Banks ramp up bond issuance in Q2 to shore up capital

China's commercial banks stepped up the issuance of tier 2 capital bonds and perpetual bonds in the second quarter to replenish capital, strengthen resilience against financial risks and better serve the real economy.

According to market tracker Wind Info, 20 commercial banks issued 36 tier 2 capital bonds and perpetual bonds from April 8 to Thursday, with a total issuance volume of 988 billion yuan ($145 billion).

During this period, large State-owned commercial banks and joint-stock commercial lenders dominated the issuance. China's six largest State-owned commercial banks by assets issued 16 such bonds totaling 615 billion yuan, accounting for more than 62 percent of the total. Joint-stock commercial banks issued 13 such bonds totaling 325 billion yuan.

City commercial lenders issued only six such bonds. Bank of Beijing, Bank of Ningbo, Hankou Bank, Bank of Quanzhou, Guilin Bank and Bank of Ganzhou issued perpetual bonds totaling 46.5 billion yuan, accounting for a combined share of 4.7 percent.

Although smaller banks are lagging behind in this respect, several small and medium-sized commercial lenders were given the green light to issue tier 2 capital bonds and perpetual bonds in June.

The Gansu office of the National Financial Regulatory Administration announced on June 15 that it had granted Bank of Gansu permission to issue tier 2 capital bonds in an amount not exceeding 5 billion yuan. In early June, the NFRA's Zhejiang office also approved the issuance of tier 2 capital bonds totaling no more than 700 million yuan by Zhejiang Jinhua Chengtai Rural Commercial Bank.

Xiamen Bank has obtained administrative approval from the People's Bank of China, the country's central bank, to issue capital supplement bonds in the national interbank market and overseas markets, with the outstanding balance of such bonds not exceeding 11.4 billion yuan.

Similarly, Bank of Qingdao has received regulatory approval and an administrative license from the PBOC to issue capital instruments totaling no more than 6 billion yuan.

Analysts said in recent years, the narrowing of net interest margins and pressure on profits in the banking sector have made the need for capital replenishment even more pressing.

The NFRA said as of the end of the first quarter, the net interest margin of Chinese commercial banks stood at 1.4 percent, down 0.02 percentage point from the end of the previous quarter; the capital adequacy ratio, tier 1 capital adequacy ratio and common equity tier 1 capital adequacy ratio were 15 percent, 12.05 percent and 10.71 percent, respectively, all of which declined slightly from the end of the previous quarter.

Xue Hongyan, a special researcher at Jiangsu Su Merchants Bank, said core tier 1 capital is currently under pressure at city commercial banks and rural commercial banks across the country.

Although tier 2 capital bonds and perpetual bonds can supplement these banks' tier 2 capital and additional tier 1 capital, they are unable to fill their most pressing core tier 1 capital shortfall. Coupled with factors such as low market acceptance of capital instruments issued by low-rated smaller banks and a slow regulatory approval process at the beginning of the year, small and medium-sized banks have been largely absent from issuing such bonds so far this year, Xue said.

In contrast, the focus of capital replenishment for large State-owned commercial banks leans more toward boosting tier 2 capital. Leveraging their high credit ratings and market recognition, large State-owned commercial banks and joint-stock commercial lenders have maintained their dominant position in the issuance of such bonds, he said.

Xue advised small and medium-sized banks to establish a long-term capital replenishment system centered on capital increases and share expansions, supplemented by the issuance of tier 2 capital bonds and perpetual bonds, and underpinned by accumulated profits.

Song Ge, deputy general manager of the financial institutions rating department at CSCI Pengyuan Credit Rating Co, said while the overall risks of small and medium-sized banks are currently manageable, there are still a few such banks with relatively high risk. "Financial regulators and local governments have continued to promote the resolution of risks at high-risk small and medium-sized banks in recent years."

Song said the practice of using local government special-purpose bonds to replenish capital for small and medium-sized banks is now relatively well-established, and merger and restructuring initiatives, such as the reorganization of provincial credit cooperatives, are proceeding in an orderly manner. In the future, financial regulators may introduce more innovative instruments to support capital replenishment for smaller banks. At a meeting on March 16, the NFRA said it would explore ways to bolster the capital of small and medium-sized financial institutions through a variety of channels.

jiangxueqing@chinadaily.com.cn