Financial Services Association, April 10 (Reporter Shi Sitong) With the Bank of China once again completing the issuance of 60 billion yuan of second-tier capital bonds, the bank's plan to “issue no more than 450 billion yuan in capital instruments” has been completed.

A Financial Services Association reporter noticed that since this year, the enthusiasm of major state-owned banks to issue bonds has increased markedly; the three state-owned banks, the Bank of China, CCB, and the Agricultural Bank, issued 240 billion yuan of second-tier capital bonds during the year.

Li Qinghe, chief fixed income analyst at Huafu Securities, pointed out that in the context of the continuing bullish bond market and scarce assets, banks are seizing the opportunity to issue second-tier capital bonds on a large scale, and while increasing capital adequacy ratios, they can also cope with the wave of maturity and redemptions of “Eryong bonds.”

Looking ahead to 2024, industry analysts generally believe that commercial banks' demand for capital supplementation may still rise this year, driving supply volume throughout the year. At the same time, major state-owned banks will still be the main issuers, but the participation of small and medium-sized banks and agricultural and commercial banks will gradually increase.

The Bank of China has successively issued 280 billion yuan of second-tier capital bonds

“The funds raised in this issue will supplement the Bank's Tier 2 capital in accordance with applicable laws and regulatory approval.” Recently, the Bank of China issued an announcement. The bank issued a total of 60 billion yuan of second-tier capital bonds on the national interbank bond market on April 2, and completed issuance on April 8.

Specifically, the bank's current bonds include two types, as in the past. Among them, the issuance scale of 10-year fixed-rate bonds is 35 billion yuan, and the 15-year fixed interest rate bond issuance scale is 25 billion yuan. However, the difference is that as interest rates continue to decline, interest rates on current bonds have also declined markedly. The coupon interest rates for these two types of bonds are 2.62% and 2.71%, respectively.

A Financial Services Association reporter noticed that this is the second time the Bank of China has issued secondary capital bonds during the year, and the fifth time since the second half of last year that it has issued secondary capital bonds.

According to information, on June 30 of last year, the shareholders' meeting held by the Bank of China deliberated and approved its bill to issue no more than 450 billion yuan or foreign currency equivalent capital instruments. Following approval from relevant regulators, the Bank of China has issued secondary capital bonds several times, including current bonds. The total amount issued has now reached 280 billion yuan.

In response, Li Qinghe, chief fixed income analyst at Huafu Securities, pointed out that under the trend of narrowing net interest spreads, banks are limited in their ability to supplement capital through retained profits. Therefore, in the context of the continuing bullish bond market and the scarcity of assets, the Bank of China is seizing the opportunity to issue second-tier capital bonds on a large scale. While increasing the capital adequacy ratio, it can also cope with the wave of maturing and redemptions of eryong bonds.

Bank of China Vice Governor Zhang Yi said at a performance conference a few days ago that in order to support the development of the real economy, the bank maintained rapid double-digit growth in asset size and loans last year, but in response, capital consumption is also accelerating. In the future, the bank will speed up the enhancement of capital strength and continue to steadily advance the issuance of perpetual bonds, secondary capital bonds, and TLAC non-capital debt instruments.

Participation in the issuance of “Eryong Bonds” by small to medium banks declined during the year

Secondary capital bonds, perpetual bonds, convertible bonds, etc. are conventional tools for commercial banks to supplement capital. According to Wind data, since 2024, 4 banks, including Bank of China, China Construction Bank, Agricultural Bank, and Hang Fung Bank, have issued second-tier capital bonds, with a total issuance scale of 250 billion yuan; at the same time, 3 banks, Agricultural Bank, Postbank, and Bank of Guilin, have participated in issuing perpetual bonds with a total issuance amount of 73 billion yuan.

A Financial Services Association reporter noticed that compared with the same period in previous years, the enthusiasm of major state-owned banks to participate in the issuance of “Eryong Bonds” has increased this year, but the participation of small and medium-sized banks has declined markedly.

According to CITIC Securities's chief economist Ming Ming, there are many reasons why major state-owned banks issue second-tier capital bonds on a large scale. First, to meet regulatory requirements, increase capital adequacy, and enhance risk resilience; second, as the scale of business expands, banks need more capital to support their business development. At the same time, in the current interest rate environment, the cost for banks to issue secondary capital bonds is low, and financing costs can be locked in for a longer period of time.

Regarding the contraction in the issuance of “Eryong Bonds” by small and medium-sized banks, Li Qinghe believes that the main reason is that the risk of non-redemption of secondary capital bonds of small and medium-sized banks is higher, and they are limited by quota, making it more difficult to issue overall. At the same time, the issuance of special bonds by small and medium-sized banks was on a large scale in 2023, which also relieved the pressure on capital replenishment to a certain extent.

Zheng Jiawei, chief fixed income analyst at Yongxing Securities Research Institute, also pointed out that small and medium-sized banks as a whole are being greatly affected by current fundamentals and are facing a situation where deposit costs are difficult to reduce and debt-side costs are high. At the same time, compared to major state-owned banks and stock banks, the profit level of small and medium-sized banks is relatively weak, and the market is not very motivated to invest in “Eryong bonds” issued by small and medium-sized banks, which is also the main reason.

Commercial banks' capital supplement demand may still rise in 2024

“Generally speaking, the pace of issuance of 'Eryong Bonds' is affected by many factors, including the growth rate of risk-weighted assets, changes in bank profits, changes in regulatory requirements and policies, the maturity and redemption situation of 'Eryong Bonds', and market issuance costs.” Lee Ching-ho told the Financial Federation reporter.

In fact, in recent years, due to the slowdown in profits, the ability of some banks to supplement endogenous capital has declined, and pressure to dispose of credit and non-performing assets has led to a high pressure to supplement capital, etc., and they need to ensure that their capital adequacy ratio is within a reasonable range through the issuance of exogenous channels such as “Eryong Bonds.”

Looking ahead to 2024, she believes that the impact of the TLAC gap on the supply of “Eryong Bonds” may be limited, but under the influence of factors such as “Eryong Bonds” redemption pressure and new capital regulations, commercial banks' demand for capital supplementation may still rise in 2024, driving annual supply volume, issuance or concentration in the second and third quarter, and major Chinese stock banks may still be the main issuing force.

“The issuance of 'Eryong Bonds' fluctuates greatly seasonally. Banks focused more on credit investment in the first half of the year, and demand for capital supplements was weak; while in the second half of the year, banks' demand for capital supplementation will increase dramatically as business expands.” Cheng Ka-wai further stated.

In his view, in the third quarter of this year, the pace at which banks issue “two permanent bonds” will accelerate. From the perspective of issuers, state-owned commercial banks are still the main issuers, but the participation of small and medium-sized banks and agricultural commercial banks will gradually increase. At the same time, in terms of interest rates, there is a possibility that interest rates for issuing “Eryong Bonds” will be reduced in the future, and interest rates on subsequent bond issues may continue to fall.