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China's largest lers face a capital gap of $301 billion by January 2025, according to Fitch Ratings' estimation. Five banks within China's 'globally systemically important' category-namely Industrial and Commercial Bank of China ICBC, Agricultural Bank of China, Bank of China, China Construction Bank, and Bank of Communications-have collectively announced plans to issue up to $44 billion in Total Loss Absorption Capacity TLAC bonds this year. Issuance could start as early as the second quarter of 2024.
The global systemically important banks need to hold at least 16 of total risk-weighted assets by January 1, 2025, which is expected to rise to 18 from January 1, 2028. This stringent requirement has added capital rsing pressure on these banks as they struggle to support China's economy, developers and local government financing vehicles.
To address this shortfall, the five major lers have already announced plans to issue $44 billion in TLAC bonds combined for this year, potentially starting in the second quarter of 2024. The TLAC bonds are non-capital securities that can be written off or converted into common equity when a bank enters its winding-up phase.
Moreover, these banks faced challenges with slowing profit growth and contracting net interest margins NIMs as shown in their 2023 annual reports. It's expected that NIMs will continue to shrink this year due to weakening loan demand, particularly for residential mortgages.
Fitch Ratings' Vivian Xue noted that the loan demand is weak across China, affecting banks such as ICBC.
As Fitch pointed out, China's largest banks are currently under significant capital pressure due to:
Slow profit growth and shrinking net interest margins NIMs in their annual reports of 2023
Weakening demand for loans, particularly residential mortgages
The upcoming NIM pressures mean these five major Chinese banks need to rse substantial capital through TLAC bonds.
This article is reproduced from: https://www.businesstimes.com.sg/companies-markets/banking-finance/china-s-top-lenders-face-1-6-trillion-yuan-loss-absorbing-capital-shortfall-2025-fitch-estimates
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Chinese Banks Face Capital Gap Challenge TLAC Bonds Issuance by Major Lenders Capital Requirement for Systemically Important Banks Struggling Profit Growth in Banking Industry NIM Shrinking and Weakened Loan Demand Chinas Largest Banks Encounter Pressure