China's Commercial Banks 'Refuel' With Tier-2 Capital Bonds
Liao Shumin
/SOURCE : yicai
China's Commercial Banks 'Refuel' With Tier-2 Capital Bonds

(Yicai Global) Dec. 11 -- With the year's end looming, banks are in the throes of an increasingly more voracious demand for capital replenishment. Large state-owned banks and joint-equity commercial ones collectively 'refuel' by issuing tier-2 capital bonds to meet this need.

The shareholders' meeting of China's fifth-largest Bank of Communications will deliberate a resolution to issue CNY80 billion (USD11.6 billion) capital bonds to supplement its tier-2 capital, optimize its capital structure and aid the stable, healthy growth of its business, the bank said in a statement yesterday.

Tier-2 capital bonds refer to debt instruments commercial banks issue whose liquidation precedence is inferior to that of banks' other liabilities but comes before that of commercial banks' equity capital. These bonds fall under the rubric of bankruptcy liquidation capital, which means they must be offset or convert to ordinary shares when a bank cannot continue to operate to enable it to absorb losses.

The issue is due to the successive expiration of the capital instruments it holds, to smoothly link up with and transition to the upcoming renewal, Bank of Communications said, adding the bonds will come out in batches after approval from regulators, and have a term valid for at least five years.

The capital adequacy ratio of Bank of Communications reached 14.08 percent by the end of September and the ratios for its tier-1 capital and core tier-1 capital were 11.93 and 10.87 percent, respectively, all of which were slightly better than last year's result.

The other four state-owned commercial banks have all supplemented their capital through issues of tier-2 capital bonds this year, except for Industrial and Commercial Bank of China. Bank of China issued its first and second batch of the bonds on Sept. 3 and Oct. 9 this year, worth CNY40 billion each. China Construction Bank also issued tier-2 capital bonds in batches in September and October in respective amounts of CNY43 billion and CNY40 billion. Agricultural Bank of China issued its own bonds with a value of CNY40 billion in April.

This refueling by joint-equity commercial banks is smaller than that of state-owned ones. Shanghai Pudong Development Bank issued tier-2 capital bonds in two batches of CNY20 billion apiece in September, while Beijing-based China CITIC Bank and Shenzhen-headquartered China Merchants Bank issued their bonds respectively worth CNY30 billion and CNY20 billion in September and last month.

Policy lenders the Export-Import Bank of China (directly under China's cabinet, the State Council) has also twice issued tier-2 capital bonds -- on Sept. 27 and Oct. 17 -- in the amount of CNY30 billion each, while China Development Bank issued CNY30 billion in bonds last month.

The collective 'refueling' of banks in recent months is due to the loosening of liquidity in the inter-bank market, and also relates to new asset management rules encouraging the return of non-standardized credit assets to the balance sheet, thus expanding banks' demand for capital, an insider in the financial market department at a joint-equity bank told Chinese state media The Paper.

China's financial regulator has tightened risk control of commercial banks' off-balance-sheet assets -- likely held through trusts and wealth management products. Banks must now allow for impaired losses on assets and retain risk-based capital for their off-balance-sheet assets

Editor: Ben Armour

Follow Yicai Global on
Keywords: Commercial Banks , Tier 2 Capital Bond