CHINA’S five globally systemically important banks would have a shortfall in their total loss absorption capital (TLAC) of 1.6 trillion yuan (S$301 billion) by January 2025, Fitch Ratings estimates, indicating huge strains on the lenders’ capital buffers.

Five of China’s largest state-owned lenders – Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications – are designated as global systemically important banks by Chinese regulators and the Swiss-based Financial Stability Board (FSB).

The global systemically important lenders are required to hold a TLAC amount of at least 16 per cent of risk-weighted assets starting Jan 1, 2025, and the bar will be further raised to 18 per cent from Jan 1, 2028.

The requirements added to the Chinese lenders’ capital-raising pressure, especially as the banks are under greater strain to support the Chinese economy, property developers and local government financing vehicles.

To plug a capital shortfall, the five lenders this year have announced plans to issue as much as 440 billion yuan of TLAC bonds in total, with issuance of the bonds could be as soon as the second quarter this year, Fitch estimated.

The TLAC bonds, which are not counted in a bank’s capital base, can be written off, or converted into common equities, when the bank enters the disposal phase.

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The five major lenders have posted slower profit growth and shrinking net interest margin (NIM) – a key gauge of profitability – in their 2023 annual reports.

The NIM is expected to further narrow this year, Vivian Xue, director of financial institutions at Fitch Ratings, said Thursday at a webinar, as asset yields would be under pressure.

“The loan demand is relatively weak, especially the residential mortgage demand,” she said. REUTERS