seasidearcade| TLAC non-capital bonds are "new"

◎ reporter Chang Peiqi

China's first total loss absorptive capacity (TLAC) bonds were officially launched. Recently, Industrial and Commercial Bank of China and Bank of China have issued TLAC bonds, which have been actively subscribed by institutional investors.

In the view of market participants, the issuance and listing of the first batch of TLAC non-capital bonds is not only an important performance of China's banking industry in response to international regulatory requirements, but also a key measure to improve the total loss absorption capacity and risk resistance of Chinese banks, as well as to enhance the stability of China's financial system.

The industry believes that with the promotion of the TLAC standard process and the accelerated construction of the capital market, the supply of TLAC non-capital bonds is expected to gradually become one of the more mainstream financial bonds.

Investors actively subscribe for TLAC bonds

According to the issuance announcement, the main terms of TLAC bonds issued by the above two banks are similar: the basic issuance amount is 30 billion yuan, including 20 billion yuan in 3 + 1-year issue and 10 billion yuan in 5 + 1-year issue.SeasidearcadeThe right to issue no more than 10 billion yuan of additional shares is set up.

Judging from the actual subscription situation, both ICBC and Bank of China have issued 40 billion yuan of TLAC bonds and exercised the right to issue 10 billion yuan in excess. A reporter from the Shanghai Securities News learned that ICBC TLAC bonds have attracted more than 150 investors to subscribe, including state-owned banks, joint-stock banks, urban and rural commercial banks, funds, insurance, securities firms, foreign institutions and other types of institutions. The distribution pattern of investors shows diversified characteristics.

As a new debt instrument, which institutional investors will TLAC bonds be favored in the future?

Looking back, in order to reduce the risk of interbank contagion, the Basel Committee issued the TLAC holding rules in 2016, requiring global systemically important banks (G-SIBs) to deduct their holdings of other TLAC non-capital debt instruments issued by G-SIBs from secondary capital, in line with the deduction rules governing small and large investments.

Wang Yifeng, chief financial analyst at Everbright Securities (activist), told reporters that the "measures for the Management of Total loss Absorptive capacity of Global systemically important Banks" issued by the central bank and other departments set a transitional period for the above-mentioned capital deduction rules and will be implemented from 2030. Therefore, during the transition period, banks' own funds may become the main allocation force of TLAC bonds.

Wang Yifeng further analyzed that in addition to the Bank of Communications, the other four major banks have more room to increase their holdings of TLAC non-capital instruments. Although the new capital rules increase the capital occupation costs of the four major banks holding TLAC non-capital instruments / second-tier bonds, taken together, interbank cooperation still helps to optimize issuance costs. In addition, commercial banks other than G-SIBs only need to provide risk-weighted assets for investment in TLAC non-capital bonds without deducting secondary capital, which further enhances the potential space for banks to allocate TLAC bonds by themselves.

From the perspective of international experience, overseas TLAC bond investors are mainly asset management agencies, insurance funds and social security funds. Wang Yifeng said that according to the situation in China, it is expected that in addition to bank self-management, bank financial management, public funds, insurance funds, and large corporate finance companies will become important investors in TLAC bonds.

The four major banks are expected to reach the TLAC standard at the beginning of 2025.

The bank prepares to "hand in the papers" in order to meet the requirements of TLAC standards.

From the perspective of the compliance schedule, ICBC, CCB, Agricultural Bank of China and Bank of China need to meet the requirement of no less than 16% risk-weighted ratio of TLAC by January 1, 2025, and Bank of Communications should meet the requirement of no less than 16% risk-weighted ratio of TLAC by 2027.

S & P Credit Review said that according to static calculations, the total amount of capital and non-capital debt instruments needed to meet the requirements of TLAC in 2025 is about 1.Seasidearcade2 trillion yuan. With the issuance of TLAC bonds, the TLAC gap of state-owned banks will be significantly reduced.

According to the reporter, by the end of the first quarter of this year, the five major banks have announced TLAC bond issuance plans, with a total issuance scale of no more than 440 billion yuan. At the same time, the five major banks also have nearly 1 trillion yuan of secondary capital bonds and perpetual bonds (collectively referred to as "Eryong bonds") that have been announced but have not yet been issued. "if the above release plan is implemented smoothly, it can effectively make up for the static gap in TLAC." S & P Credit Review expects.

With the expansion of banks' risk-weighted assets, will there be a new gap in TLAC compliance in the future? Wang Yifeng told reporters that according to regulatory requirements, qualified TLAC tools are mainly divided into Basel III (Basel III) recognized capital instruments and non-capital debt instruments. On the one hand, the implementation of the new capital rules has a positive impact on Dahang, which is conducive to the marginal release of risk-weighted assets (RWA) consumption intensity; on the other hand, from the perspective of capital replenishment of commercial banks, in addition to endogenous capital replenishment through retained earnings, exogenous capital replenishment can also be carried out by issuing perpetual bonds and secondary capital bonds. "the dual drivers of endogenous accumulation and exogenous capital replenishment are not expected to significantly increase the TLAC compliance pressure." Wang Yifeng said.

The supply of TLAC bonds may be gradually reduced.

A number of institutions believe that future TLAC bonds may have a certain substitution effect on Eryong bonds.

Fitch Ratings said that the cost of issuing overseas TLAC bonds is usually between ordinary financial bonds and secondary capital bonds, so after the gradual introduction of TLAC bonds by domestic G-SIBs, it is likely to gradually reduce the issuance of second-perpetual bonds in terms of cost.

As for the degree of substitution, Zhong Zheng Pengyuan believes that it is mainly affected by many factors, such as the capital adequacy ratio of the five major banks, the market recognition of TLAC bonds and the cultivation of investor groups.

"it has little impact on Eryong debt in the short term, and a certain replacement force may be formed gradually in the medium term." Wang Yifeng said that judging from the issuance of Bank of China and ICBC, the actual offering price of TLAC is closer to that of financial bonds. With lower capital costs and flexible maturity arrangements, TLAC bonds may gradually form a substitute for Eryong bonds. The follow-up big bank will further coordinate the relationship between capital replenishment and TLAC compliance, continue to optimize the distribution of capital and TLAC structure, and effectively save the cost of supervision and compliance.

Looking forward to the development trend of TLAC, market participants expect that the supply of TLAC bonds is limited in the short term and is expected to further improve in the medium and long term.

The CICC fixed collection team believes that given that the regulatory requirements for TLAC risk-weighted ratios will reach 18 per cent in 2028, superimposing the expansion of banks' risk-weighted assets and the substitution effect of TLAC non-capital bonds on second-perpetual bonds, the supply of TLAC bonds is expected to gradually expand from 2025 to 2027.

The chief economist of CITIC Securities clearly predicts that the TLAC bond issuance trend will show four characteristics: the issuance scale will gradually increase to meet the TLAC regulatory requirements of G-SIBs; the issuance period will be diversified to adapt to the needs of different investors; the pricing mechanism will be more market-oriented, reflecting the relationship between supply and demand and the risk-return ratio; as the market deepens its awareness of TLAC bonds, more institutional investors may participate in investment.

"With the advancement of TLAC compliance process and the accelerated construction of the capital market, it is expected that TLAC non-capital bonds will gradually become one of the more mainstream financial products, and more diversified TLAC innovative tools will also be launched, which will help the banking industry continue to improve its stability. Sex and prevention of risk spillover, and enhance the quality and efficiency of serving the real economy." An industry insider made this judgment.

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