China megabanks plan funding spree to plug capital shortfall

BLOOMBERG 

China’s megabanks are planning at least 40 billion yuan ($5.8 billion) of bond sales, kicking off a major funding push to comply with global capital requirements by early 2025.
Industrial & Commercial Bank of China Ltd (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. The exact amounts haven’t been finalised but each bank is targeting at least 10 billion yuan.
China’s big banks have typically relied on so-called additional Tier-1 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 operations or survival of a lender.
The planned issuance comes at a shaky time for global debt markets after Swiss regulators shocked investors with the wipe-out of AT1 bonds issued by Credit Suisse Group AG when they orchestrated a rescue of the lender. The move triggered some lenders to delay their planned debt sales and made investors wary of adding new exposure to such notes.
The big four Chinese banks are more likely to target domestic institutional investors, according to Shen Meng, a director at Beijing-based investment bank Chanson & Co.
China’s big four state-owned banks, which are deemed globally systemically important, face a capital shortfall of as much as 3.7 trillion yuan by 2025 in order to comply with TLAC requirements, according to S&P Global Ratings. Fitch Ratings Inc sees a smaller gap of 1.3 trillion yuan based on capital positions levels at 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.”
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 people.
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%, up from 3.377% a year earlier.
As systemically important emerging market banks, ICBC, China Construction Bank Corp, Agricultural Bank of China Ltd and Bank of China Ltd must have liabilities and instruments available to “bail in” in the equivalent of at least 16% of risk-weighted assets by January 1, 2025, rising to 18% in 2028, according to the Financial Stability Board, 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% to 20% 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, according to Fitch. The volatility in offshore debt market following the Credit Suisse blow-up might add uncertainty over the issuance of TLAC bonds, she said.