Bank Stocks Rise on Boost to Core Tier-1 Capital

On September 24th, the State Council Information Office held a press conference to introduce the situation concerning financial support for high-quality economic development. Li Yunze, Director of the State Financial Regulatory Administration, stated at the conference that the country plans to increase the core tier-one capital for six large commercial banks, which will be implemented in an orderly manner following the approach of "overall promotion, phased batches, and one policy per bank." The State Financial Regulatory Administration will also continue to urge large commercial banks to enhance their refined management level and strengthen their ability for high-quality development under capital constraints.

Boosted by this news, as of today's closing, the share prices of state-owned major banks have collectively strengthened, with Bank of Communications' share price soaring by 6.74%, and Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China, and Postal Savings Bank of China rising by 4.9%, 4.63%, 4.48%, 3.9%, and 3.78%, respectively.

Enhancing the Banks' Risk Resistance Capability

Li Yunze indicated that large commercial banks are the main force in serving the real economy within China's financial system and also the ballast stone for maintaining financial stability. At present, large commercial banks are operating and developing steadily, with stable asset quality, and all major regulatory indicators are within the "healthy range." Capital is the "principal" of financial institutions' operations, the foundation for enhancing the ability to serve the real economy, and a barrier against risks. In recent years, large commercial banks have mainly relied on retaining their own profits to increase capital. However, as the intensity of banks' fee reductions and concessions continues to increase, the net interest margin has narrowed, and profit growth has gradually slowed down, necessitating the coordination of various internal and external channels to replenish capital.

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Pan Shu Yue, Senior Deputy Director of the Financial Business Department of Orient Gold Honesty, believes that there are three main reasons for this increase in core tier-one capital: First, to strengthen the strength of large banks and stabilize the financial system. Large commercial banks occupy an extremely important position in China's financial system and are the "ballast stone" for financial stability. At the same time, capital is the "principal" of financial institutions' operations, the foundation for enhancing the ability to serve the real economy, and a barrier against risks. Increasing the core tier-one capital of the six major banks can improve their capital adequacy ratio, enhance their risk resistance capability, help maintain steady operations in the current economic environment, and ensure the stable operation of the financial system.

Second, to support the development of the real economy. Large commercial banks are the main force in serving the real economy within China's financial system. Enhancing their capital strength helps to expand credit scale, support business development, provide more financial support for the real economy, and play a greater role in supporting major national construction projects, the development of strategic emerging industries, and financing for small and micro enterprises.

Third, to alleviate the pressure of capital replenishment caused by the slowdown in profit growth. With the intensification of banks' fee reductions and concessions and the intensification of market competition, the narrowing of the interest margin and the slowdown in profit growth have weakened banks' internal capital replenishment capabilities, necessitating the coordination of various internal and external channels to replenish capital.

Wang Pengbo, Chief Analyst of the Financial Industry at Broadband Consulting, believes that large commercial banks with more abundant core tier-one capital can enhance their risk resistance capability, maintain operational stability, and have more funds available for lending, supporting enterprise development, and participating in major construction projects; of course, sufficient capital can also ensure that banks avoid regulatory penalties due to insufficient capital. The reality is that the method of increasing capital by retaining their own profits is no longer sufficient to meet the banks' current needs, so it is also necessary to increase coordinated channels.

Zong Liang, Chief Researcher at the Bank of China, believes that increasing the core tier-one capital of the six large commercial banks is to maintain the stability of the banking industry and enhance the competitiveness of state-owned major banks, which will also lay a solid foundation for the next round of loan distribution and the stability of the financial system. In conjunction with the positioning of state-owned large financial institutions at the Central Financial Work Conference, this is also to support state-owned large financial institutions to be excellent and strong, to be the main force in serving the real economy, and to be the ballast stone for maintaining financial stability.From the perspective of the necessity to replenish capital, Zong Liang believes that in recent years, the profit growth rate of the six major banks has slowed down. They still need to maintain a reasonable loan growth rate and their own stability, so the capital level is under certain pressure, but it is still at a normal level. Under the condition that internal and external capital replenishment is relatively limited, replenishing the capital of the six major banks through special methods is a big move. As for how to operate in the next step, it needs further refinement and observation.

Mainly divided into internal and external replenishment

Pan Shu Yue said that the ways for banks to replenish core tier-one capital mainly include internal and external replenishment. Among them, internal replenishment through profit retention is the most basic and continuous way for banks to replenish core tier-one capital. External replenishment methods include IPO, private placement, rights issue, and issuance of convertible bonds, etc.

Wang Peng Bo speculated that judging from the current dynamic of bank stocks, the replenishment methods of core tier-one capital are more likely to be government capital injection or preferred shares.

Lou Fei Peng, a researcher at Postal Savings Bank, believes that issuing special treasury bonds to replenish capital is a feasible choice, and the scale of special treasury bond issuance can be flexibly set according to actual needs.

"From the perspective of systemic importance and supporting the development of key areas, Industrial and Commercial Bank of China and China Construction Bank may be relatively ahead in the implementation order of capital replenishment. Among them, Industrial and Commercial Bank of China has a wide customer base and a large business scale. China Construction Bank has a traditional advantage in infrastructure construction loans, housing finance, and other fields, which is closely related to national major construction projects." Pan Shu Yue added.

Yang Hai Ping, a researcher at the Securities and Futures Research Institute of Central University of Finance and Economics, said that the last round of state capital injection into large banks can be traced back to the period of large bank share reform and listing. Although there have been cases of large bank private placements after that. Compared with the previous capital injection, the background and objectives of the upcoming capital injection are different. The background of the last capital injection was that the risk of large banks was relatively high, and the main goal was to resolve risks and promote mechanism reform. The background of the upcoming capital injection is that the indicators of large banks are healthy, and the goal is to further improve the quality and efficiency of large banks serving the real economy, and to better play a leading role.

In Yang Hai Ping's view, there are also differences in the process and regulatory requirements faced by this capital injection and the previous one. The last capital injection occurred before the listing of large banks, and now all large banks have become listed banks, and the regulatory environment has also changed greatly. The process and regulatory requirements of this capital injection will be stricter. Preliminary judgment, this capital injection is expected to mainly take the form of private placement.

At present, the semi-annual report of A-share listed banks in 2024 has been disclosed. As of the end of June, the capital adequacy ratio of the 42 listed banks has all exceeded 11%, and the capital adequacy ratio of state-owned banks is relatively high. Among them, the capital adequacy ratios of China Construction Bank, Industrial and Commercial Bank of China, Bank of China, and Agricultural Bank of China all exceeded 18%. In addition, the capital adequacy ratio of China Merchants Bank is also high, reaching 17.95%.

In terms of core tier-one capital adequacy ratio, as of the end of June 2024, among the six major banks, the core tier-one capital adequacy ratio of China Construction Bank is relatively high, at 14.01%, an increase of 0.86 percentage points from the end of last year. The core tier-one capital adequacy ratios of the other five major banks, Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, and Bank of Communications, are all above two digits, at 13.84%, 12.03%, 11.13%, and 10.3%, respectively. Postal Savings Bank is relatively lower, at 9.28%.