Chinas banks seen launching US$60 billion of loss-absorbing bonds to align with PBOCs guidelin
Two of China’s largest banks unveiled plans to sell total loss-absorbing capacity (TLAC) bonds this week, as Chinese lenders draw up plans to sell these newly introduced securities to strengthen their balance sheets and meet the central bank’s solvency regulations.
State-owned lender the Industrial and Commercial Bank of China (ICBC), the world’s largest bank by assets, said it will raise 30 billion yuan (US$4.2 billion) and Bank of China (BOC), another government-owned bank, said it will borrow 30 billion yuan via such issuances.
The bonds, a type of bail-in instrument designed to ensure that G-SIBs (global systemically important banks) can transfer losses to investors and can be converted to equity shares when it is determined that the issuer’s business is no longer viable.
The People’s Bank of China has required China’s G-SIBs to have a minimum total loss-absorbing capacity of 16 per cent of their risk-weighted assets by 2025, and 18 per cent by 2028. Fitch Ratings estimates that additional capital and TLAC-eligible senior debt requirements could amount to around 1.6 trillion yuan for China’s five G-SIBs by January 2025, and around 6.2 trillion yuan by January 2028.
Beijing-based ICBC will issue 20 billion yuan worth of four-year bonds and 10 billion yuan worth of six-year bonds on Wednesday in an offering to be lead managed by Citic Securities, according to a notice published on the website of Shanghai Clearing House, a central securities depository. BOC said it will also issue 20 billion yuan worth of four-year TLAC bonds and 10 billion yuan worth of six-year TLAC bonds on Thursday.
China’s five biggest state-owned lenders, including China Construction Bank, the Agricultural Bank of China, Bank of China, and Bank of Communications expect to sell 440 billion yuan of TLAC bonds to meet solvency requirements, the banks have said in their quarter-end capital plans.
“We believe that the issuance of TLAC bonds will help banks establish a new loss-absorbing layer when capital instruments are insufficient to absorb losses, allowing the lenders to bail themselves out, rather than resorting to help from outside,” Vivian Xue, APAC director of financial institutions at Fitch Ratings, told the Post in an emailed response. “Overall, TLAC bonds will help to enhance banks’ total loss-absorbing capacity and risk resilience.”
“TLAC bonds will only be used to absorb losses in the resolution for the banks, which means investors are less likely to suffer loss,” said Li Ying, head of financial institutions ratings at S&P Global (China) Ratings, who added the factors driving the bond price were similar to those of senior unsecured bonds.
In terms of principal and interest payment claims, TLAC bonds will rank in priority to equity capital and various other tiers of eligible equity capital instruments, and after the issuers’ excluded liabilities, such as insured deposits, according to Shanghai Clearing House.
“We believe the central government will intervene and prevent G-SIBs from getting into the resolution stage, particularly in China,” said S&P’s Li. “Therefore, the credit risk of Chinese G-SIBs’ TLAC bonds is very similar to their senior bonds.”
Fitch Ratings said its capital requirement estimates were based on an assumption of 8 per cent return on weighted average (RWA) growth, 3 per cent net profit growth, and dividend payout ratios of 30 per cent annually. The issuance amount may grow if banks accelerate their RWA growth, for example by taking on additional credit to support the domestic economy and/or specific sectors, it said.
“China’s TLAC consultation paper has stipulated that the loss absorption of TLAC debt will only be triggered after the full write-off or conversion of outstanding tier-2 (T2) instruments. Therefore, all things equal, we expect the coupon rate for TLAC debt to reflect default and loss-severity risks relative to T2 and additional tier-1 bonds,” wrote Fitch analysts.
In terms of appetite for these loss-absorbing bonds, Fitch said it expects its investor base to include mainly investors of existing bank instruments such as T2 and additional tier 1, as China’s onshore capital markets were still developing. These include the larger commercial banks, wealth-management companies, asset-management companies and insurance companies. Offshore bank issuance has been limited to date, reflecting differences in investor appetite and pricing, it said.
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