According to Moody’s on 26 December, China’s State Council’s Financial Stability and Development Committee announced in a statement on the People’s Bank of China website that it was researching multiple ways to help commercial banks replenish capital and push for the issuance of perpetual bonds. The statement extends the thinking laid out by the regulator in 2018, when it suggested ways to augment and replenish banks’ capital with new capital instruments.
Allowing banks to issue perpetual bonds to boost their capitalization is credit positive for Chinese banks, their depositors and senior unsecured creditors. Perpetual bonds are classified as Additional Tier 1 (AT1) securities and ranked lower than senior instruments in a liquidation, meaning that they will strengthen banks’ capacity to absorb losses. The bonds will qualify and be counted toward banks’ total loss-absorbing capacity requirements, which take effect on 1 January 2025, if not earlier.
The move will also ease pressure on banks’ capital.
Although loan growth is slowing, the full phase-in of a capital conservation buffer and the migration of prior shadow banking assets back to banks’ on-balance sheet loans are two sources of strain. Issuing perpetual bonds will widen the pool of potential investors in banks’ capital instruments, creating another channel to raise AT1 capital.
Preference shares have been the dominant form of AT1 instruments that banks have so far issued, but investors with debt-only investment mandates cannot access them. Banks are currently allowed to issue preference shares to increase their overall Tier 1 capital ratios, which requires the approval of the China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities Regulatory Commission. Because perpetual debts are not “shares,” their issuance is likely to require the oversight of both the CBIRC and the People’s Bank of China, as is the case for Tier 2 debt instruments.
Although several banks have expressed interest in issuing more AT1 capital instruments, banks will only begin to issue perpetual debt once the regulator provides further guidance. The size of Chinese banks’ assets means that issuance is likely to be relatively sizable and success will depend on market depth and pricing. Because they are not the same quality of equity capital, perpetual bonds have no impact on a bank’s Common Equity Tier 1 ratio.
