Bank of China Plans Offshore Tier 2 Debt Amid Capital Boost Push
Bank of China Ltd., the nation’s fourth-biggest by market value, hired four banks to help arrange its first offshore sale of subordinated securities that will count as capital under the country’s new banking rules.
The four include Bank of China’s own investment-banking arm, the people familiar with the matter said, asking not to be identified because the details are private. The lender plans to raise about $1 billion via the 10-year notes, which will include a provision that reduces their value to zero should the regulator ever consider the bank not viable, they said.
Nonperforming loans in the world’s second-largest economy touched a five-year high of 694.4 billion yuan ($113 billion) on June 30, or 1.08 percent of total advances, making it more urgent for banks to build capital buffers to cushion against losses. Shares of China’s five-biggest banks trade at an average of five times estimated earnings, the least among lenders globally.
“Everyone’s focus is on the Chinese bank capital deals in the pipeline,” said Tim Jagger, a Singapore-based fixed-income manager at Aviva Investors Asia Pte, the Asian asset management unit of U.K. insurer Aviva Plc. “If you’re going to issue about $5 billion of bonds you need to manage it at an early stage so everyone can get their heads around it.”
Hefty Pipeline
Lenders including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. sold an equivalent of $27.5 billion of securities that can be counted toward capital in August, according to data compiled by Bloomberg. At least another $63.3 billion, which includes preference shares, is in the pipeline, Royal Bank of Scotland Group Plc said last week.
Bank of China last month shortlisted six banks for a separate $6.5 billion-equivalent sale of offshore perpetual securities that will convert into equity if the bank’s capital drops to a level considered unsafe.
ICBC Macau is meeting investors in Hong Kong and Singapore this week ahead of a planned U.S. dollar-denominated Reg S subordinated 10-year note sale, while parent ICBC has selected seven banks for an offshore perpetual securities offering of as much as $5.7 billion.
Most regulatory capital sales from Chinese banks this year have been in the local market. Four of China’s five biggest banks — ICBC, Bank of China, Agricultural Bank of China Ltd. (3988) and Bank of Communications Co. — sold yuan-denominated subordinated securities last month with a 5.8 percent coupon.
Soured Loans
Tier 1 capital consists of common equity and additional securities that have equity-like characteristics, such as having no fixed maturity and being subordinate to most other claims. Under China’s banking rules, systemically important banks need a minimum Tier 1 capital ratio of 9.5 percent, with total buffers of 11.5 percent, before the end of 2018. As much as 2 percentage points of that can be in Tier 2 capital, which includes items such as undisclosed reserves and subordinated term debt.
China’s five biggest banks, including China Construction Bank, had soured loans of 395.7 billionyuan as of June 30 and an average non-performing loan ratio of 1.05 percent, China Banking Regulatory Commission data show.
Bank of China said it had more than doubled the amount it set aside for bad loans last month as profit growth cooled to the slowest pace in five quarters amid a weakening economy. Its capital adequacy ratio, a measure of financial strength, was 11.8 percent, down from 12.5 percent in December. Its Tier 1 buffer was 9.37 percent.
Bad loans reduce a bank’s profit, forcing it to strengthen its balance sheet with more capital, and can discourage savers.
“The interim reports we’ve seen so far suggest that asset quality has deteriorated further in the second quarter and there’s no sign of a turnaround yet,” Tang Yayun, a Shanghai-based analyst at Northeast Securities Co., said by phone Aug. 22.
To contact the reporters on this story: Christopher Langner in Singapore atclangner@bloomberg.net; Tanya Angerer in Singapore at tangerer@bloomberg.net
To contact the editors responsible for this story: Katrina Nicholas atknicholas2@bloomberg.net Ken McCallum
