China banks' issuance of Basel III securities swelling: Moody's

This is amid new global requirements.

Moody's Investors Service expects banks in China to continue issuing Basel III securities in 2015, in line with new global requirements that boost the loss-absorption requirements for non-viable banks.

According to a release from Moody's Investors Service, Moody's-rated banks plan to issue RMB705 billion of Basel III securities in the next few years; of which, RMB350 billion were already issued year-to-date in 2014.

"We expect this trend to continue, driven mainly by the need to replace traditional subordinated debt that either matures or loses its capital status under Basel III's phase-out mechanism," says Christine Kuo, a Moody's Vice President and Senior Credit Officer.

Banks also need to increase their Tier 1 capital -- by issuing additional Tier 1 (AT1) securities -- to keep pace with the rising minimum capital standards and to support growth.

"Our rated banks in China will have about RMB662 billion in old-style subordinated debt outstanding at end-2014," adds Kuo.

Here's more from Moody's Investors Service:

While many banks have issued Basel III-compliant Tier 2 debt, Industrial & Commercial Bank of China (A1 stable), Agricultural Bank of China (A1 stable) and Bank of China (A1 stable) have also issued preference shares, which will qualify as Basel III AT1 securities in 4Q 2014.

Moody's rating approach to contractual Basel III securities generally reflects the explicit loss-absorbing nature of these securities.

Under China's Basel III capital framework, all capital-qualifying securities other than common equity -- issued by banks after 1 January 2013 -- must have explicit terms that include principal write-downs or conversions to equity at the point of non-viability (PONV).

As Basel III-compliant capital securities are designed to absorb losses at the PONV and before systemic support would kick in, Moody's ratings on such securities are generally linked to the issuer's Adjusted baseline credit assessment (BCA).

The Adjusted BCA reflects Moody's opinion of the bank's intrinsic financial strength, incorporating parental support, if applicable, and generally removing any systemic support that is embedded in the parent's rating.

Moody's conference also discusses the impact of the upcoming regulatory move towards a risk-based capital regime—the China Risk-Oriented Solvency System (C-ROSS).

The new regime, which requires insurance companies to maintain capital commensurate with their specific risks, is credit positive, says Moody's.

Life insurers will likely seek longer-duration assets to avoid asset-liability mismatch, rebalance asset allocations to lower capital charges for investment risk, and those life insurers with negative spread will need larger capital buffers.

In addition, property and casualty insurers' risk charges will possibly shrink, although the proposed rules will favor large insurers, notes Moody's. In addition, a surcharge on insurance risk based on combined ratios will encourage adherence to underwriting discipline.

Overall, because of premium growth and C-ROSS, Chinese insurers will likely need to replenish capital over the next few years. The regulator has proposed new funding channels, including preference shares and catastrophe bonds, etc., which would provide insurers with more options to replenish capital and as a result, change insurers' capital structure.