Countdown to the entry of new financial bonds from banks

As the deadline for achieving the total loss-absorbing capacity ("TLAC") deadline is approaching, the issuance of non-capital bonds with total loss-absorbing capacity ("TLAC non-capital bonds") is also on the agenda. On May 15, ICBC will issue 2024 total loss-absorbing capacity non-capital bonds (Phase I) with a bond size of 30 billion yuan, which will become the first TLAC non-capital bond. With the exception of Bank of Communications, which is scheduled for 2027, there are less than seven months left for other global systemically important banks to submit their papers...... It remains to be seen how TLAC non-capital bonds will affect the overall capital adequacy ratio of the domestic banking industry, and whether the introduction will lead to changes in the structure of traditional bank subordinated bonds.

TLAC non-capital bonds will be listed

Recently, ICBC disclosed the issuance plan of "2024 Total Loss Absorbing Capacity Non-Capital Bonds (Phase I)" to raise funds to improve total loss absorption capacity.

Judging from the prospectus, the basic issuance scale of this issue of bonds is 30 billion yuan, of which the basic issuance scale of variety 1 is 20 billion yuan, and the basic issuance scale of variety 2 is 10 billion yuan. Bond variety 1 is a 4-year fixed-rate bond with a conditional issuer's right of redemption at the end of the third year, and bond variety 2 is a 6-year fixed-rate bond with a conditional issuer's right of redemption at the end of the 5th year.

TLAC non-capital bonds refer to financial bonds issued by global systemically important banks to meet the requirements of total loss absorption capacity, which have the function of absorbing losses and do not belong to the capital of commercial banks.

In the rating report released by United Credit, it pointed out that in recent years, ICBC's capital adequacy index has improved, and its capital has maintained an adequate level. In addition, as one of the world's systemically important banks, the implementation of the regulatory requirements on total loss absorption capacity has put forward higher requirements for ICBC's capital adequacy level, and the issuance of non-capital bonds with total loss absorption capacity will further enhance its capital adequacy level.

In the aftermath of the 2008 financial crisis, the need to strengthen the financial regulatory system has become particularly acute in order to prevent the "too big to fail" phenomenon from triggering systemic risks again. To this end, in November 2015, the G20 leadership adopted the Global Total Loss Absorption Capacity Clause for Systemically Important Banks, presented by the Financial Stability Board, which establishes a benchmark for total loss absorption capacity that can be applied across borders. This provision requires large financial institutions to maintain sufficient resources of their own to rely on their own strength, that is, to maintain the operation of core business and basic services through "self-redemption" means in the event of financial difficulties, thus eliminating the need to rely on the government for external rescue.

Against this backdrop, in October 2021, the People's Bank of China, the former China Banking and Insurance Regulatory Commission (CBIRC) and the Ministry of Finance jointly issued the Measures for the Management of the Total Loss-Absorbing Capacity of Global Systemically Important Banks (hereinafter referred to as the "Administrative Measures"), which established the Chinese version of the TLAC regulatory system, stipulating that the risk-weighted ratio of global systemically important banks in mainland China should reach 16% in early 2025 and 18% in early 2028, and the leverage ratio should reach 6% in early 2025 and 6.75% in early 2028.

The implementation of TLAC has helped to improve the capital adequacy ratio of the domestic banking sector. Bai Wenxi, vice chairman of the China Enterprise Capital Alliance, said in an interview with a reporter from Beijing Business Daily that the implementation of TLAC non-capital bonds may have a positive impact on the capital adequacy ratio of the domestic banking industry. This is because the issuance of TLAC non-capital bonds requires banks to improve their capital adequacy ratios in response to possible loss absorption deficiencies. This may prompt banks to adopt a more disciplined capital management strategy, enhance risk management, and optimize their asset portfolios to reduce their risk exposure. In addition, the issuance of TLAC non-capital bonds will also have an impact on the capital structure of banks, pushing banks to optimize their capital structure and increase the proportion of long-term capital sources.

A total of 440 billion yuan is planned

Since the introduction of TLAC non-capital bonds, TLAC non-capital bonds have become one of the key ways for global systemically important banks to meet regulatory requirements.

Since 2011, the number of global systemically important banks announced by the Financial Stability Board has remained at around 28 to 30 per year. During this period, Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China were included successively, and Bank of Communications was slightly late, making the list for the first time in 2023.

According to the Administrative Measures, commercial banks that are recognized as global systemically important banks before January 1, 2022 shall meet the relevant requirements of TLAC; Commercial banks that are designated as global systemically important banks after January 1, 2022 shall meet the TLAC requirements within three years after being designated.

In other words, the four major state-owned banks, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China, need to meet the TLAC risk-weighted ratio of not less than 16% by January 1, 2025, and Bank of Communications needs to meet the TLAC risk-weighted ratio requirement of not less than 16% by 2027.

In order to meet the TLAC compliance standards, all five major state-owned banks have begun to prepare and take steps to advance their implementation plans. A reporter from Beijing Business Daily found that as of the end of the first quarter of this year, the five major banks have announced the issuance quota of TLAC non-capital bonds, with a total issuance of no more than 440 billion yuan. Among them, the Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China will issue 60 billion yuan, 50 billion yuan and 50 billion yuan respectively, and Bank of China and Bank of Communications plan to issue TLAC non-capital debt instruments of no more than 150 billion yuan and 130 billion yuan respectively.

Yu Fenghui, a new finance expert, pointed out that the issuance of TLAC non-capital bonds will have an impact on the risk management strategy of the banking industry, and banks need to establish a more complete risk management system, including the management of the issuance, pricing and risk management of TLAC non-capital bonds. It is necessary to pay more attention to the management of market risk and liquidity risk; There is also a need to strengthen the management of credit risk to ensure that no credit risk events occur during the bond issuance process.

It may affect the issuance structure of traditional subordinated bonds

At the 2023 annual results conference, the management of a number of major state-owned banks expressed their response to the TLAC requirements.

"At present, all our preparations have been made to ensure the smooth implementation and smooth transition of the new capital regulations." At the 2023 annual results conference held by CCB recently, Sheng Liurong, the bank's chief financial officer, revealed, "It is not a big problem to judge that the TLAC will be met in 2025 now, because CCB's capital adequacy ratio is close to 18%. Next, the issuance of TLAC bonds will be submitted to the regulatory authorities, and strive to be issued in the third quarter. ”

Zhang Yi, deputy governor of Bank of China, also said at the bank's 2023 annual results conference that 2024 is the first year of the official implementation of the "Measures for the Capital Management of Commercial Banks", and at the same time, the TLAC standard should be achieved in 2025. Bank of China further strengthened capital constraints, promoted the transformation of development mode, and ensured that TLAC met the target as scheduled.

Liu Jianjun, Chief Risk Officer of Bank of Communications, also mentioned that the selection of a global systemically important bank has brought new opportunities to Bank of Communications, and of course, it has also put forward additional requirements. Bank of Communications will comply with domestic and foreign regulations, grasp the market window, and promote the issuance of qualified debt instruments in an orderly manner to meet the TLAC compliance requirements and continuously improve its risk resilience.

From the perspective of capital adequacy ratio, as of the end of 2023, the capital adequacy ratios of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications were 19.1%, 17.14%, 17.74%, 17.95% and 15.27% respectively.

As for the issuance process of TLAC non-capital bond instruments, in view of the need to complete a series of procedures such as regulatory approvals, institutions generally speculate that the actual issuance work may be realized in the second quarter of this year, and the initial issuance scale is expected to be conservative and will not reach a large amount immediately.

According to Jiang Han, a senior researcher at Pangu Think Tank, the launch of TLAC non-capital bonds may lead to changes in the structure and maturity structure of bank subordinated bonds. As TLAC non-capital bonds are a new type of bank subordinated bonds with better security and a shorter maturity, its launch may attract more investors' attention. This could lead to a decrease in the issuance of subordinated debt from traditional banks, or an increase in the issuance cost of subordinated debt from traditional banks. At the same time, the key elements of TLAC non-capital bonds, such as issuance size, maturity and interest rate, will be affected by various factors such as market supply and demand, macroeconomic environment, and policy guidance. In terms of future prospects, it is expected that the performance of TLAC non-capital bonds in the market will continue to be stable, providing banks with more channels for capital replenishment.

"With the implementation of TLAC, banks may need to issue more non-capital bonds to replenish capital, which will make subordinated debt less preordinated." In addition, as the demand for TLAC non-capital bonds increases, some banks may consider including them in their basket of capital replenishment instruments, which will increase the variety of capital replenishment instruments for banks. As a result, with the introduction of TLAC non-capital bonds, banks' subordinated bonds are likely to show a trend of longer maturities. At the same time, in order to adapt to the new market environment, banks may need to redesign their investment strategies and risk management strategies.

Beijing Business Daily reporter Song Yitong