China’s big four banks $550m short of meeting loss provision

Expect a flurry of senior non-preferred issuance bonds from the lenders.

China’s four biggest banks are still $550m (RMB3.7t) short of meeting the total loss-absorbing capital or TLAC provision in order to meet international requirements for global systemically important banks, reports S&P Global Ratings.

China's four largest banks–Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China–are required to hold TLAC that is equal to 16% of their risk-weighted assets by 1 January 2025.

Loss-absorbing capital is not paid back in the event of major losses at banks. Instead, the capital is used to "absorb losses," and thus reduce the need and likelihood of governments bailing out the institutions, according to S&P.

This, coupled with new regulations in 2022 that widen channels for TLAC-eligible issuances from these banks, drive S&P’s belief that there should be a flurry of issuance of senior non-preferred bonds by the big four banks.

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"A wider range of TLAC-eligible instruments will help China's big four banks to narrow gaps in regulatory capital requirements set to come into effect in 2025," noted S&P Global Ratings credit analyst Michael Huang.

On the upside, the banks have done well against S&P’s estimates. The ratings agency’s 2020 report had estimated that the lenders will have a RMB6t gap as the deadline approached.

“Our forecast for the gap has narrowed in part because bank profits have been better than we previously expected, whilste growth in the banks' risk-weighted assets has slowed. Proactive issuance of regulatory capital instruments by the big four banks over the past few years has also narrowed the shortfall,” Huang said.