About two months after the latest version of the Global Systemically Important Banks (G-SIBS) was announced, the three major domestic banks, the Bank of China, the Agricultural Bank of China and the Industrial and Commercial Bank of China, successively disclosed their plans for the issuance of non-capital bonds with total loss absorption capacity (TLAC), with a total scale of no more than 260 billion yuan.
This will provide more space to meet G-SIBS requirements. For the four major domestic banks (the five major banks after the Bank of Communications is selected in 2023) have not issued TLAC instruments after being selected for G-SIBS, some industry insiders previously told the first financial reporter that it may be related to the inclusion standard of deposit insurance. At present, it has entered the stage of actual advancement, and many institutions **deposit insurance** according to the upper limit of the actual deposit amount 25% is more likely to be included in TLAC.
However, the above-mentioned industry insiders told reporters that this inclusion ratio may be lower, and if the upper limit can be reached and included, the current necessity for large banks, especially ICBC, to issue TLAC tools is low.
Although there is little pressure to meet the target in 2025, the industry generally expects that at least ICBC, Agricultural Bank of China, Bank of China and CCB will issue TLAC tools within the year. From the perspective of landing time, Liao Zhiming, an analyst at China Merchants ** banking industry, believes that the first domestic TLAC bond is expected to land in the second quarter.
The release of the major TDAC tools is imminent.
Since January 26, Bank of China, Agricultural Bank of China, and Industrial and Commercial Bank of China have successively disclosed the announcement of the resolution of the board of directors, announcing that they will issue TLAC non-capital bonds, with a total amount of no more than 260 billion yuan.
On February 1, ICBC announced that in order to meet the requirements of TLAC, the bank's board of directors decided to submit it to the general meeting of shareholders for approval to issue no more than 60 billion yuan of TLAC bonds in the domestic market from the date of approval of the general meeting of shareholders to 24 months after the approval of the State Financial Supervision and Administration of the People's Republic of China.
Previously, on January 31, the Agricultural Bank of China announced that it planned to issue TLAC bonds in batches, with a total issuance amount of no more than 50 billion yuan or its equivalent in foreign currency, and the funds raised would be used to enrich the bank's total loss-absorbing capacity, with a maturity of not less than one year.
Earlier, on the 26th, Bank of China, as the first systemically important bank in China to announce a TDAC bond issuance plan, announced that the board of directors approved the TLAC bond issuance plan, with a batch issuance scale of no more than 150 billion yuan or its equivalent in foreign currency.
According to the 2023 edition of the list of global systemically important banks released by the Financial Stability Board (FSB) in November last year, the number of selected domestic banks has increased from 4 to 5, of which Bank of Communications has been listed for the first time and has been listed in the first tranche, Agricultural Bank of China and China Construction Bank have been upgraded from the first to the second tranche, and Bank of China and Industrial and Commercial Bank of China have continued to remain in the second tranche.
At that time, some industry insiders told reporters that as an important tool for global systemically important banks to achieve the total loss absorption capacity standard, the issuance of domestic TLAC non-capital bonds is expected to accelerate, and the main obstacle at present lies in the standard of deposit insurance.
According to the Measures for the Management of the Total Loss-Absorbing Capacity of Global Systemically Important Banks jointly issued by the FSB and the People's Bank of China (PBoC), the former China Banking and Insurance Regulatory Commission (CBIRC) and the Ministry of Finance in April 2021, China's G-SIBS (the four major banks of industry and agriculture in China) that were recognized before 2022 are required to meet the requirements of a risk-weighted ratio (TLAC) of no less than 16% and 18% in stages in 2025 and early 2028 respectively, and the leverage ratio of the TLAC should be at the beginning of 2025, early 2028 respectively75%。Banks designated after January 1, 2022 (Bank of Communications) shall meet the prescribed requirements for total external loss absorption capacity within three years from the date of designation.
In April 2022, the People's Bank of China (PBoC) and the former China Banking and Insurance Regulatory Commission (CBIRC) issued the Notice on Matters Concerning the Issuance of Total Loss-Absorbing Non-Capital Bonds by Global Systemically Important Banks (the "Notice"), which clarified the core elements and issuance regulations of TLAC non-capital bonds, and provided an important basis for the issuance.
However, the four major domestic banks have not issued TLAC instruments after being selected for G-SIBS, and some industry insiders told the first financial reporter that it may be related to the inclusion standard of deposit insurance. According to Liao Zhiming, a banking analyst at China Merchants, referring to Japan's experience, domestic deposit insurance is subject to the upper limit of the paid-in amount of 25% is more likely to be included in TLAC.
However, the above-mentioned industry insiders told reporters that the gap of some large banks is below the upper limit of 25%, if it is included according to the upper limit, the necessity of bond issuance will be greatly reduced, and the specific details of the landing will need to be observed. From the perspective of the timing of issuance, the issuance plans of the above three banks still need to be approved by the shareholders' meeting and the approval of the regulatory authorities, and there is still uncertainty about the timing of the issuance.
Liao Zhiming believes that the first domestic GLAC bond is expected to land in the second quarter of 2024, and the four major banks may issue an appropriate amount of TLAC bonds within the year, and the follow-up Bank of Communications is expected to issue TLAC bonds.
In addition to Bank of China, Agricultural Bank of China, and Industrial and Commercial Bank of China, China Construction Bank and Bank of Communications are also expected to disclose their TLAC issuance plans in the first quarter of this year. Previously, on February 3, the board of directors of China Construction Bank passed the proposal on the annual issuance plan of the group's financial bonds, but did not disclose the specific type of bond issuance, the details of which will be disclosed in the meeting materials of the general meeting of shareholders.
According to Fitch Bohua's estimates, under the baseline scenario (8% RWA growth), the overall TDAC dynamic gap of the four major banks in the first phase by early 2025 is about 2.6 trillion yuan, and the gap in the second phase of TLAC by early 2028 is about 79 trillion yuan. Since Bank of Communications has just been selected into the list, it has a three-year buffer period, and the static gap required by the current and first stage of TLAC is about 400 billion yuan, and the dynamic gap is about 700 billion yuan under the baseline assumption.
What are the configuration requirements?
From the perspective of the pace of issuance, CITIC ** Chief Economist Ming Ming believes that although the bank's capital replenishment gap is limited, considering the narrowing of the bank's net interest margin, it is difficult to fully meet the assessment by relying only on the endogenous growth of the bank and the renewal of the maturity capital instrument, and the support of external forces is needed.
CICC's research report pointed out that the implementation of the new capital regulations this year may bring one-time benefits, but the mismatch between the growth rate of risk-weighted assets and endogenous capital accumulation in the medium and long term may lead to an increase in the pressure on banks' TLAC replenishment, and the potential issuance scale is considerable. However, at the end of 2022, the scale of China's deposit insurance** is far from reaching the upper limit of TRAC, and there may be some room for supplementation in the future.
Ming Ming also pointed out that with the implementation of the "New Capital Regulations" within the year and the possibility of the regulatory authorities increasing the proportion of deposit insurance**, the pressure on banks' capital replenishment will be reduced. Zhu Shuning, senior credit rating officer of Moody's Financial Institutions Department, also believes that another important factor for banks to consider whether or not to issue TLAC bonds and the scale of issuance is the proportion of deposit insurance**.
Another institutional source told reporters that another concern in the industry about the issuance of TLAC bonds was the impact on liquidity and the bond market. From the perspective of the year, the above-mentioned report of CICC believes that the issuance volume of TLAC bonds this year may be relatively low, mainly due to the favorable factors of the new capital regulations and the relatively abundant approval of the stock of second-term bonds of state-owned banks.
In particular, it should be noted that from the perspective of asset allocation needs, many institutions pointed out that because no TLAC bonds have been issued in China before, new varieties may still need to be cultivated in the market. However, there are also views that in the context of the shortage of assets in the bond market, bank financial bonds may usher in a favorable issuance window.
Due to the low deposit interest rate, it is expected that the scale of insurance funds will grow significantly in 2024, and the scale of wealth management may break through the historical high. Liao Zhiming analyzed in the latest report.
From the institutional point of view, considering that the repayment order of the TRAC capital replenishment instrument is inferior to that of commercial banks' ordinary bonds and has priority over subordinated bonds, adhering to the principle of matching risk and return, its coupon rate is likely to be between the two.
From the perspective of allocation institutions, CICC's above-mentioned research report mentioned that it is expected that the holder structure of TLAC non-capital bonds may be similar to that of Tier 2 capital bonds, mainly concentrated in non-bank institutions such as broad **, which may lead to similar valuation volatility of TLAC non-capital bonds as secondary perpetual bonds. Liao Zhiming also believes that the yield on 5-year state-owned Tier 2 capital bonds is expected to fall to 2 in 20248%, perpetual bonds fell to 29% or less. The landing of TLAC bonds may further compress the spread of capital bonds.
In terms of issuance maturity, the issuance period of TLAC non-capital bonds is more flexible, or shorter than that of secondary permanent bonds, which on the one hand better matches the duration preference of broadly**, and on the other hand, it may be less affected by interest rate fluctuations.
With the beginning of the redemption of "perpetual bonds" by commercial banks, it will also make the industry reassess the capital pressure of the banking industry. However, from a longer-term perspective, Liao Zhiming believes that since the four major banks will meet the requirements of the second stage of the TLAC in 2028, and the credit demand will weaken, the credit growth rate will move downward, and it is expected that the balance of bank capital bonds may be close to zero growth from 2030.
Editor-in-charge: Tao Jiyan |Review: Li Zhen |Supervisor: Wan Junwei.
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