An economy still under the reigns of the virus requires maximum aid given, and thus, on Wednesday the CBB—Chinese Construction Bank CORP (601939.SS) have begun to sell 60 billion yuan ($8.9 billion) in the form of bonds. Among them are the peers who scramble to be quick in recharging the capital in feedback to harsher regulations the country is dealing with. Small firms and sectors that dealt with a blunt blow from the pandemic’s quarantine measures have been receiving financial assistance from banks as a request by the Chinese Government to lend a hand in stabilizing the world’s second-largest economy.
A glimpse of the data shown from the credit rating, trusty firm Fitch Bohua, noted that some subordinated bonds are given away by domestic banks including the ICBC—Industrial and Commercial Bank of China (601398.SS) & the BOC—Bank of China Ltd (601988.SS) corresponded to 400 billion yuan, a drastic leap of 42% from the same bracket from the one year period, all during the first half of this year.
The Associate Director of Banks at Fitch Bohua, Li Peng, forecasted considerable exposure to loans in the latter half of this year.
China’s monetary easing knocks down the interest rates by a mile, causing the debt-increasing spree to spike. Banks trading way down below book value may remain unable to raise capital through share sales alone.
Meanwhile, CCB’s Tier 2 capital will receive a supplement from the Chinese interbank market through bonds that have been bought. Furthermore, exchange fillings have briefed that the lender will auction off a secondary 60 billion yuan worth of bonds by December 2023. In its innate desire to replenish capital, CBB also intends to sell about 100 billion yuan worth of permanent bonds in the domestic market and a nearly $3 billion round-up of extended debt in international markets, soon to commence.
Li Peng also emphasized that the commercial banks are making provisions as they attempt to make an effort in stabilizing the ampleness of the capital requirements. This is a sign gathered from the surge in bond publication.
Chinese authorities have ordered its current most capable lends to meet the bars of the Total Loss-Absorbing Capacity (TLAC) ambitions that stretch to 2025, these banks are ICBC, BOC, CBB, and Agricultural Bank of China Ltd (601288.SS).
When these bigger, long-standing banks face tightened capital directives, they are able to fend themselves against massive financial unsteadiness and cut their losses short. This leads to an overall capital raising, as a lot of them are well-versed with unstable economy protocols and have the connections to fare well under immense pressure.
There are smaller banks with lesser functionality that have limited or nearly no access to capital markets or even depositors, who are faced with harsher capital challenges at this day when the Chinese economy has dramatically slowed down.
This threatens asset quality, and past this, there are valid worries over profitability which in turn has propelled bank market shares to approximately 50% of their book value on average. All in all, the economy bouncing back might take their best efforts.
Economist Gary Ng, belonging to Natixis in Hong Kong, had commented that insufficient capital generation is an inevitable consequence, even if the capital ratios of the banks are well above regulatory limitations. There is also this arbitrary thrust from the country’s authorities in making the banks lend a portion of their profits with low-cost loans to aid in stimulating the activity and progress of the economy, which remains a top priority to Chinese banks who wish to raise capital in a steady but assured way.
