China Megabanks Kick Off $8.3 Billion Loss-Absorbing Bond Sales

Two of China’s biggest state banks will sell a combined 60 billion yuan ($8.3 billion) of total loss-absorbing capacity bonds starting this week, the first such debt sales by Chinese lenders in a drive to replenish capital and support growth of the world’s No. 2 economy.

Industrial & Commercial Bank of China Ltd. is planning to sell 30 billion yuan TLAC bonds in two tranches during May 15-17, the lender said in a May 11 statement to the Shanghai Clearing House. Bank of China Ltd. disclosed its issuance plan of the same amount, to be sold on May 16-20, according to a Monday statement.

The funding push marks the latest efforts by the nation’s largest lenders to beef up capital strength to meet global requirements by early 2025. It also comes at a time when Beijing is eager to guide lenders to ensure credit supply and lower funding costs for businesses, further straining their depressed margins and profitability.

China’s big five state-owned banks, deemed globally systemically important banks, (G-SIBs), said earlier this year that they expected to issue as much as 440 billion yuan of the TLAC instruments in total. They must have liabilities and instruments available to “bail in” the equivalent of at least 16% of risk-weighted asses by Jan. 1, 2025, rising to 18% in 2028, according to the Financial Stability Board, an international body that drafted the TLAC rules in 2015.

The banks have typically relied on so-called additional Tier-1 and Tier-2 bonds in recent years to replenish capital. The new TLAC bonds may offer a smoother way for their fundraising since they absorb losses after the other two instruments in case of a risk event that threatens operations or even survival of a lender.

TLAC rules require banks to hold a certain amount of debt at the level of their holding companies, which can be converted to equity in a distressed scenario to keep the operating company solvent, or close to solvent.

Fitch Ratings estimated in an April report that China’s five G-SIBs could issue around 1.6 trillion yuan in capital instruments and TLAC-eligible senior debt by January 2025, and around 6.2 trillion yuan by January 2028. Besides ICBC and BOC, that group also includes China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of Communications Co.