China Banks Plan $29 Billion in Bond Sales to Replenish Capital

Chinese banks are planning near record bond sales this month to replenish capital levels weakened by a surge in cheap loans to struggling businesses and sliding earnings.

Industrial & Commercial Bank of China Ltd., the world’s largest lender, and three domestic competitors plan to sell a combined 195 billion yuan ($28.5 billion) of perpetual or tier-2 capital bonds in September, said people working on the plans who asked not to be named discussing internal matters. Their issuance alone would amount to the second highest monthly sales ever in China, according to data compiled by Bloomberg.

Enlisted to ease the financial hardship of consumers and businesses hurt by the coronavirus pandemic, Chinese banks are under increasing stress. Authorities have called on them to forgo 1.5 trillion yuan in profit by providing cheap funding, deferring payments and increasing lending, eroding their capital buffers as they struggle with a record pile up of non-performing loans.

“Banks need to make long-term preparations to stabilize their asset quality, hence comes the demand to replenish both tier-1 and tier-2 capital,” analysts led by Zhang Jiqiang at Huatai Securities Co. wrote in a report last month. “NPLs will probably continue to rise.”

China Banks Plan $29 Billion in Bond Sales to Replenish Capital

While they still currently meet minimum domestic requirements with a safe margin, China’s four biggest banks face a shortfall of $220 billion to meet global capital rules kicking in at the start of 2025, S&P Global Ratings said in a report last month. That gap may increase to more than $900 billion over the next few years as economic pressure weighs on earnings, S&P said.

This month alone, ICBC and China Guangfa Bank Co. aim to issue 60 billion yuan and 45 billion yuan of tier-2 bonds, respectively, said the people. Bank of Communications Co. plans to raise 30 billion yuan from a perpetual bond sale, while Postal Savings Bank of China Co. is seeking to sell 60 billion yuan, they said.

The planned sales are part of the broad fundraising plans proposed by the banks to their board and shareholders earlier. Some of the issuance is pending regulatory approval, said one of the people, which may delay the timing of the sale.

ICBC declined to comment. Bank of Communications and Guangfa Bank didn’t immediately respond to requests seeking comments. Postal Savings Bank said in a text message it will choose an appropriate window for the offering.

Investor enthusiasm for the debt deluge may be limited. Weakening demand, as reflected in sliding prices on subordinated notes, doesn’t bode well for new issues, according to the Huatai analysts.

The price of Agricultural Bank of China Ltd.’s 4.28% perpetual bond declined to a one-year low this month and a similar 3.69% note issued by Postal Savings Bank at the end of last month slid to the lowest level since it was issued in March, trading at 96.84 of its 100 face value.

China Banks Plan $29 Billion in Bond Sales to Replenish Capital

Policy makers have acknowledged concerns over capital at the banks. Xiao Yuanqi, a spokesman of China’s banking regulator, told a press briefing last week that no matter how the pandemic and the economy develop, it will ensure a solid capital foundation. Liu Guoqiang, the deputy central bank governor, said at the same briefing that the People’s Bank of China is working with various departments to ensure banks have enough capital.

©2020 Bloomberg L.P.

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