Commercial Banks Ramp Up Bond Sales

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The financial landscape in China has recently witnessed a significant uptick in the issuance of "perpetual bonds" and "subordinated bonds" by commercial banksBy the time this article was published, a staggering 1.47825 trillion yuan worth of these instruments had been issued in just the current year, surpassing the total issuance of approximately 1.11579 trillion yuan for the entire previous yearThis uptick illustrates a growing reliance on these financial tools to bolster capital, particularly among large state-owned banks and city commercial banks.

The surge in bond issuance can be attributed to several interrelated factorsNotably, refinancing pressures, capital requirements, and the costs associated with funding have engendered a vigorous climate for debt issuance among commercial banksWith the net interest margin continuously under pressure and many of the previously issued bonds approaching their redemption dates, the trend toward expanding the issuance of secondary and perpetual bonds is likely to continue.

The data is telling

Large state-owned banks collectively accounted for about 50.5% of the total bond issuance, whereas city commercial banks displayed extraordinary growth, with a recorded issuance increase of 138.5%. This highlights a disparity in operating conditions and capital adequacy across different tiers of banks in the Chinese financial system.

A prime example of this ongoing trend is the recent announcement from the Industrial and Commercial Bank of China (ICBC). The bank confirmed the completion of issuing its second-level capital bonds amounting to 40 billion yuanThese bonds are characterized by a fixed interest rate of 2.37% over a ten-year term, with a conditional redemption right that becomes exercisable at the end of the fifth yearThe raised funds will primarily serve to enhance the bank’s secondary capital under relevant legal and regulatory approvals.

Moreover, city commercial banks have significantly ramped up their issuance of perpetual bonds

For instance, Ping An Bank recently announced the issuance of 200 billion yuan in perpetual capital bonds, with the rate adjusted every five years; the first five-year period started with a 2.45% rateOther notable issuances included Minsheng Bank’s 100 billion yuan perpetual bond with a rate of 2.73%, and China Merchants Bank following closely with a 300 billion yuan issue at a 2.42% rate.

The trend within the industry throws into stark relief the pressing need for enhanced capital buffersAs outlined by industry experts, the issuance of subordinated and perpetual bonds serves to elevate banks' capital adequacy levels swiftlyIn 2023 alone, major institutions have issued a total of 124 subordinate and perpetual bondsNotably, the total issuance of perpetual bonds within the year has approached a remarkable 2.24 times that of 2023 figures, signaling a robust appetite for capital raising among banks.

Yu Du, a researcher at the Bank of China Research Institute, posits that the issuance of these bonds is critical for enhancing banks' capital generation capabilities

This method appears to be more viable compared to other forms of capital supplementation, especially for listed banks struggling with stock prices below book valueNon-listed banks, mostly smaller institutions, also face stark limitations in access to other capital-raising avenues, making bond issuance a lifeline for reinforcing their capital base.

Furthermore, the year has seen mixed economic scenarios impacting the banking sectorWhile large commercial banks experienced a robust recovery in capital adequacy, city commercial banks struggled due to lower capital availabilityAnalysts suggest that the drop in capital adequacy among city banks amidst attempts to support local economic growth serves as a clarion call for the issuance of more subordinated and perpetual bonds.

It’s important to note that the capital-raising avenues for banks often circle back to two principal routes: internal and external

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Internal capital generation methods rely on the conversion of operating profits into capital, while external methods vary from public offerings to bond issuance, potentially tapping into new forms of debt instruments to strengthen the capital base.

As larger banks focus on developing strategies for core tier-one capital replenishment, the market anticipates an uptick in the overall issuance of secondary capital and perpetual bondsThis move is expected to help alleviate existing pressures related to capital regulation and will allow banks to reassess their future issuance plans.

The recent responses from major banks, particularly their quarter-three earnings reports, reflect an urgent focus on addressing capital issuesAgricultural Bank officials noted their urgency in meeting internationally recognized capital conservation requirements amid their status as a globally significant bank

Likewise, Industrial and Commercial Bank representatives are working diligently to push these capital plans forward, highlighting the necessity of navigating through complex regulatory landscapes.

Overall, the strategies deployed by these banks suggest a consolidated push towards strengthening their capital bases through external debt instruments, with the dual goal of enhancing liquidity and stabilizing their financial standingStakeholders anticipate that once a more stable environment is reinstated, it will lead to a more steady issuance cycle of perpetual and secondary capital bonds to ensure that banks can remain resilient in a fluctuating economic climate.

In conclusion, the landscape of capital raising through "perpetual bonds" and "subordinated bonds" in China reflects a crucial shift in the operational strategies of commercial banksThe dramatic increases in issuance rates underline a proactive response to evolving regulatory demands and market dynamics, positioning these institutions to navigate the complexities of current economic conditions more effectively.

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