China’s mega banks plan funding spree to plug capital shortfall
CHINA’S mega banks are planning at least 40 billion yuan (S$7.7 billion) of bond sales, kicking off a major funding push to comply with global capital requirements by early 2025.
Industrial & Commercial Bank of China (ICBC) and its three closest rivals are planning to tap domestic debt markets to sell a new category of total loss-absorbing capacity (TLAC) bonds as soon as June, said people familiar with the matter. The exact amounts have not been finalised, but each bank is targeting at least 10 billion yuan, added the people, who asked not to be named as the information has not been made public.
China’s big banks have typically relied on so-called Additional Tier-1 (AT1) and Tier-2 bonds in recent years to replenish capital. But the lenders are now seeking to issue a more senior type of TLAC bond that can also be used towards meeting regulatory requirements. The new TLAC bonds may offer a smoother way to raise capital for the banks, since they absorb losses after the other two instruments in case of a risk event that threatens the operations or even survival of a lender.
The planned issuance comes at a shaky time for global debt markets after Swiss regulators shocked investors with the wipeout of AT1 bonds issued by Credit Suisse Group, when they orchestrated a rescue of the bank. The move triggered some lenders to delay their planned debt sales and made investors wary of adding new exposure to such notes.
China’s big four state-owned lenders, which are deemed globally systemically important banks (G-SIBs), face a capital shortfall of as much as 3.7 trillion yuan by 2025 in order to comply with TLAC requirements, said S&P Global Ratings. Fitch Ratings predicts a smaller gap of 1.3 trillion yuan, based on capital position levels at the end of last year. Estimates vary depending on projections of profit, dividends and asset growth, among other factors.
“The recent risk events highlight the importance of having strong capital buffers and total loss-absorbing capability, so the big banks may feel more determined to close the gap,” said Vivian Xue, director of financial institutions at Fitch Ratings. “But that doesn’t necessarily mean the pace of new issuance will pick up in the near term, as the events will more or less weigh on market sentiment.”
The four lenders, the China Banking and Insurance Regulatory Commission and People’s Bank of China did not immediately respond to requests for comments.
After an initial delay due to Covid disruptions, the lenders have been in discussions with regulators since late last year, and this month started working with bankers on the issuance, said the sources.
China’s big four banks issued 150 billion yuan of Tier-2 bonds in the first quarter this year at an average coupon of 3.55 per cent, up from 3.377 per cent a year earlier.
Appetite
As systemically important emerging market banks, ICBC, China Construction Bank, Agricultural Bank of China and Bank of China 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, said the Financial Stability Board (FSB), which was created by the Group of 20 nations. The big four banks must also have additional capital buffers required by the Basel Accords, resulting in a minimum aggregate requirement of between 19.5 per cent and 20 per cent of risk-weighted assets by 2025. Banks in developed markets met the first phase in 2019.
The new debt will likely make them more appealing to investors than AT1 or Tier-2 debt, and less costly to the issuers, said Fitch’s Xue. Still, the recent volatility in offshore debt market following the Credit Suisse blow-up might add uncertainty over the issuance of TLAC bonds, she noted.
Moreover, China earlier this year raised the risk weighting for subordinated debt and TLAC non-capital bonds of financial institutions to 150 per cent from 100 per cent, increasing the costs for banks to hold such debt of their peers. That could further weigh on domestic demand for TLAC bonds, said S&P Global Ratings.
At the same time, the banks are in a squeeze because they are being called on to boost lending to help the economy get back on its feet following years of strict Covid containment. That makes it difficult for them to limit the growth in risk-weighted assets, which could have been another way to reduce capital needs.
The central bank said in late 2021 that TLAC rules will not affect the capacity of Chinese lenders to supply credit, adding that the requirements are “acceptable”.
“The mega banks could also balance TLAC conformation with their other key policy mandates, including supporting the Chinese economy,” Michael Huang, an analyst at S&P, said.
State-backed
China’s G-SIBs have been actively replenishing capital over the past few years, raising an annual 900 billion yuan via capital bonds and financial debentures, Fitch’s Xue said.
The FSB drafted the TLAC rules in 2015 to prevent a repeat of the “too big to fail” dilemma after the global financial crisis. Beijing published its local version in late 2021.
While neither FSB nor Beijing elaborated on the consequences for those that fail to comply by the deadline, one guiding principle is that all G-SIBs should have sufficient loss-absorbing capacity for an orderly resolution that has minimal impact on financial stability and avoids exposing the public to loss, said the FSB.
Fitch’s Xue remained upbeat on the capital positions of Chinese state banks and their ability to raise capital, given their solid credit profile and government backing.
“The major difference between China’s big four banks and foreign peers is that the former is owned by the Chinese government,” said Nicholas Zhu, an analyst at Moody’s Investors Service. “Once risks arise, China would definitely rescue and support them to maintain financial stability. That means the government would at least offer some support to repay their TLAC bonds.” BLOOMBERG
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Sign up here to get Decoding Asia newsletter. Delivered to your inbox. Free.
Share with us your feedback on BT's products and services
