Banks' Multi-Channel Capital Replenishment: Preferred Stock Scale Falls Below 500 Billion Yuan, Perpetual Bonds Become New Mainstay for Blood Replenishment

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Daily Economic News Reporter | Liu Jukai    Daily Economic News Editor | Bi Luming

Since March 2026, multiple listed banks such as China Merchants Bank and Ping An Bank have announced early redemption of preferred shares, continuing the trend that began in 2025. Data shows that as of March 17, there are 16 preferred shares remaining in the banking sector, with total outstanding scale falling below 500 billion yuan, a significant shrinkage from the peak of nearly 840 billion yuan in 2020.

This change is closely related to the market interest rate environment. From 2014 to 2019, the dividend yields of issued preferred shares mostly ranged from 5% to 6.5%, while current issuance rates for alternative instruments like perpetual bonds have generally fallen below 3%. Against the backdrop of a persistent narrowing net interest margin, banks are increasingly motivated to optimize capital structures and reduce financing costs through “redeem and issue new” strategies.

Meanwhile, regulatory efforts to standardize and marketize capital supplement tools, along with simplified issuance procedures for perpetual bonds, have created favorable conditions for this round of preferred share redemptions. Industry analysis indicates that the gradual decline in preferred share scale, coupled with the expansion of perpetual bonds and other tools, reflects a shift toward more sustainable and flexible market-based capital replenishment methods in banking.

On March 14, 2026, China Merchants Bank announced its plan to fully redeem 275 million shares of its privately issued preferred stock “Zhaoyin You 1” by April 15, raising a total of 27.5 billion yuan. This is the third listed bank this year to announce preferred share redemption. Previously, Everbright Bank completed the redemption and delisting of 35 billion yuan “Everbright You 3” on February 11, and Ping An Bank redeemed 20 billion yuan “Pingyin You 1” on March 9. These three banks alone are expected to redeem a total of 82.5 billion yuan this year.

Looking further back, the scale of this redemption wave is even more astonishing. According to Daily Economic News reporters, in 2025, banking financial institutions redeemed over 100 billion yuan of preferred shares both domestically and abroad. This includes ICBC and Bank of China, which redeemed $57.2 million of offshore preferred shares, Industrial Bank’s one-time redemption of three series of preferred shares totaling 56 billion yuan, and five city commercial banks—Changsha, Nanjing, Shanghai, Hangzhou, and Beijing—redeeming 45.8 billion yuan of preferred shares in December 2025.

A senior banking industry analyst pointed out that this wave of redemptions shows clear timing patterns. Most preferred shares are issued with redemption clauses after five years, and the peak issuance period was 2018-2019. The first major redemption window then occurred in 2024-2025, creating a compounded market perception of redemption pressure.

As redemptions intensify, the outstanding scale of preferred shares continues to shrink. Statistics show that as of March 17, the remaining preferred shares in banks further decreased to 16, with total scale falling below 500 billion yuan.

Looking back historically, the pilot program for commercial bank preferred shares officially launched in 2014, mainly to help banks supplement additional Tier 1 capital without diluting common shareholders’ equity. Data indicates that from 2014 to January 2020, a total of 35 preferred shares were issued in the domestic market, raising approximately 839.15 billion yuan. However, after the last batch issued by Changsha Bank in 2020, there has been a six-year “issuance hiatus” for listed bank preferred shares.

The collective redemption of preferred shares by listed banks reflects proactive financial strategy adjustments amid profound changes in the interest rate environment. Unlike common equity, preferred shares have both equity and debt attributes, belonging to “quasi-equity, quasi-debt” products, with dividend payments constituting a rigid financial burden for banks.

Cost differences are the most direct drivers of redemption. The aforementioned banking analyst explained that preferred shares issued from 2014 to 2017 had dividend yields generally between 5% and 6.5%. Even after rate resets, yields remained high at 3.5% to 4.5%. Currently, new perpetual bonds issued by banks have significantly lower coupon rates. In 2025, the average coupon rate for bank perpetual bonds was only 2.43%, with a range as low as 2.0% to 2.9%. There is a gap of over 3 percentage points between new and old instruments.

For example, the preferred stock “Zhaoyin You 1” redeemed by China Merchants Bank had a coupon rate of 4.81% at issuance, which was adjusted down to 3.62% in 2022, still higher than current market financing costs. It is estimated that fully redeeming 27.5 billion yuan of preferred shares could save nearly 1 billion yuan annually in dividend payments. Industrial Bank’s case is even more representative: in June 2025, it issued 30 billion yuan of perpetual bonds with a coupon rate of just 2.09% for the first five years, and in July, it redeemed preferred shares totaling 56 billion yuan with coupon rates between 3.7% and 5.5%, saving about 1.28 billion yuan in interest annually.

Beyond explicit coupon rate differences, tax treatment further widens the actual financing cost gap. Interest on perpetual bonds is tax-deductible before tax, whereas preferred share dividends are not, giving perpetual bonds a clear after-tax cost advantage.

Regulatory evolution also provides policy space for redemption operations. Industry experts say that regulators continue to encourage banks to improve capital quality and optimize capital tool structures. Although preferred shares are classified as Additional Tier 1 capital, their high dividend yields exert ongoing pressure on net profit. As long as capital adequacy ratios are met, redeeming high-cost instruments and replacing them with more standardized, lower-cost products aligns with regulatory guidance.

Simplified procedures also lower the threshold for replacements. Compared to preferred shares, which require dual approval from the China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission, with an average issuance cycle of 13 months, perpetual bonds only need approval from the China Banking and Insurance Regulatory Commission. The process is greatly simplified, with issuance cycles shortened to 3 to 6 months. This efficiency allows banks to better seize market interest rate windows and implement “redeem and issue new” capital management strategies flexibly.

The intensive redemption of preferred shares not only reshapes banks’ liability cost structures but also has a profound impact on asset allocation in capital markets. As supply of high-yield preferred shares continues to shrink, institutional investors relying on such assets for stable income face increasing asset allocation challenges.

Industry analysts note that the current banking sector has formed a seamless “issue perpetual bonds, then redeem preferred shares” model. This precise timing window effectively avoids phased declines in capital adequacy ratios and achieves steady optimization of capital structure. The capital released through redemptions creates space for banks to improve capital adequacy and efficiency, while the direct reduction in interest expenses alleviates profit pressure from narrowing net interest margins.

However, redemption is not without conditions. Banks must have relatively ample capital adequacy levels, with key indicators significantly above regulatory thresholds. For example, China Merchants Bank’s core Tier 1 capital adequacy ratio has remained above 12% for a long time, well above the 7.5% regulatory requirement, providing a strong capital cushion for redemption operations.

On the market side, perpetual bonds have successfully become the main tool for other Tier 1 capital replenishments. Data shows that in 2025, various banks issued a total of about 1.76 trillion yuan of “Second perpetual bonds” (Tier 2 capital bonds and perpetual bonds), exceeding the scale of 2024. The market size of “Second perpetual bonds” is expected to reach new highs in 2026.

“Under the current low-interest-rate environment, perpetual bonds offer attractive yields for long-term funds such as insurance and wealth management, ensuring ample market absorption. However, some small- and medium-sized banks may face issuance pressures due to lower market recognition, while large state-owned and leading joint-stock banks, with their credit advantages, face lower risks of liquidity mismatch,” said the analyst. “Currently, overall risk appetite for wealth management products is low, and high-risk assets are rarely invested in. After preferred shares exit, product yields may decline. Institutions are seeking diversification through multi-asset allocation, including gold, REITs, derivatives, and other alternative assets, or indirectly participating in equity markets via increased allocations to secondary bond funds and equity ETFs.”

“The redemption process for preferred shares is expected to continue,” the analyst predicts. Going forward, remaining preferred shares in the market will mainly fall into two categories: one, those not yet in redemption period; and two, tools issued by some small- and medium-sized banks under capital pressure that lack alternative channels. By early 2027, the market scale of bank preferred shares could further shrink below 100 billion yuan, gradually fading out as a mainstream tool for bank capital replenishment.