On May 13, Bank of China announced that it would issue 2024 Total Loss-Absorbing Capacity (TLAC) non-capital bonds (Phase I) from May 16 to May 20, with a basic issuance scale of RMB 30 billion.
The latest announcement from the two major banks
According to the announcement, after deducting the issuance costs, the funds raised in this issue of bonds will be used to enhance the issuer's total loss absorption capacity in accordance with applicable laws and the approval of the competent authorities.
According to the announcement, the TLAC non-capital bonds issued by the Bank of China include two varieties:
Variety 1 is a 4-year fixed-rate product with a conditional issuer's right of redemption at the end of the third year. The basic issuance scale is 20 billion yuan.
Variety 2 is a 6-year fixed-rate product with a conditional issuer's right of redemption at the end of the 5th year. The basic issuance scale is 10 billion yuan.
At the same time, the announcement also shows that if the actual full-time subscription multiple (full-time subscription amount/basic issuance size) of any one of the current bonds α≥ 1.4, the issuer has the right to choose to exercise the right to over-issue the corresponding varieties, that is, to increase the issuance scale of the corresponding varieties in addition to the basic issuance scale of the current bonds, and the total additional issuance scale of varieties 1 and 2 shall not exceed RMB 10 billion.
On May 11, ICBC also announced that it would issue 2024 TLAC non-capital bonds (Phase I) from May 15, with an issuance scale of RMB 30 billion.
The total shortfall of the first phase of TLAC of the five major banks is 600 billion yuan to 2.09 trillion yuan
TLAC refers to the total loss-absorbing capacity of banks, which is the sum of capital and debt instruments that can absorb losses by write-downs or conversion into common equity when global systemically important banks (G-SIBs) enter the resolution phase.
According to the Measures for the Management of the Total Loss-Absorbing Capacity of Global Systemically Important Banks (hereinafter referred to as the "Measures") issued by the People's Bank of China, the former China Banking and Insurance Regulatory Commission and the Ministry of Finance in 2021, the risk-weighted ratio and leverage ratio of the total external loss-absorbing capacity of G-SIBs shall not be less than 16% and 6% respectively from January 1, 2025, and shall not be less than 18% and 6.75% respectively from January 1, 2028.
The so-called TLAC non-capital bonds are financial bonds issued by G-SIBs 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.
According to the latest list of G-SIBs released by the Financial Stability Board (FSB), a total of five Chinese banks are on the list, including Agricultural Bank of China, Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Bank of Communications. Among them, Bank of Communications will be selected for the first time in 2023 and will be in the first group, while the remaining four banks are all in the second group.
The Measures specify that commercial banks that have been identified as global systemically important banks before January 1, 2022 shall meet the requirements of total external loss absorption capacity within the time limit specified in the Measures. Commercial banks that are designated as global systemically important banks after January 1, 2022 shall meet the total external loss absorption capacity requirements stipulated in these Measures within three years from the date of designation.
Therefore, Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China are all required to meet the regulatory requirements of no less than 16% and 6% respectively for the risk-weighted ratio and leverage ratio of total external loss absorption capacity from January 1, 2025, while Bank of Communications, which was selected for the first time in G-SIBs in 2023, still has a three-year transition period.
At the beginning of this year, the five major banks have announced their respective TLAC non-capital bond issuance quotas, according to the announcements of the banks, as of now, the five major banks will issue a total of no more than 440 billion yuan of TLAC non-capital bonds.
Among them, Bank of China said that it will issue write-down TLAC non-capital debt instruments of no more than 150 billion yuan or its equivalent in foreign currencies in batches to raise funds to supplement the bank's TLAC. According to Bank of Communications, the total amount of TLAC bonds to be issued in domestic and overseas markets in 2024 will not exceed RMB130 billion (including foreign currency equivalents). The issuance scale of Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China was 60 billion yuan, 50 billion yuan and 50 billion yuan respectively.
Dai Zhifeng, director of Zhongtai Securities Research Institute, once pointed out in an article that the total gap between the five major banks in the first phase of TLAC is 600 billion yuan to 2.09 trillion yuan.
"If the deposit insurance fund is not taken into account, it is expected that the total gap of the five major banks in 2024 will be 2.09 trillion yuan, and if the deposit insurance fund is included at the upper limit of 2.5%, the gap will be 618.2 billion yuan." Dai Zhifeng said that from the perspective of the time to meet the standard, the four major banks need to meet the first stage requirements by 2025, and the Bank of Communications needs to meet the first stage requirements by 2027. By the second stage (before 2028), the average annual shortfall will be 1.15 trillion yuan.
"We don't think there's much of a problem with meeting the 2025 TLAC standard." Sheng Liurong, Chief Financial Officer of CCB, said at the 2023 annual results meeting that CCB is currently focusing more on reaching the target in 2028 and has made some plans and arrangements for 2-3 years.
The capital management capabilities of commercial banks will be more demanding
Oriental Jincheng International Credit Rating Co., Ltd. (hereinafter referred to as "Oriental Jincheng") pointed out in the credit rating notice of Bank of China's bond issuance that under the background of "seeking progress while maintaining stability" and prudent monetary policy, the overall business operation of commercial banks will remain stable, the asset quality of the industry will remain within a controllable range, and the differentiation trend will continue.
Oriental Jincheng said that since 2023, the issuance of capital supplementary bonds by commercial banks has accelerated, and local governments have also vigorously issued special bonds to support small and medium-sized banks to replenish capital, but the overall capital adequacy ratio of commercial banks has fallen slightly compared with the beginning of the year due to the weakening of endogenous capital replenishment capacity and the rapid growth of business scale. It is expected that in the future, based on the demand for further support for the real economy, improving the ability of credit delivery, and resolving risk assets, commercial banks will still have a large demand for capital replenishment, but it is expected that the overall capital adequacy of the industry will remain reasonable and sufficient in the context of regulatory encouragement of multi-channel capital replenishment. At the same time, with the implementation of additional regulatory provisions for systemically important banks and the Measures for the Management of Capital of Commercial Banks, industry capital has ushered in differentiated management, which has put forward higher requirements for the capital management capabilities of commercial banks.
United Credit Rating Co., Ltd. pointed out in the 2024 TLAC non-capital bond (phase I) credit rating report of ICBC that the total loss-absorbing capacity non-capital bond has a loss-absorbing clause, on the one hand, the total loss-absorbing capacity non-capital bond has the ability to absorb losses, and on the other hand, once the loss-absorbing clause is triggered, investors in the total loss-absorbing capacity non-capital bond will face larger losses. However, the trigger event for write-downs of non-capital bonds with total loss-absorbing capacity is less likely to occur.
Dai Zhifeng believes that the safety of the TLAC bonds of the big banks is better, and it can provide investors with new investment varieties similar to Tier 2 capital bonds. In terms of yield, the yield of the TLAC instrument is expected to be between commercial and financial bonds and Tier 2 capital bonds. From the perspective of investor types, it is expected that the main investors of TLAC bonds will be investors such as wealth management and broad funds.
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