Asia-Pacific bank bond issuance is set to pick up in 2023, driven by expectations for increased issuance from Chinese lenders as they prepare to meet requirements to build buffers for total loss-absorbing capacity.
China's global systemically important banks, or G-SIBs, have an estimated $550 billion capital gap to fill before the Jan. 1, 2025, deadline to meet the total loss-absorbing capacity, or TLAC, requirements, according to S&P Global Ratings. The banks are likely to start issuing TLAC securities soon given the deadline and their sizable shortfall in TLAC capacity, said Nicholas Yap, head of Asia credit desk analysts at Nomura.
"While the shortfall looks huge, we suspect that not all of it will be met via the capital markets, and for the portion that is, much of it will likely be directed onshore," Yap said.
Aggregate debt issued by Asia-Pacific banks fell to $215.42 billion in 2022 from $228.78 billion in 2021, dragged by a decline in issuance volumes from Chinese banks, according to S&P Global Market Intelligence data. Chinese bank debt issuances in 2022 declined 24% year over year, totaling $108.54 billion, making up about 50% of Asia-Pacific bank debt issuances. The debt figures include bonds, senior debt and preferred securities, among others.
Meeting TLAC requirements
Due to the size of the TLAC shortfall of the Chinese G-SIBs, the banks are poised to tap more onshore debt, or debt denominated in local currency, in 2023 amid rising rates in the U.S., said Marvin Kwong, director and portfolio manager for fixed income, Asia, at M&G Investments.
"The banks can fulfill this [TLAC] requirement by replacing their senior debt over time, which would allow the banks to meet this requirement at a lower funding cost," Kwong said.
The U.S. federal reserve will likely continue to hike rates through early 2023, albeit at a slower pace, S&P Global Ratings said in a Jan. 19 report. S&P Global economists expect the U.S. interest rate to rise to just over 5% by the middle of 2023, before the Fed reverses course later in the year, leading to rates somewhat declining in 2024.
"Historically, banks issued more through the domestic market, and we expect this to continue to be the case for TLAC instruments," said Andy Suen, co-head of Asia ex-Japan fixed income at PineBridge Investments. Even 10% of offshore TLAC issuance would total $15 billion to $20 billion per year, "which can be well absorbed by the market," Suen added.
In addition to the TLAC requirements, China's easing of COVID-19 curbs since late 2022 and a stronger U.S. dollar are expected to increase bond issuance, said Terence Fong, KPMG China's head of Chinese banks. The need for funds to support the reopening of the Chinese economy, especially the property sector and small- and medium-sized enterprises hit by the pandemic, will also likely fuel bond issuance, Fong added.
Attractive local-currency bonds
For Asia-Pacific banks, issuing local-currency bonds will also remain attractive given the high cost of issuing U.S. dollar bonds following elevated interest rates and heightened volatility in 2022, analysts said.
"Funding conditions in several Asian countries remain more favorable onshore, and as such, we should continue to see these Asian banks tap local currency markets to control overall borrowing costs, especially if these banks have a local investor base," M&G Investments' Kwong said.
Overall, Kwong believes Asian banks' bond issuance is expected to pick up in 2023 "but is likely to remain subdued given the overall high interest rate and low growth environment."
The size of Asia-Pacific banks' offshore bond issuances will also depend on the yield differential and rates outlook onshore and offshore, PineBridge Investments' Suen said.
"The yield differential has narrowed moderately in recent weeks but onshore funding costs still remain more favorable than offshore," Suen added.
