Recently, Industrial Bank announced that it has fully redeemed its "Industrial Bank Co., Ltd. 2020 Perpetual Capital Bonds" (hereinafter referred to as "the perpetual bonds"). These bonds were issued in October 2020, with a scale of CNY 30 billion and an interest rate of 4.73%, featuring a conditional redemption right for the issuer.

Since the beginning of this year, commercial banks have been actively redeeming Tier 2 Capital Bonds and Perpetual Bonds (hereinafter referred to as "Tier 2 and Perpetual Bonds"). According to Wind Information, as of October 20, over 80 Tier 2 and perpetual bonds issued by commercial banks have been redeemed this year, totaling over CNY 970 billion.

In contrast to the intensive redemptions, the issuance of Tier 2 and perpetual bonds remains high. Data shows that, as of October 20, commercial banks have issued a total of CNY 1.26 trillion in Tier 2 and perpetual bonds this year.

Multiple banks have exercised their redemption rights. According to the announcement from Industrial Bank, it can redeem the perpetual bonds entirely or partially on the fifth anniversary of the bond's interest payment date, which is set for October 15, 2025.

Before completing the redemption of these perpetual bonds, Industrial Bank issued the second tranche of perpetual capital bonds (Bond Connect) this year from September 9 to September 11, totaling CNY 20 billion, with a coupon rate of 2.24%, significantly lower than the already redeemed perpetual bonds.

Data indicates that as of October 19, 81 Tier 2 bonds have been redeemed this year, surpassing the 55 bonds redeemed in the same period of 2024. The total amount of redeemed Tier 2 bonds reached CNY 978 billion.

The bonds redeemed this time primarily originated in 2020, issued by various types of banks, including large state-owned banks, joint-stock commercial banks, urban commercial banks, and rural commercial banks, all with interest rates exceeding 3%. Generally, Tier 2 Capital Bonds have a maturity of ten years with a conditional redemption option available to the issuer at the end of the fifth year; similar conditions apply to perpetual bonds, allowing redemption after five years from issuance on each interest payment date.

Some Tier 2 Capital Bonds have been redeemed upon maturity, while some commercial banks opt for early redemptions due to changes in operational and capital conditions. For example, Qinghai Datong Rural Commercial Bank announced on September 29 that it plans to partially redeem CNY 150 million in Tier 2 Capital Bonds issued in 2016 due to recent changes in its operational and capital conditions, aimed at adjusting its capital structure and improving the efficiency of fund utilization.

Despite the active redemptions, the enthusiasm for issuing Tier 2 and perpetual bonds remains high. On October 18, Changsha Bank announced that it has received regulatory approval to issue up to CNY 12 billion (inclusive) of capital instruments, which consist of perpetual capital bonds and Tier 2 capital bonds.

As of October 20, commercial banks have issued a total of CNY 1.26 trillion in Tier 2 and perpetual bonds this year. The highest issuance rate is 3.49%, while the lowest is 1.88%, with overall rates trending downward. Experts suggest that commercial banks are redeeming high-rate bonds and issuing new bonds at lower rates to reduce financing costs and optimize their financing structure.

According to Du Juan, a senior researcher at the Su Bank Research Institute, the intensive exercise of redemption rights by commercial banks this year is driven by several factors: firstly, the capital supplementing capabilities of previously issued Tier 2 and perpetual bonds decline over time; secondly, commercial banks redeem prior high-rate Tier 2 and perpetual bonds and issue lower-rate new bonds to cut costs.

“Maturing redemptions from commercial banks are expected to lead to a short-term contraction in the supply of Tier 2 and perpetual bonds, resulting in a scarcity of high-yield products, lower yields, and increased investment demand,” said Ming Ming, chief economist at CITIC Securities, adding that in the long term, this will benefit commercial banks in forming a low-cost and healthy capital replenishment mechanism.