Event overview: on April 29, the central bank and the China Banking and Insurance Regulatory Commission jointly issued the notice on matters related to the issuance of non capital bonds with total loss absorption capacity by global systemically important banks.
Analysis and judgment:
The new regulations and supporting policies of TLAC were implemented to regulate the issuance of non capital bonds
In October 2021, the measures for the administration of total loss absorptive capacity of global systemically important banks (new regulations of TLAC) was implemented. In addition to meeting the international requirements for higher loss absorptive capacity of g-sibs, it also defined the categories of TLAC qualified instruments, including capital instruments such as common shares, preferred shares, perpetual bonds and secondary capital bonds, as well as non capital TLAC debt instruments. The notice is a supporting policy, which further defines the relevant requirements of non capital TLAC debt instruments, and defines the issuance management provisions of TLAC non capital bonds mainly from the aspects of definition, repayment order, loss absorption method, information disclosure, issuance pricing, registration and custody, so as to build a policy framework and provide basis for the issuance of g-sibs.
Non capital debt builds a loss absorbing layer between general liabilities and capital instruments
From the definition, TLAC non capital bonds refer to the financial bonds issued by g-sibs to meet the requirements of TLAC, which have the function of absorbing losses and do not belong to the capital of commercial banks. It is required that non capital bonds with loss absorption capacity should include write down or share conversion terms. In the disposal stage of gsibs, after all secondary capital instruments are written down / converted into shares, the supervision can force all or part of non capital bonds to write down / convert into shares. In the corresponding repayment order, TLAC’s non capital debt is also better than various capital instruments, but after excluding liabilities (i.e. general debts not belonging to TLAC, such as deposits, general liabilities that cannot be written down and converted into shares, etc.), it is equivalent to building a loss absorption layer between deposits and capital instruments.
From the perspective of international experience, in order to meet the requirements of TLAC, countries generally introduce new debt levels, such as the issuance of senior bonds by holding companies in the United States, Britain and Japan (the repayment order of senior bonds of holding companies is naturally subordinated after the ordinary debts of bank subsidiaries); Under the structure of non holding companies, the EU mainly issues non priority senior bonds (in 2017, the non priority senior bonds were added to the traditional bankruptcy creditor’s rights ranking sequence, the repayment order was inferior to the priority senior bonds, and the relevant loss absorption mechanism was clarified by legislation).
The normalization of international non capital bond issuance is a medium and long-term stable source of funds
From the perspective of issuance volume, TLAC non capital bonds are the conventional debt instruments of g-sibs. Referring to international experience, FSB estimated in the technical implementation review report of TLAC standard (201906) that the total issuance of TLAC in 2018 was US $360 billion, including US $36 billion of affiliated tier 1 capital instruments, US $24 billion of tier 2 capital instruments, US $52 billion of non senior bonds and US $248 billion of senior unsecured bonds. It can be seen that the issuance of TLAC non capital debt instruments has occupied a dominant position. In terms of term, TLAC bonds are mainly medium and long-term varieties of 5 years or more. For example, the issuance term of TLAC bonds of Huaqi bank is concentrated in 4-9 years, some of which are more than 10 years, and the issuance term of Credit Agricole Bank of France is mainly 5-10 years. 1. Therefore, while meeting the standard requirements, issuing TLAC bonds is also an important tool for banks to actively manage liabilities and adjust the maturity structure of liabilities. It has become an important medium and long-term stable source of funds for g-sibs. In addition 2, from the perspective of non preferred senior debt investors of Deutsche Bank, they mainly include asset management companies and pensions (47%), retail customers (18%), banks (12%), governments and institutions (16%), insurance companies (3%) and other institutional investors (4%). From the perspective of issuance cost, compared with Tier 2 capital and other tier 1 capital instruments in the same currency, the nominal interest rate of TLAC instrument is lower.
Expand the varieties of active liabilities and promote the diversification of capital sources of g-sibs
For the impact on the industry, the policy coverage mentioned in the Notice includes both the four major industrial and agricultural CCCC banks identified as g-sibs in China and the domestic subsidiaries of overseas g-sibs identified as disposal entities. As global systemically important banks, in order to meet the regulatory requirements of TLAC, the four major banks have also increased their demands for capital supplement and issuance of non capital bonds. They will be the main issuers of non capital bonds in the future. On the other hand, while expanding the varieties of banks’ active liabilities and promoting the management of banks’ active liabilities, the policy also helps to further improve the yield curve of the bond market and promote the development of multi-level capital market.
Investment suggestions:
The release of TLAC’s regulatory framework for non capital bonds generally helps to improve the risk resilience of g-sibs and enhance the robustness of the financial system, and also plays a guiding role for other types of banks. Specific regulatory rules need to be further clarified, such as the measurement of risk weight, investor qualification and peer supervision.
In terms of industry, the recent multiple outbreaks have increased the demand and strength of stabilizing the economy. The policy focuses on small and micro enterprises and structural industries and fields such as consumption and people’s livelihood, which are greatly affected by the epidemic, and continues to guide banks to increase credit. The bank’s first quarterly report has also been implemented, the performance is relatively stable, the asset quality indicators are still improved, the sector defense attribute is prominent, the superimposed dividend rate is at an all-time high, and the investment cost performance is still high. Individual stocks continue to be recommended: China Merchants, Ningbo, Chengdu, Hangzhou, Ping An, Xingye, Jiangsu Changshu Rural Commercial Bank Co.Ltd(601128) etc.
Risk tips
1) the downward pressure on the economy continues to increase, and the credit cost has increased significantly;
2) major operational risks of individual banks, etc.
