Text/Liu Zhentao
"Blood replenishment" has become a busy business for banks!
Recently, a number of listed banks in the market have announced the issuance of indefinite capital bonds to supplement their own capital. The so-called open-term capital bonds, also known as perpetual bonds, are an important tool for commercial banks to supplement other tier 1 capital.
The Measures for the Management of Capital of Commercial Banks (for Trial Implementation), which came into effect in 2013, put forward clear requirements for the capital adequacy ratio of commercial banks, and perpetual bonds, as an effective capital replenishment tool, will help improve the Tier 1 capital adequacy ratio and capital adequacy ratio of commercial banks.
On the evening of June 12, Huaxia Bank, an A-share listed bank, announced that the bank recently issued 2024 indefinite capital bonds (Phase I) with a scale of 40 billion yuan in the national interbank bond market. The proceeds from the issuance of the bonds are used to supplement the Company's other Tier 1 capital.
We observe that Huaxia Bank's asset scale has expanded rapidly in recent years, and the company's total assets will reach 4.25 trillion yuan by the end of 2023. However, its own capital adequacy ratio has fluctuated significantly in recent years, and its performance and profitability have come under pressure.
The bank's own capital situation affects the bank's scale expansion and profitability. In recent years, as banks continue to increase their efforts to serve the real economy, credit supply has continued to grow, which has been intensifying capital consumption to a certain extent, and banks urgently need to replenish capital to strengthen their ability to resist risks and ensure healthy and stable development.
Profitability was under pressure, and 40 billion bonds were issued to supplement capital
There are usually two sources of replenishment of the bank's own capital: internal and external. The internal source mainly relies on retained earnings and part of the excess provisions, while the external source mainly relies on listing financing, capital increase and share expansion, and the issuance of convertible bonds, preferred shares, perpetual bonds, Tier 2 capital bonds, etc.
In recent years, most banks have stepped up their efforts to replenish capital from external sources.
In 2023, Huaxia Bank will achieve operating income of 93.207 billion yuan, a year-on-year decrease of 0.64%, and a net profit of 26.363 billion yuan, a year-on-year increase of 5.30%. In the past three years from 2021 to 2023, Huaxia Bank's operating income has changed from growth to decline, with revenue growth decreasing from 0.59% to -0.64%, and net profit growth slowing down, with net profit growth decreasing from 10.62% to 5.30%.
In the first quarter of 2024, Huaxia Bank's operating income was 22.114 billion yuan, down 4.34% simultaneously, and its net profit was 5.890 billion yuan, a year-on-year increase of 0.61%, compared with the end of the first quarter of 2023, the net profit growth rate slowed down again, falling below 1%.
Behind the decline in the growth rate of Huaxia Bank's revenue and net profit, the company is facing greater pressure on interest margins, with net interest margins and net interest margins showing a downward trend, and profitability is under pressure.
In terms of net interest margin, at the end of 2023, Huaxia Bank's net interest margin was 1.82%, a decrease of 0.28 percentage points compared with the same period in 2022 and a decrease of 0.53 percentage points compared with 2021. According to regulatory data, at the end of 2023, the average overall net interest margin of commercial banks was 1.69%, and the average overall net interest margin of joint-stock banks was 1.76%.
Although Huaxia Bank's net interest margin is better than the average of commercial banks and joint-stock banks, it is declining compared to itself.
In terms of net interest margin, at the end of 2023, Huaxia Bank's net interest margin was 1.77%, a decrease of 0.3 percentage points from the same period in 2022 and a decrease of 0.49 percentage points from the same period in 2021.
At the end of the first quarter of 2024, Huaxia Bank's net interest margin fell again, from 1.82% to 1.62%, a decrease of 0.2 percentage points. Net interest margin also fell again from 1.77% to 1.62%, a decrease of 0.15 percentage points.
Huaxia Bank's performance declined and its profitability was under pressure, and its cash dividend ratio decreased compared with 2022. According to Huaxia Bank's dividend plan, Huaxia Bank will pay a dividend of 3.84 yuan per 10 shares in 2023, with a cash dividend ratio of 23.18%, a decrease of 1.17 percentage points from 24.35% in 2022, and the cash dividend ratio will not reach 30%.
The cash dividend ratio is less than 30%, which is mainly used by Huaxia Bank to replenish capital.
According to Huaxia Bank's announcement, Huaxia Bank said that the company is still in the development stage of continuous transformation and upgrading, and in order to better serve the implementation of national strategic policies and enhance the ability to serve the real economy, it needs to have sufficient capital to support business development.
It can be seen that Huaxia Bank is facing the pressure of capital replenishment. The rating agency Zhongchengxin International also pointed out in the rating report on the bonds issued by Huaxia Bank that Huaxia Bank's profitability needs to be improved, its asset quality is facing continuous pressure, short-term liquidity risk control is difficult, and it is facing continuous capital replenishment pressure.
The exogenous method has become an important way for banks to replenish capital, and the issuance of perpetual bonds has become an important tool. The same goes for Hua Xia Bank.
In May 2024, Huaxia Bank's "Instructions on Applying for the Issuance Quota of Capital Instrument Plan" was approved by the State Administration of Financial Regulation. According to the relevant approval, Huaxia Bank was approved to issue 80 billion yuan of capital instruments, which are indefinite capital bonds.
According to Huaxia Bank's announcement on the evening of June 12, Huaxia Bank completed the issuance of the first phase on June 11, with an amount of 40 billion yuan, and the coupon rate for the first five years was 2.46%, which was adjusted every five years.
The rating agency China Chengxin International gave Huaxia Bank a AAA rating for the issuance of bonds, and said that the issuance of the indefinite capital bonds in this issue will help Huaxia Bank improve its capital structure and enhance its capital strength.
The capital adequacy ratio fluctuates, and the capital strength still needs to be improved
Capital is the capital of a commercial bank, which directly determines the scale of business and is one of the most valuable resources of a bank.
The Measures for the Management of Capital of Commercial Banks, which came into effect on 1 January 2024, put forward higher requirements for the replenishment of bank capital. It is clearly stipulated that the minimum capital adequacy ratio of commercial banks at all levels is 5% for core Tier 1 capital, 6% for Tier 1 capital adequacy and 8% for capital adequacy ratio.
In addition, commercial banks should make reserve capital on the basis of the minimum capital requirement. The reserve capital requirement is 2.5% of risk-weighted assets, which is met by core Tier 1 capital, i.e., the minimum requirements of core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio and capital adequacy ratio (including reserve capital) of commercial banks are 7.5%, 8.5% and 10.5% respectively.
In addition, the regulations stipulate that systemically important banks should also accrue additional capital. There are five groups of systemically important banks, with additional capital requirements of 0.25%, 0.5%, 0.75%, 1% and 1.5% applied to banks in groups 1 to 5, respectively.
Huaxia Bank is one of the important systemic banks in China, which is in the first group and applies 0.25% of the additional capital. This means that Huaxia Bank's capital will need to be further improved to meet regulatory requirements.
In 2023, Hua Xia Bank's core Tier 1 capital adequacy ratio was 9.16%, Tier 1 capital adequacy ratio was 10.48%, and capital adequacy ratio was 12.23%. Compared with the regulatory value, Huaxia Bank is higher than the regulatory value.
However, judging from the data of the past three years from 2021 to 2023, Huaxia Bank's capital adequacy ratio fluctuates greatly. It was 12.82% at the end of 2021, 13.27% at the end of 2022, and 12.23% at the end of 2023, which is less than 2 percentage points away from the regulatory value.
At the end of 2023, the capital adequacy ratio of mainland commercial banks (excluding branches of foreign banks) was 15.06%, the Tier 1 capital adequacy ratio was 12.12%, and the core Tier 1 capital adequacy ratio was 10.54%, according to data from the regulatory authorities.
In comparison, Huaxia Bank's capital adequacy ratio indicators are lower than the average of commercial banks.
In addition, taking the capital adequacy ratio as an example, compared with the 12 joint-stock banks, Huaxia Bank's capital adequacy ratio ranks 9th among the 12 joint-stock banks, which is relatively low.
In the first quarter of 2024, Huaxia Bank's capital adequacy ratio, tier 1 capital adequacy ratio, and core tier 1 capital adequacy ratio were 12.55%, 10.75%, and 9.44%, respectively, which were higher than the capital adequacy ratios at the end of 2023.
However, at the end of the first quarter of 2024, the capital adequacy ratio of mainland commercial banks (excluding branches of foreign banks) was 15.43%, and the tier 1 capital adequacy ratio was 12.35%; The core Tier 1 capital adequacy ratio was 10.77%. Huaxia Bank's level is still lower than the average of commercial banks.
On the whole, Huaxia Bank's capital adequacy ratio has fluctuated significantly in recent years, and its capital adequacy ratio is lower than that of joint-stock banks and lower than the overall average of commercial banks. As a nationally important system bank, Huaxia Bank's capital strength needs to be further improved.
What do you think about Huaxia Bank's earnings under pressure and issuing 40 billion bonds to supplement its own capital?