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First TLAC non-capital bond issuance! The five major banks plan to issue no more than 440 billion, what is the impact?

China's first Total Loss Absorption Capacity (TLAC) non-capital bond landed today.

On May 15, ICBC issued 2024 Total Loss Absorbing Capacity Non-Capital Bonds (Phase I) with an issuance scale of 30 billion yuan, becoming the first bank to issue TLAC bonds among the five global systemically important banks (G-SIBs) in mainland China.

According to expert analysis, the five global systemically important banks in mainland China are still facing a TLAC gap. In the short term, the completion of the first phase of the target is expected to be optimistic, while the demand for long-term TLAC bond issuance is broad, and the future issuance may increase at an incremental rate.

ICBC's initial offering scale was 30 billion yuan

It is reported that the basic issuance scale of ICBC's current bonds is RMB 30 billion. Among them, the first product is a 4-year fixed-rate bond, with a conditional issuer's redemption right at the end of the third year, and the basic issuance size is RMB 20 billion; The second type of bond is a 6-year fixed-rate bond, with a conditional issuer's right of redemption at the end of the fifth year, and the basic issuance size is RMB10 billion.

The total issuance size of the two types of bonds shall not exceed RMB10 billion, and the minimum subscription amount shall be RMB10 million, and the subscription amount shall be an integer multiple of RMB10 million.

It is reported that TLAC (Total Loss-absorbing Capacity) refers to the sum of capital and debt instruments that can absorb losses through write-downs or conversion into common equity when global systemically important banks enter the resolution stage. TLAC bonds are financial bonds issued to meet the requirements of TLAC, have the function of absorbing losses, and do not belong to the capital of commercial banks.

To put it simply, when global systemically important banks are in crisis, they can adopt an "internal bailout" approach to maintain the continuity of key business and service functions, avoid using public funds for "external bailouts", and prevent and resolve systemic financial risks.

"The main feature of TLAC bonds is that when a bank encounters a major risk, it can trigger a pre-agreed bond conversion mechanism to convert it into equity or reduce the principal amount of the bond, so as to realize the loss sharing between creditors and shareholders and avoid the bank from entering bankruptcy liquidation." Zhong Huiyong, an associate professor at the School of Finance of Shanghai University of International Business and Economics, said in an interview with reporters, "The issuance of TLAC bonds by ICBC will help enhance its resilience to financial risks." ”

"The issuance of TLAC bonds is an important manifestation of China's banking industry's response to international regulatory requirements, and is of positive significance to the mainland financial system. In addition, the issuance of TLAC bonds can help commercial banks complete the TLAC compliance assessment at a lower cost, which will help improve the 'hematopoietic ability' of banks to support the real economy, so as to better serve the real economy." Sun Enxiang, head of the project of Paipaiwang Wealth Partners, analyzed.

In the view of Liu Yan, chairman of Anjue Assets, the issuance of TLAC bonds will enrich the product supply of the mainland bond market, provide investors with more diversified investment options, help promote the diversification and healthy development of the capital market, and improve the activity and efficiency of the market.

The big five banks have taken action

In 2021, the Measures for the Management of the Total Loss-Absorbing Capacity of Global Systemically Important Banks jointly issued by the People's Bank of China, the former China Banking and Insurance Regulatory Commission and the Ministry of Finance pointed out that from January 1, 2025, the risk-weighted ratio and leverage ratio of the total external loss absorption capacity of global systemically important banks in mainland China should reach 16% and 6%, respectively, and from January 1, 2028, they should not be less than 18% and 6.75%, respectively.

According to the latest list of global systemically important banks released by the Financial Stability Board (FSB), there are five banks on the list, namely Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications.

It is worth noting that except for the "new member" Bank of Communications, which joined last year, the deadline for meeting the first phase of the task can be extended to 2027, and the other four major banks only have a transition period of the second half of the year.

As the deadline approached, banks took action.

On May 13, Bank of China announced that it would issue the first phase of the bank's TLAC non-capital bonds from May 16 to May 20, with a total scale of RMB 30 billion, which is basically the same as ICBC in terms of bond maturity, basic issuance scale and excess issuance rights.

In addition, according to the TLAC non-capital bond issuance plan disclosed by the five major banks at the beginning of the year, the total scale of subsequent issuance will not exceed 440 billion yuan. In early April, Sheng Liurong, chief financial officer of China Construction Bank, said at the 2023 annual results conference that the bank's TLAC bonds would be issued in the third quarter and were optimistic that the target would be met in 2025.

"The top five banks in mainland China are the only banks in the latest G-SIBs list in 2023 whose TLAC ratio has not yet reached 16%, and the five major banks still have a TLAC gap, and there is a certain pressure on capital replenishment." Zheshang Securities analyst Du gradually analyzed in the research report.

Sun Binbin, a fixed income analyst at Tianfeng Securities, expressed his opinion that if the deposit insurance fund is not considered, the risk-weighted ratio of the total external loss absorption capacity of the five major state-owned banks has not reached the regulatory standard of 16%. In addition, banks are currently facing the dilemma of narrowing net interest margins and insufficient endogenous capital. In order to meet regulatory requirements, the issuance of TLAC bonds is the preferred option at this time.

Sun Binbin pointed out that in the short term, the TLAC bond issuance plans of Bank of China, CCB and ICBC can meet the first phase of regulatory targets in 2025. Bank of China, China Construction Bank (CCB) and ICBC announced plans to issue a total of 260 billion yuan of bonds, which can basically meet the first phase of TLAC regulatory requirements. In the long run, there is a broad demand for TLAC bond issuance.

TLAC issuance or incremental growth

For the four large state-owned banks, there is only a transition period of the second half of the year. So, what is the outlook for the five G-SIBs banks to issue TLAC bonds in the future?

In Liu Yan's view, the five major state-owned banks will accelerate the issuance of TLAC bonds in the future.

"This decision is not only a positive response to the requirements of global financial regulation, but also a deliberate consideration based on the inevitable trend of the development of the domestic financial market, as well as the bank's own business strategy and risk management needs. Against the backdrop of increasingly stringent global financial regulation, systemically important banks need to continuously improve their capital adequacy ratios and risk resilience to maintain the stability of the financial system. Liu Yan analyzed, "As the systemically important banks of the mainland, the issuance of TLAC bonds by the five major state-owned banks will become an inevitable choice for them to meet regulatory requirements and enhance market confidence." The continuous opening and deepening of the domestic financial market has also provided a broad market space for the issuance of TLAC bonds. With the continuous influx of foreign banks and the intensification of market competition, domestic banks need to continuously improve their competitiveness and market position. ”

Zhong Huiyong also pointed out that from the perspective of the entire banking and financial system, the issuance of TLAC bonds provides a new channel for capital replenishment, which is conducive to improving the capital level of banks and enhancing their ability to resist risks. In the future, the five global systemically important banks will gradually increase the number and size of TLAC bond issuance.