On September 18, Changsha Bank announced the issuance of 5 billion yuan of perpetual bonds with no fixed term due in 2024, within a short period after the approval of the 5 billion yuan capital instrument issuance plan to supplement the bank's other Tier 1 capital.

In the industry's view, against the backdrop of narrowing net interest margins and weakened internal capital generation ability, commercial banks as a whole are facing increased pressure to supplement capital, leading to increased demand for external financing tools by small and medium-sized banks. With the peak of redemptions approaching, the subsequent approval and issuance speed of the secondary perpetual bonds may further accelerate.

According to a statistics by the financial association, as of now, commercial banks have issued 99 secondary perpetual bonds this year, with a total issuance amount of 1.33 trillion yuan. Among them, the total issuance amount in the first quarter was 263 billion yuan, in the second quarter it was 438.55 billion yuan, and up to the present in the third quarter, the total issuance amount has reached 540.93 billion yuan.

Changsha Bank's first perpetual bond issuance, with a proposed issuance of secondary perpetual bonds totaling 12 billion yuan pending review.

The "2024 No Fixed Term Capital Bonds" is the first perpetual bond issued by Changsha Bank. Prior to this, the bank had consecutively issued two Tier 2 capital bonds in 2020 and 2021, with issuance sizes of 6 billion yuan and 2 billion yuan respectively.

At that time, with the consecutive issuance of two bonds, Bank of Changsha's capital adequacy ratio also increased, reaching 13.25%, 13.60%, and 13.66% from 2019 to 2021. However, in recent years, as business scale continued to expand and capital consumption increased, the bank's capital adequacy ratio showed a significant decline, dropping to 13.41% and 13.04% in 2022 and 2023 respectively.

Since the implementation of new capital regulations this year, the capital adequacy level of Bank of Changsha has slightly rebounded. As of the end of the first half of the year, the bank's core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and overall capital adequacy ratio were 9.70%, 10.64%, and 13.06% respectively, all of which meet regulatory requirements.

However, compared to peers, the bank's various capital adequacy ratio indicators are still much lower than the industry average. Regulatory data shows that at the end of the second quarter of 2024, the capital adequacy ratio of commercial banks was 15.53%, the Tier 1 capital adequacy ratio was 12.38%, and the core Tier 1 capital adequacy ratio was 10.74%.

"The bank continues to deepen its capital management, optimize its business structure through planning, allocation, and assessment, enhance its capital return capability, and promote the balance between endogenous capital growth and risk-weighted asset growth to maintain a stable level of capital adequacy." Changsha Bank stated.

In this regard, United Credit also bluntly stated in its rating report that in recent years, Changsha Bank has mainly supplemented its capital through retained earnings, and its good profitability level has provided protection for its endogenous capital accumulation. However, considering that the rapid growth of business has brought certain consumption of capital, the core capital will face certain replenishment pressure in the future.

It is worth mentioning that just a few days ago, the board of directors of Changsha Bank passed several proposals, including the issuance of subordinated capital bonds with a total amount not exceeding 8 billion yuan and non-fixed-term capital bonds with a total amount not exceeding 4 billion yuan, respectively, to supplement the company's Tier 2 capital and other Tier 1 capital. Changsha Bank will hold the second extraordinary general meeting of shareholders in 2024 on October 10 to deliberate on the relevant proposals.

With the peak of perpetual bonds coming due, the scale of bank issuances in the third quarter has reached 540.9 billion yuan.

In fact, Changsha Bank is not the only one facing capital replenishment pressure. "Commercial banks maintain adequate levels of capital, but under the background of narrowing net interest margins and rising credit costs directly weakening their endogenous capital capacity, commercial banks as a whole face increased pressure to replenish capital." United Credit said.

In the view of Li Qinghe, fixed income analyst at Guolian Securities, in recent years, the pressure of narrowing net interest spreads in banks has continued, and the banks' endogenous capital replenishment capacity has declined, leading to an increase in the demand for external financing tools, especially for some smaller banks, they rely more on low-threshold perpetual bonds to enhance their capital strength.

According to data from Wind, as of now, commercial banks have issued a total of 99 perpetual bonds this year, with a total issuance amount of 1.33 trillion yuan. Among them, there are 71 Tier 2 capital bonds with a total issuance amount of 814.78 billion yuan, and 28 perpetual bonds with a total issuance amount of 511.7 billion yuan.

In terms of institution types, state-owned large banks are still the main force in the issuance of perpetual bonds, but the issuance by small and medium-sized banks has also significantly accelerated this year. Among them, the issuance scale of perpetual bonds by state-owned banks reached 706 billion yuan, while the issuance scale by joint-stock banks was 376 billion yuan, and the total issuance amount by other small and medium-sized banks such as city commercial banks and rural commercial banks was 244.48 billion yuan.

Looking at the issuance pace, the issuance of perpetual bonds is currently mainly concentrated in the second and third quarters. Specifically, the total issuance amount of perpetual bonds by commercial banks in the first quarter was 263 billion yuan, in the second quarter it was 438.55 billion yuan, and as of now in the third quarter, the total issuance amount has reached 540.93 billion yuan.

Relatively speaking, the second half of the year is often the peak period for the supply of perpetual bonds. Looking ahead, the industry generally believes that with the pressure on the level of capital adequacy, the demand for capital supplementation by city commercial banks and rural commercial banks is expected to remain strong. The issuance and approval speed of perpetual bonds by small and medium-sized banks in the second half of the year may further accelerate.

"The issuance scale of perpetual bonds in the future may continue to expand, especially with the continuous low interest rate environment, commercial banks may seize the opportunity to supplement capital by issuing perpetual bonds. At the same time, with the peak of redemptions of existing perpetual bonds approaching, banks will also need to issue new bonds to maintain capital adequacy ratios," said Mingming, chief economist at Citic Securities.

Looking at the future maturity of perpetual bonds by banks, there may be nearly 800 billion yuan (795.35 billion yuan) of bank perpetual bonds exercising rights/expiring from June to December 2024. The third quarter is the peak period for maturities, with a single-month maturity of perpetual bonds reaching as high as 217.2 billion yuan in September.