(Bloomberg) -- China’s biggest lenders are on a debt issuance spree as they lock in cheap rates and plug a $224 billion loss absorbency shortfall before the end of the year.
New regulatory requirements taking effect on Jan. 1 mean China’s globally systematically important banks, G-SIBs, need to raise more capital. While retained profits or issuing stock would also help fund the gap, their profitability has been crimped by record low margins and the country’s markets and economy remain in the doldrums.
Debt issuance is also getting a boost from more than 1.1 trillion yuan ($153 billion) of callable debt at banks. With new deals getting printed at record low interest rates, lenders have been keen to refinance.
That’s led to a combined 1 trillion yuan of perpetual bonds and tier-2 capital notes issued by Chinese banks through the first seven months of the year, a record high for the period, according to data collected by Bloomberg. Fitch Ratings Inc. estimated in April that the G-SIBs needed to raise an additional 1.6 trillion yuan before January to meet their loss absorbency requirements.
“Banks’ profitability and capital accumulation have both weakened, so they naturally have a stronger demand for external capital tools,” said Vivian Xue, director of Asia-Pacific Financial Institutions at Fitch. “The lenders also need to roll over subordinated bonds coming due this year, and the relatively low rates mean that they could issue new tools at cheaper costs for replacement purpose.”
Agricultural Bank of China Ltd. topped the list by issuing 230 billion yuan of debt, followed by Bank of China Ltd. at 150 billion yuan and China Construction Bank Corp. at 100 billion yuan. The largest state-owned lenders accounted for 61% of issuance this year, joint stock banks 28% and regional lenders 11%. The coupon on the notes averaged 2.745%, the lowest ever, according to data collected by Bloomberg.
China’s G-SIBs must have total loss-absorbing capacity (TLAC) of at least 16% of risk-weighted assets by Jan. 1, rising to 18% in 2028, according to the Financial Stability Board, an international body created by the Group of 20 nations. They also have to meet additional capital buffers under the Basel Accords, resulting in a aggregate requirement of 19.5% to 20% of risk weighted assets by 2025.
Bank of Communications Co. became China’s fifth G-SIB last November, and doesn’t need to meet the TLAC requirements until three years after its designated.
So far, investors have been happy to absorb the supply. The average yield of 10-year AAA rated onshore financial bonds sold by Chinese commercial banks have fallen almost 70 basis points this year to roughly 2.21%, the lowest level since at least 2009 when ChinaBond began to publish its index. That outperformed the yield on 10-year sovereign notes which tightened roughly 40 basis points in the same period.
Li Han, chief fixed income analyst at Citic Securities Co., expects Chinese banks’ capital bond issuance to pick up in coming years, with strong demand from investors who lack many other high-yielding alternatives.
“Chinese banks’ perpetual bonds and tier-2 capital notes offer good liquidity and solid returns,” said Li. The supply of such notes “will have a further leg up in next few years.”
©2024 Bloomberg L.P.
