slowing profitability," Fitch Ratings said in a Dec 7 report.
International issuance could entail higher financing costs. Bank of China Ltd. sold perpetual notes that count as Tier 1 capital at home in March with a coupon of 5.5 per cent. That compares to a 6.75 per cent rate on securities sold internationally last year.
China Construction Bank Corp may price AT1 securities in dollars Wednesday, according to a person familiar with the matter. That comes after Bank of Communications Co become the only Chinese lender to sell such securities earlier this year.
The four largest lenders by assets are from China and since the beginning of 2014 the country is also the biggest producer of bonds that count as capital under global banking rules established after the 2008 global financial crisis.
Biggest Issuers Lenders in the world's second biggest economy sold the equivalent of US$146 billion of such securities since Jan 1, 2014, more than all the securities sold by French and US lenders combined in the same period, respectively the second and third biggest issuers of Basel III compliant notes, Bloomberg data showed. About 90 percent of these bonds were sold in the local market, which is now the second largest in the world at about US$5.6 trillion. Even that may not be enough to absorb all the upcoming issuance, according to Barclays and Commerzbank.
"The China Banking Regulatory Commission has to approve issuance quotas both offshore and onshore and I think the banks will try to maximize their allowance in both markets," said Xuanlai He, the Singapore-based credit analyst at Commerzbank. "There is no optimal funding strategy. We call it maximum funding strategy." Four Chinese lenders will be required by 2025 to sell bonds that can be written down in case of bankruptcy adding up to 16 per cent of their risk-weighted assets, the FSB ruled last month in its rules on total loss-absorbing capacity. That would require them to raise at least US$500 billion in new bonds, according to the estimates of bank capital-focused hedge fund manager Algebris Investments Ltd.
"In China, the TLAC shortfall is significant," said Richard Surrency, the Singapore-based managing director of capital strategy at Algebris. "Chinese banks are in the 'extraordinary' bucket," in terms of their funding needs to meet the new rule, he said.