Source of this article: Times Finance Author: Zhang Xinying
Source: Picture Worm Creative
China's First TLAC Bond Issued Today!
On May 11, Industrial and Commercial Bank of China (601398. SH) announced that it will issue 2024 Total Loss Absorbing Capacity (TLAC) non-capital bonds (Phase I) from May 15 to May 17, with a basic issuance size of 30 billion yuan.
Closely following ICBC, Bank of China (601988. SH) also announced on May 13 that it will issue 2024 Total Loss Absorption Capacity (TLAC) non-capital bonds (Phase I) from May 16 to May 20, with a basic issuance size of RMB 30 billion.
As global systemically important banks (G-SIBs), ICBC and Bank of China have attracted much attention in the issuance of TLAC bonds.
At present, it is less than a year before the deadline for G-SIBs to meet the TLAC compliance period, and according to the regulations of the Financial Stability Board (FSB), G-SIBs need to meet the requirements of total external loss absorption capacity risk weighted ratio and leverage ratio by January 1, 2025.
In addition to ICBC and Bank of China, there are currently three other G-SIBs in mainland China: China Construction Bank (601939.SH) and Agricultural Bank of China (601288. SH), Bank of Communications (601328. SH) has not yet announced the actual issuance of its TLAC bonds. However, judging from the issuance plan at the beginning of the year, the total proposed issuance scale of the above three banks does not exceed 230 billion yuan.
In an interview with Times Finance on May 13, Xue Huiru, director of Fitch Ratings' Asia-Pacific financial institution ratings, said, "In addition to ICBC and BOC, several other Chinese global systemically important banks have also disclosed their TLAC issuance plans, and we expect these banks to comprehensively determine the pace and scale of future issuance based on compliance requirements, market demand and issuance costs." ”
The first issuance size is 30 billion
The first tranche of TLAC bonds issued by ICBC and Bank of China was 30 billion yuan.
According to the announcement of the Bank of China in January this year, the bank intends to issue TLAC bonds of no more than 150 billion yuan or its equivalent in foreign currencies in the domestic market and overseas markets, and the resolution is valid until August 2025. ICBC announced in February this year that it intends to issue TLAC bonds in the domestic market with a size of no more than 60 billion yuan, and the resolution will be valid until 24 months after the regulatory approval.
In comparison, the TLAC bonds of the two major banks are relatively similar in terms of issuance varieties and bond maturities.
According to the issuance announcement, ICBC and Bank of China both contain two types of bonds, the first of which has an issuance scale of 20 billion yuan, which is a 4-year fixed-rate product with a conditional issuer's redemption right at the end of the third year; The issuance size of Variety 2 is 10 billion yuan, which is a 6-year fixed-rate product with a conditional issuer's redemption right at the end of the fifth year.
On the other hand, according to the previously disclosed issuance plan, except for ICBC's issuance to the domestic market, the remaining G-SIBs in mainland China all said that they planned to issue to the domestic market and overseas markets.
Fitch Ratings said in an online live broadcast in April this year that it is more advantageous to issue TLAC bonds onshore in view of the differences in issuance costs, approval processes, and the different risk appetites of domestic and foreign investors towards the debt instruments of state-owned banks.
Fitch also pointed out that for Chinese G-SIBs, a significant portion of the existing senior unsecured bonds are issued offshore, and it cannot be ruled out that these state-owned banks will also issue a certain amount of TLAC instruments in the offshore market, in order to move closer to their international peers.
Xue Huiru said to Times Finance, "As a new debt instrument, the market demand for TLAC bonds still needs to be tested, and the issuance cost is affected by monetary policy, interest rate environment and market supply and demand, and there is also a certain degree of uncertainty." ”
TLAC bonds may have a larger interest rate advantage
In terms of pricing, ICBC and Bank of China will adopt a fixed interest rate for the current TLAC bonds, and the final coupon rate will be determined through bookbuilding and centralized placement.
According to the "Subscription Range and Subscription Indicative Instructions" disclosed by ICBC on May 14, the issuer and the bookrunner have negotiated and determined that the subscription range of the coupon rate of the first bond is 2.00%-2.60%, and the subscription range of the coupon rate of the second bond is 2.10%-2.70%.
Previously, according to a research report by Liao Zhiming's team of China Merchants Securities, the pricing of TLAC bonds will be between the 3-year ordinary financial bonds of large state-owned banks and the secondary capital bonds with a remaining maturity of 3 years. Based on the current interest rate level, the pricing of large bank TLAC bonds is expected to be around 2.65%. The real issue rate is likely to be lower than 2.6% due to the possibility of further downward interest rates in the future.
In terms of potential investors, institutional investors may be the main ones. According to the issuance announcement, the two major banks are issued to institutional investors in the national interbank bond market.
Xue expects that the main investors in China's TLAC debt instruments will be similar to existing investors in bank debt instruments such as Tier 2 capital instruments and other Tier 1 capital instruments, mainly including large commercial banks, bank wealth management products, asset management companies and insurance companies.
In terms of income, Xue Huiru pointed out that for investors, since TLAC non-capital bonds have a loss-absorbing clause of write-down or equity conversion, theoretically, the yield of TLAC bonds may be higher than that of ordinary financial bonds under other things being equal.
In addition, TLAC bonds enjoy a higher order of repayment. According to Xue Huiru, when G-SIBs enter the resolution stage, the regulator can mandate a write-down or equity conversion of non-capital debt instruments with total external loss absorption capacity, but TLAC non-capital debt instruments should absorb losses after Tier 2 capital instruments, so other Tier 1 capital instruments and Tier 2 capital bonds can provide some protection for TLAC non-capital debt instruments.
The overall pressure of reaching the standard is controllable
The Measures for the Management of the Total Loss-Absorbing Capacity of Global Systemically Important Banks will be implemented from 2025.
Among them, the requirement for the ratio of total external loss absorption capacity is that the risk-weighted ratio of total external loss absorption capacity shall not be less than 16% from January 1, 2025 and 18% from January 1, 2028; The leverage ratio of total external loss absorption capacity shall not be less than 6% from January 1, 2025 and 6.75% from January 1, 2028.
Wind data shows that as of the end of the first quarter of 2024, the capital adequacy ratios of Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, China Construction Bank and Bank of Communications were 19.21%, 18.52%, 18.40%, 19.34% and 16.09% respectively. The leverage ratios are 7.68%, 7.35%, 6.79%, 7.76% and 7.17% respectively.
Xue Huiru analyzed that the compliance of TLAC mainly depends on the future growth rate of risk-weighted assets, net profit growth, dividend ratio and the future issuance progress of TLAC bonds and capital instruments.
From the perspective of the growth rate of risk-weighted assets, taking Bank of China as an example, in 2022 and 2023, the bank's risk-weighted assets will be 14.66 trillion yuan and 16.53 trillion yuan respectively, with a growth rate of about 3.65% and 12.74% respectively; In terms of performance, in the first quarter of this year, among the above five state-owned banks, except for the net profit attributable to the parent of the Bank of Communications, which maintained a growth rate of 1.44%, the rest are declining.
A number of major banks have publicly stated that there is little pressure on TLAC to meet the standard. On April 3, Sheng Liurong, chief financial officer of CCB, said at the bank's 2023 annual results conference that CCB's capital adequacy ratio is close to 18%, and with the addition of the DPS Fund, it is not a big problem to judge that the TLAC will be met in 2025.
At that time, Sheng Liu Rong also mentioned that CCB's TLAC bonds will be issued in the third quarter, which will not only help meet the total loss absorption capacity, but also reduce financing costs.
As a "new member" who just joined the G-SIBs in November last year, Bank of Communications has a two-year grace period to achieve the first phase of TLAC compliance in early 2027.
However, Bank of Communications' capital adequacy ratio is lower than that of the five major state-owned banks.
At the 2023 annual results conference of Bank of Communications, Liu Jianjun, chief risk officer of the bank, said that Bank of Communications was selected as a global systemically important bank for the first time in November 2023, reflecting the recognition of the operation and development and international status of the Bank by international regulators, as well as the status of China's financial industry.
Liu Jianjun also said that 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 risk resilience.