Hundred-billion redemption wave! Listed banks' high-yield preferred stocks "exit," while low-interest perpetual bonds "fill in" the gap

Interface News Reporter | He Liuying

Interface News Editor | Wang Shu

Listed banks are intensively redeeming preferred stocks.
Recently, China Merchants Bank (600036.SH) released its second reminder announcement regarding the redemption of preferred stocks, announcing plans to redeem 275 million domestic preferred shares (Zhaoyin Preferred 1) on April 15, with a par value of 100 yuan per share, totaling 27.5 billion yuan, and the redemption price will be the par value of the preferred shares plus the accrued dividends for the current period.
Interface News statistics show that since November of last year, several banks, including China Merchants Bank, Ping An Bank (000001.SZ), Everbright Bank (601818.SH), and Changsha Bank (601577.SH), have decided to redeem preferred stocks, with a total redemption scale exceeding 100 billion yuan.
In a low-interest rate environment, redeeming high-yield preferred stocks has become an important measure for banks to reduce costs and increase efficiency, while capital replenishment tools such as perpetual bonds, which have a price advantage, are increasingly favored by institutions. The market expects this wave of preferred stock redemptions to continue.

Banks Intensively Redeem High-Yield Preferred Stocks

Since November of last year, banks have announced redemptions of preferred stocks exceeding 100 billion yuan.
In terms of amount, several banks have redemption scales exceeding 10 billion yuan. Among them, Everbright Bank’s redemption scale reached 35 billion yuan. The bank’s announcement shows that it has fully paid shareholders the par value of preferred stocks and the dividends during the holding period, totaling 35.148 billion yuan, and the preferred stocks were canceled on the same day.
In terms of interest rates, the coupon dividend rates of these preferred stocks range from 3.62% to 4.86%. Among them, several banks, including Ping An Bank, Nanjing Bank, Shanghai Bank, and Beijing Bank, have preferred stock dividend rates exceeding 4%. It is worth noting that most of the earlier issued preferred stocks have entered the second interest-bearing period when redeemed, meaning that the initial interest rates at issuance are usually higher than the data in the table.
For example, the initial coupon dividend rate of Changsha Bank’s Changyin Preferred 1 is 5.3%, readjusted down to 3.84%; the initial coupon dividend rate of Ningbo Bank’s Ningxing Preferred 02 is 5.30%, readjusted to 4.50%; the initial coupon dividend rate of Hangzhou Bank’s Hangyin Preferred 1 is 5.20%, readjusted down to 4.00%.
The market generally believes that the high interest rate level is the core factor for banks redeeming preferred stocks.
Liu Feipeng, a researcher at China Postal Savings Bank, specifically analyzed to Interface News reporters that banks’ recent intensive redemption of preferred stocks is mainly due to three reasons: first, early-issued preferred stocks have relatively high interest rates, while current alternative tools like perpetual bonds have lower interest rates, and redemption can reduce costs; second, most preferred stocks have “redeemable after 5 years” clauses, and those issued during the peak period of 2018-2019 have concentrated into the redemption window; third, the net interest margin of the banking industry has fallen to historic lows, and redeeming high-yield preferred stocks can directly reduce interest expenses and relieve profit pressure.
Moreover, redeeming high-dividend preferred stocks also has a positive impact on banks’ financial metrics.
Liu Feipeng told Interface News reporters that in terms of costs, banks redeeming preferred stocks can reduce rigid dividend payments, directly enhancing net profit. Since preferred stock dividends are allocated from after-tax profits, reducing this expenditure after redemption means that the profits available for common stock shareholders increase accordingly, boosting EPS (earnings per share).
“At the same time, banks can use the saved funds for higher-return businesses or replenish capital through low-cost tools such as perpetual bonds, optimizing capital structure and improving capital efficiency. However, redeeming preferred stocks requires a one-time payment of principal, which may put pressure on cash flow, but in the long run, it is beneficial for enhancing shareholder returns,” Liu Feipeng added.

Low-Yield Perpetual Bonds “Fill the Gap”

The issuance of preferred stocks by Chinese banks began in October 2014. At that time, with policy support, China Bank (601988.SH) successfully completed the issuance pricing of offshore preferred stocks, becoming the first domestic listed company to issue preferred stocks.
Subsequently, preferred stocks gained favor from several banks. Wind data shows that from 2014 to January 2020, A-share listed banks issued a total of 34 preferred stocks domestically, raising a total of 837.15 billion yuan. Issuers include major state-owned banks such as China Bank, Industrial and Commercial Bank (601398.SH), Agricultural Bank (601288.SH), as well as joint-stock banks like China Merchants Bank and Ping An Bank, and city commercial banks like Changsha Bank and Ningbo Bank (002142.SZ), with the latest coupon dividend rates ranging from 3.02% to 6.00%, mostly floating rates, with a few fixed rates.
After January 2020, the issuance of preferred stocks entered a more than six-year “valley period.” Considering the timeline, the launch of perpetual bonds is a significant influencing factor. On January 25, 2019, China Bank successfully issued 40 billion yuan of perpetual capital bonds in the interbank bond market, marking the first issuance of perpetual capital bonds in the Chinese banking industry. The central bank at the time stated that the launch of the first perpetual capital bond provided a model for subsequent commercial banks to issue perpetual capital bonds and broadened the channels for commercial banks to supplement other tier-one capital tools.
Huayuan Securities mentioned in a report that since 2020, most banks have preferred to use perpetual bonds to supplement other tier-one capital instead of preferred stocks; coupled with the fact that the first batch of preferred stocks issued in 2014-2015 has gradually reached 5 years in 2019-2020, issuers are exercising redemption rights, and some banks’ preferred stocks are being redeemed and delisted, resulting in a near halt in the issuance of new preferred stocks after 2020 and a decrease in the scale of existing stocks, leading to a significant decline in their trading activity.
On one hand, preferred stocks are gradually exiting the market; on the other hand, the issuance scale of perpetual bonds continues to expand. Wind data shows that by 2025, the issuance volume of bank perpetual bonds reached 71, an increase of 48% year-on-year; the total issuance scale reached 825 billion yuan, an increase of 17% year-on-year. In terms of interest rates, the interest rate range for bank perpetual bonds in 2025 is between 1.96% and 3.18%, with an average interest rate of 2.43%.
The issuance scale of perpetual bonds has expanded. Source: Wind
As a capital replenishment tool, low-yield perpetual bonds are clearly more favored by banks today. “On one hand, the interest rates of perpetual bonds are significantly lower than those of preferred stocks, with a noticeable cost difference. The interest on perpetual bonds can be deducted before tax, further reducing the actual financing costs. On the other hand, the issuance process for perpetual bonds is simplified and standardized, with a higher degree of marketization. From a capital replenishment perspective, both tools supplement other tier-one capital, but perpetual bonds are more flexible in terms of accounting treatment and investor structure,” Liu Feipeng told Interface News reporters.
Looking ahead, this wave of redemptions is expected to further spread. Huayuan Securities analysts believe that considering the existing preferred stocks’ interest rates often exceed 3%, and some even exceed 4%, issuing perpetual bonds to replace existing preferred stocks can significantly reduce costs, save interest expenses, and relieve performance pressure. “We expect that listed banks will gradually take the initiative to redeem all preferred stocks, and by 2026, major banks may actively redeem a large amount of preferred stocks, which will bring about net financing demand for perpetual bonds.”