China’s ICBC plans US$5.5 billion sale of loss-absorbing bonds

Industrial and Commercial Bank of China is planning to issue as much as 40 billion yuan (S$7.45 billion) of total loss-absorbing capacity (TLAC) bonds as soon as this month, people familiar with the matter said, marking the first such debt sale from the country’s largest state-owned lenders. 

China’s biggest bank by assets is working with underwriters including Citic Securities and Haitong Securities on the upcoming sale, said the people, who requested anonymity in talking about private matters. 

ICBC’s move comes after China’s big banks posted scant gains in earnings for 2023, weaker net interest margins and rising levels of bad loans. That has added to the urgency for large lenders to bolster their capital to comply with global regulatory requirements. 

The Beijing-based bank is likely to issue 20 billion yuan in TLAC bonds that it can redeem at the end of three years, and 10 billion yuan in bonds that it can choose to redeem after five years. If ICBC doesn’t redeem the securities at those points, the bonds will remain outstanding as regular senior debt for one more year. The total amount of issuance could also be increased by another 10 billion yuan if demand is strong, the people said.

TLAC bonds are a type of “bail-in” instrument, and are designed to absorb losses at globally systemically important banks in the event of a financial crisis. They would be triggered after tier-2 and additional tier-1 debt instruments have absorbed losses. 

ICBC didn’t immediately respond to a request for comment.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The nation’s largest state-owned banks have struggled to maintain their profitability over the past few years – a critical means of capital replenishment – as they have followed Beijing’s directive to help pump up the economy and provide assistance to debt-laden property developers and local governments. 

China’s big five state-owned banks released their TLAC bond issuance plans early this year, saying they expected to issue as much as 440 billion yuan of the instruments in total.  

ICBC in February proposed issuing domestic TLAC debt instruments of no more than 60 billion yuan. Following the sales this month, the bank could issue the remaining 20 billion yuan in bonds as early as June, although that will depend on the market demand at that time, the people familiar with the matter said.

Fitch Ratings estimated in a report this week that China’s five globally systemically important banks could issue around 1.6 trillion yuan in capital instruments and TLAC-eligible senior debt by January 2025, and around 6.2 trillion yuan by January 2028. Besides ICBC, that group includes China Construction Bank, Agricultural Bank of China, Bank of China, and Bank of Communications. 

The ratings firm said it expects the main investors for Chinese TLAC debt to be included larger commercial banks, wealth-management companies, asset managers and insurers. 

The banks must have liabilities and instruments available to “bail in” in the equivalent of at least 16 per cent of risk-weighted assets by Jan 1, 2025, rising to 18 per cent in 2028, according to the Financial Stability Board, an international body that drafted the TLAC rules in 2015. BLOOMBERG