Peter Leung, deputy chief executive and chief financial officer at the Industrial & Commercial Bank of China (ICBC) (Asia), tells Asiamoney PLUS that the Hong Kong-incorporated subsidiary of China-based ICBC will steer clear of offshore renminbi, or CNH, bond issues in 2012 due to the rising cost of funding – and notes that others looking to approach the market have missed their window for issuance, as well.
“It’s unlikely that we’ll issue a CNH bond this year because interest rates are going up. Unless we find the differential that makes raising CNH cheaper than raising Hong Kong or US dollar funding, it’s not reasonable to focus primarily on CNH business anymore,” he said. “Competition is rising in the market, and there are many more issuers looking to enter the market before the summer. This is driving up yields and the CNH market is now a true buyer’s market.”
Leung’s claim comes six months after ICBC (Asia) made a landmark CNH, or dim sum, bond sale, issuing a 10-year hybrid note that marked Asia’s first Basel III-compliant bond. That note, its first CNH-denominated bond, was touted as a success as it priced at 6% - an average of 200 basis points (bp) to 400bp less than other Basel III-compliant hybrids issued worldwide.
ICBC (Asia) achieved a lower yield because it offered a rare longer-dated dim sum bond (most bonds have a three-to-five-year tenor) which drew appetite despite this risk. The bonds were priced at 6% on October 27, at the lower end of its 6%-6.125% guidance, and is now trading at approximately 4.5% on the secondary market.
Since then, however, CNH deposits in Hong Kong had decreased, and the market has seen a rising number of issuers. This competition for fewer reserves has driven up the price to issue dim sum bonds. Leung notes that a bank looking to issue a similar bond to ICBC (Asia)’s 10-year note would have to pay between 25bp-50bp more.
More are poised to come to market as well. In January, 10 Chinese banks were given approval to issue CNH bonds. Some, including China Development Bank and Agricultural Development Bank of China, have already sold bonds in 2012, but the majority such as Export-Import Bank of China, Agricultural Bank of China and China Construction Bank have not. Leung said that these banks have waited until after the first-quarter holidays and after the election of Hong Kong’s chief executive to make their issues, and in doing so missed a favourable pricing window.
“There’s been a shrinkage of the CNH investor base recently. Even with Hong Kong claiming that it has about Rmb600 billion (US$95 billion) of deposits in banks, at least one-quarter of that is frozen by the clearing bank and much of the remaining Rmb450 billion is already allocated toward trade related financing and investment in CNH bonds. This will lead to a more severe competition for the available CNH funding,” he said. “In addition, the market going to see quite a lot of issuers, including the big banks in China, so investors have a lot of choices and essentially compare yields.”
Yet, asked whether ICBC (Asia) would consider issuing a CNH bond for the sake of developing its yield curve in the market, Leung says that there’s little point.
Last year, ICBC (Asia) raised money in the format of a CNH subordinated debt to bring onshore for injection into its subsidiar
y in China, rather than bolstering its offshore deposit levels. Given that ICBC (Asia) has sufficient capital ratios – claiming above 15% of core capital and around 10% Tier I capital – issuing subordinated debt is not in its short-term plans.
“The subordinated debt that we issued last year is a capital instrument that raises fund
s for capital investment purposes. If a bank issues a five-year bond with the purpose of lending it out to customers then there’s no way you’re going to make a profit,” he explained. “There is very limited opportunity for a bank to match the duration of the borrowing with the lending at the present moment, since there is no widely accepted benchmark for pricing a floating rate CNH loan. Banks need to address why they’re entering the CNH bond market and whether the payoff is worth it.”
Leung says that the US dollar market will offer issuers more appealing rates, though ICBC (Asia) won’t be turning to that market for funding, either. Instead, ICBC (Asia) will relay on direct equity injections from its onshore parent for any capital needs.
ICBC (Asia) last issued a US dollar-denominated note in January 2011, its second bond sale in the currency. The bank additionally manages three Hong Kong dollar-denominated bonds.