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China’s megabanks begin bond sales to absorb losses of US$8.3 billion
(Bloomberg) — Two of China’s biggest state-owned banks will sell a combined 60 billion yuan ($8.3 billion) of full-loss-absorbing bonds starting this week in the first debt sale of its kind by Chinese lenders in an effort to replenish capital and support growth. of the second largest economy in the world.
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Industrial and Commercial Bank of China Ltd. is planning to sell 30 billion yuan of TLAC bonds in two tranches between May 15 and May 17, the lender said in a May 11 statement to the Shanghai Clearing House. Bank of China Ltd. disclosed its issuance plan for the same amount, to be sold from May 16 to May 20, according to a statement released on Monday.
The financing effort marks the latest efforts by the country’s biggest lenders to bolster capital strength to meet global needs by early 2025. It also comes as Beijing is eager to guide lenders to secure credit supply and reduce financing costs for companies, further straining their depressed margins and profitability.
China’s big five state-owned banks, considered globally systemically important banks (G-SIBs), said earlier this year that they expected to issue up to 440 billion yuan in TLAC instruments in total. They must have liabilities and instruments available to “redeem” the equivalent of at least 16% of risk-weighted assets by January 1, 2025, increasing to 18% in 2028, according to the Financial Stability Board, an international body that drafted the TLAC rules in 2015.
Banks have typically relied on so-called additional Tier 1 and Tier 2 bonds in recent years to replenish capital. The new TLAC bonds may offer a smoother way of raising funds, as they absorb losses after the other two instruments in the event of a risk event that threatens the operations or even the survival of a creditor.
TLAC rules require banks to hold a certain amount of debt at the level of their holding companies, which can be converted into equity in a distressed scenario, to keep the operating company solvent, or almost solvent.
Fitch Ratings estimated in an April report that China’s five G-SIBs could issue about 1.6 trillion yuan in TLAC-eligible senior debt and equity instruments by January 2025, and about 6.2 trillion yuan until January 2028. In addition to ICBC and BOC, this group also includes China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of Communications Co.
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–With assistance from Zheng Li.
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