Small banks' bond floats to quench capital thirst

Small and medium-sized commercial banks will be encouraged to issue perpetual bonds to augment their capital requirements and increase lending to small businesses, according to the banking and insurance regulator.

A perpetual bond is a bond without a maturity date. The instruments are nonredeemable, but offer steady returns.

Since the beginning of this year, five unlisted city commercial lenders, namely Guilin Bank Co Ltd, Guangxi Beibu Gulf Bank Co Ltd, Bank of Huzhou Co Ltd, Bank of Dongguan Co Ltd, and Huarong Xiangjiang Bank Co Ltd, have received regulatory approval for the issuance of perpetual bonds totaling 18 billion yuan ($2.6 billion).

Postal Savings Bank of China Co Ltd, a large State-owned commercial lender, and Bank of Jiangsu Co Ltd, a regional joint-stock commercial lender headquartered in Nanjing, Jiangsu province, also received the green light this year to issue up to 80 billion yuan and 20 billion yuan of perpetual bonds, respectively.

"We will offer more policy support to small and medium-sized banks in terms of capital replenishment, with the aim of strengthening banks' overall capacity to supply credit and further promoting development of the real economy," said Liu Guoqiang, deputy governor of the People's Bank of China, the central bank.

"The PBOC will encourage commercial banks to replenish capital by taking various measures and to explore innovative instruments in this regard," Liu said at a news conference on Feb 27.

To support banks' capital replenishment demands, the PBOC conducted two central bank bill swaps totaling 11 billion yuan over the last two months. The bill swaps allow dealers to swap the perpetual bonds they hold for central bank bills, which will effectively boost market demand for perpetual bonds but have a neutral impact on liquidity in the banking system.

Last year, 15 banks, including five large State-owned commercial lenders and seven national joint-stock commercial lenders, issued perpetual bonds amounting to 569.6 billion yuan. They were joined by a growing number of small regional banks this year.

"China will step up support for small and medium-sized banks by launching a 'green passage' scheme to help replenish capital and accelerate efforts to introduce new strategic investors," said Xiao Yuanqi, chief risk officer and spokesperson of the China Banking and Insurance Regulatory Commission.

Other central government departments and local governments will also take measures to enhance the capabilities of small and medium-sized banks in giving further support to small businesses, which account for a major part of enterprises affected by the novel coronavirus outbreak in China. As small businesses are major clients of small and medium-sized regional banks, the epidemic has put some strain on these banks, Xiao said.

Till now, regulatory indicators such as the capital adequacy ratio and the liquidity coverage ratio have shown that small regional banks are capable of providing further financing and other financial services to small businesses. However, considering that it will take a while to see the real impact of the epidemic on these banks, financial regulators must take proactive measures to ensure that small banks can maintain the capabilities, he said.

China issued a notice on March 1, calling for banks to provide certain micro, small and medium-sized enterprises with temporary extensions on repayments for loans that mature after Jan 25, with a maximum extension period until June 30, to avoid the capital chain rupture of major clients of small banks.