China's biggest bank falls short in bid to replenish capital

A massive push by China's biggest banks to boost capital amid the worst downturn in at least a decade faltered out of the gate. Industrial & Commercial Bank of China Ltd. slashed a planned bond sale of the riskiest type of debt by more than a third, raising only $2.9 billion in dollardenominated bonds out of a planned $4.4 billion.

Some of China's biggest lenders are trying to raise at least $29 billion in bonds this month to shore up capital as profits slide and bad debt balloons. Banks are being enlisted by the government to provide cheap loans to millions of businesses and consumers struggling with the fallout of the pandemic, triggering the worst earnings slump in a decade.

The sale by ICBC, the world's largest bank by assets, was likely hampered by the competition from a jump in Chinese dollar debt sales, which have contributed to a record amount of global issuance this year.

The Additional Tier 1 bonds priced at a yield of 3.58%, which was just below what rival Bank of China issued debt at earlier this year, according to Pramod

Shenoi, head of APAC research at Creditsights.

"Achieving a tighter coupon may have been more important for the issuer," Shenoi said. "We've seen that investors have had less cash to put to use more recently they have allocated their cash and cash levels are low so overall supply would have used up their cash."

Even at the reduced size, the Beijing-based bank's offering is the biggest of its kind by a Chinese lender since Postal Savings Bank of China Co.'s $7.25 billion bond in 2017, according to data compiled by Bloomberg. It's also the first offshore AT1 deal from ICBC in six years. The notes typically pay a higher yields than regular debt since they stand first in line for losses if the issuer goes bust.

"There are also concerns that this may not be the best time to be in longer maturity assets if the treasury curve continues to steepen," said Thu Ha Chow, a portfolio manager at Loomis Sayles Investments Asia Pte. "Chinese banks are supporting the real economy during this pandemic and are expected to take some credit losses, so capital buffers will need to be replenished."

While they meet minimum domestic capital requirements with a safe margin, China's four biggest banks face a shortfall of $220 billion to meet global capital rules kicking in at the start of 2025, S&P Global Ratings said in a report last month. That gap may increase to more than $900 billion over the next few years as economic pressure weighs on earnings, S&P said.

Harry Hu, a Hong Kong-based analyst at S&P Global, said the whole industry is in need of capital. "The reason is because of high credit growth and there's slowing profitability," he said. "Credit growth is high this year, higher than what we originally expected. We were looking at about 13% loan growth or maybe slightly more."

Meanwhile, Evanston-based Accuity, a global provider of financial crime screening, payments and counterparty know your customer (KYC) solutions, announced that ZA Bank, said to be Hong Kong's first virtual bank, has implemented its screening solution to improve customer experiences, and at the same time, meet domestic and international regulatory requirements.

Under Hong Kong's regulatory and supervisory framework, a bank must regularly demonstrate that it has a robust risk and compliance screening system in place to screen and alert the bank regarding individuals who could be engaged in financial crime, associated with sanctioned regions or entities, or are politically exposed persons (PEPs), to prevent them from using the bank as a conduit for illicit activities.

Rockson Hsu, CEO, ZA Bank said, "While ZA Bank provides around-the-clock, innovative services purely through a mobile application, we have adopted a rigorous compliance and risk management approach like the traditional banks do. Accuity has been a valuable partner in our endeavour to make banking accessible to more people in our community through technology. By handling growing numbers of customers and transactions with high levels of accuracy, their Firco screening solution has not only helped us meet the AML and KYC-related requirements, it has played a key role in upholding our dedication to excellence."

According to The Future of Digital Banking Report 2020 report by IBS Intelligence, virtual banks do not face legacy technology and outdated processes impediments which are generally the challenges of traditional financial institutions. These neobanks are here to save the day from bloated incumbents who may have taken their customers for granted for way too long.