China banks lay the ground for dollar capital-eligible debt

Tue Mar 4, 2014 1:49am EST

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* Chinese banks issue senior dollar debt to set benchmarks

* Bankers see up to US$25bn in capital-eligible securities this year

* Some US$8bn could be sold as dollar-denominated subordinated debt

By Neha D'silva

HONG KONG, March 4 (IFR) - Bankers and analysts believe the recent spate of US dollar bond issues from China's banking sector is an effort to lay the groundwork for the sale of more Basel III-compliant securities.

Dollar offerings from Chinese banks could total as much as US$8bn this year, as issuers begin to ramp up their overseas profiles with an eye on building out their regulatory capital, according to bankers pitching for roles on the financings.

"The goal is to develop a curve for the Chinese banks to raise capital," said a credit analyst focused on Asian banks.

"Banks will look to raise Tier 2 in the interim and Tier 1 ultimately," the analyst added.

ICBC International, a unit of Industrial and Commercial Bank of China, sold a US$650m three-year Reg S dollar bond on February 25, while, earlier this year, Bank of Communications and Bank of China, Hong Kong branch, priced senior unsecured US dollar bonds. In December, Agricultural Bank of China (Hong Kong) sold US dollar senior bonds.

This wave of issuance came after two subdued years for senior bond sales by Chinese lenders, without a single overseas benchmark in 2012. ICBC Asia and China Citic Bank issued Basel III-compliant Tier 2 capital in US dollars last year, marking a tentative beginning to overseas capital raisings under the new Basel regime.

Some market participants viewed ICBC International's latest offering as preparation for forthcoming bank capital outings, noting that the onshore market has yet to embrace perpetual bonds or Basel III-compliant structures.

One banker that covers financial institutions in China said it is no coincidence that the bank came to market now. According to this banker, regulators have given the green light for ICBC to issue up to Rmb80bn (US$13bn) in Tier 1 subordinated debt this year. The approval allows a quarter of that to be sold offshore.

"ICBC is the only one that has already secured a board approval and regulatory approval to sell Tier 1, but regulators have already approved Rmb240bn in Basel III-compliant issuance this year," said the banker.

The bank's Hong Kong subsidiary, ICBC Asia, was also the first to establish a benchmark for Basel III compliant debt in dollars in the region. In early October, ICBC Asia sold a 10-year US$500m subordinated bond that included loss-absorption features.

US$25BN THIS YEAR

All added, debt capital markets bankers estimate China's lenders could issue more than US$25bn of bank capital this year alone, mostly either onshore or in equities.

One predicted, however, that some US$8bn could reach the overseas bond markets in the near future, after a rise in onshore rates left the US dollar market looking more attractive.

The timing, for now, remains unclear. Yet, debt capital markets bankers have been actively pitching banks in Beijing and Shanghai. "Easily offshore investors could see US$8bn or more in subordinated debt from Chinese banks this year," said another banker.

The big four Chinese banks - Bank of China, ICBC, Agricultural Bank of China and China Construction Bank - do not have an urgent need to raise capital, with risk-adjusted capital ratios set to stay at 6%-7% over the next couple of years, according to Standard & Poor's.

Deal-flow will also depend on market conditions.

Typically, investors want a premium for buying Basel III-compliant bonds because of their loss-absorbing features, making such instruments expensive for issuers in volatile markets.

"This is obviously not a good time; they should have done it a little earlier. However, a lot of issues are stuck with the government awaiting approvals," a debt capital markets banker said.

However, as issuers wait for approvals and better market conditions, senior deals will provide fresh benchmarks when the time is right to issue capital bonds.

ICBC International's issue priced on February 25 to yield 162.5bp over three-year US Treasuries, narrowing from an initial spread of 180bp over. (Reporting By Neha D'silva; editing by Christopher Langner and Steve Garton)

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