Subordinated bond issuance rose sharply last year

11:00, February 08, 2010      

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According to a report on China's financial market operation in 2009 released by the People's Bank of China, 2009 subordinated bond issuance by 23 Chinese banks reached 266.9 billion yuan, an increase of 3.7 times, of which, 2 commercial banks issued hybrid capital bonds totaling 6.5 billion yuan. For Chinese banks, subordinated bonds have become an effective tool which can be used to offset the negative effect of the huge credit scale.

China Construction Bank claimed in a notification February 24 2009 that it would issue subordinated bonds of 30 billion yuan, marking the start of the subordinated bond war. After that, Chinese banks began issuing subordinated bonds one by one.

According to statistics by WIND, China's top 4 state-owned banks issued subordinated bonds totaling 210 billion yuan in 2009, of which, the Industrial and Commercial Bank of China and Bank of China both issued 40 billion yuan each, Agricultural Bank of China issued 50 billion yuan, and 80 billion yuan came from China Construction Bank.

Affected by the huge credit scale, the capital adequacy ratios of all banks declined sharply. The capital adequacy ratios in some banks were even lower than 8 percent, a bottom line set by the Chinese government. Under heavy pressure, all banks had to attempt all means to raise capital. They showed special interest in subordinated bonds although it is not the only way to raise funds.

Fu Lichun, a banking analyst with Southwest Securities, said that the issuance process of subordinated bonds is relatively simple and easily accepted by the market, so issuing subordinated bonds has always been the main choice of commercial banks.

The potential risks in subordinated bonds issued by various banks are also rising. It is common that banks are mutually holding subordinated bonds of other banks, so the issuance of subordinated bonds only is idle work to some degree, and the systematic risks that are possibly triggered by the issuance have also attracted attention from regulators.

In June 2009, the China Banking Regulatory Commission (CBRC) released a circular requiring each bank to deduct all the subordinated bonds from their supplementary capitals and stipulating that major commercial banks are not permitted to issue subordinated bonds unless their core capital adequacy ratios reach 7 percent and above, increasing the cost and difficulty for banks to issue subordinated bonds.

Multiple institutions previously forecasted that the scale of loans in 2010 will be about 7.5 trillion yuan, maintaining at a historically high level. The concerns about banks' capital adequacy ratios have resurfaced. "The banks' capital adequacy ratios will be a rather serious issue in 2010," Fu said. Banks will face heavy pressure to issue additional shares.

Fu said that following the issue of new regulations by the CBRC, the value of subordinated bonds has markedly reduced. Financial institutions such as insurers are relatively weak to buy subordinated bonds, so the scale of subordinated bonds to be issued in 2010 is expected to drop remarkably.

By People's Daily Online
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