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

Since March 2026, several listed banks such as China Merchants Bank and Ping An Bank have announced their intention to redeem preferred shares, continuing the trend of bank preferred share redemptions that began in 2025. Data shows that as of March 17, there are 16 remaining preferred shares in the banking sector, with total outstanding scale falling below 500 billion yuan, a significant reduction 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 between 5% and 6.5%, while the issuance rates of alternative instruments like perpetual bonds have generally fallen below 3%. Against the backdrop of a continued narrowing net interest margin, banks are increasingly using “redeem and issue new” strategies to optimize capital structures and reduce financing costs.

At the same time, 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.

Redemptions exceeding 100 billion yuan this year: preferred shares accelerate exit, outstanding scale drops below 500 billion yuan

On March 14, 2026, China Merchants Bank announced it plans to fully redeem 275 million shares of its privately issued preferred stock “Zhaoyin You 1,” issued in December 2017, on April 15. This marks the third 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 “Ping An 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 data from the Daily Economic News, in 2025, banking financial institutions redeemed over 100 billion yuan of domestic and offshore preferred shares. This includes ICBC and Bank of China, which redeemed a combined $57.2 million of offshore preferred shares; Industrial Bank, which redeemed three tranches totaling 56 billion yuan; and five city commercial banks—Changsha Bank, Nanjing Bank, Shanghai Bank, Hangzhou Bank, and Beijing Bank—that collectively redeemed 45.8 billion yuan in preferred shares in December 2025.

A senior banking industry analyst pointed out that this redemption wave shows a clear temporal pattern. 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 temporal overlap that amplifies market perception of redemption activity.

As redemptions intensify, the market scale of preferred shares continues to shrink. Data shows that as of March 17, the number of remaining preferred shares in banks has further decreased to 16, with total scale falling below 500 billion yuan.

Historically, the pilot program for bank preferred shares officially launched in 2014, mainly to help banks supplement additional Tier 1 capital without diluting common equity. Data indicates that from 2014 to January 2020, 35 preferred shares were issued domestically, raising a total of 839.15 billion yuan. Since the last batch issued by Changsha Bank in 2020, there has been a six-year “issuance hiatus” for bank preferred shares.

Lower interest rates drive “redeem and issue new,” with cost optimization as a core consideration

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

Cost differences are the most direct drivers of redemption. Industry analysts note that preferred shares issued between 2014 and 2017 generally had dividend yields between 5% and 6.5%. Even after rate resets, yields remained high at 3.5% to 4.5%. Currently, the issuance rates of new perpetual bonds have dropped significantly. In 2025, the average coupon rate for bank perpetual bonds was only 2.43%, with rates as low as 2.0% to 2.9%. The spread between new and old instruments exceeds 3 percentage points.

For example, the preferred share “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. Even so, it remains higher than current market financing costs. After fully redeeming 27.5 billion yuan of preferred shares, the bank can save nearly 1 billion yuan annually in dividend payments. Industrial Bank’s case is even more illustrative: in June 2025, it issued 30 billion yuan of perpetual bonds with a 2.09% coupon rate for the first five years, and in July, it redeemed three tranches of preferred shares totaling 56 billion yuan with coupon rates between 3.7% and 5.5%. This results in annual interest savings of about 1.28 billion yuan.

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

Regulatory evolution also provides policy space for redemption operations. Industry analysts say regulators continue to encourage banks to improve capital quality and optimize capital structure. Although preferred shares are classified as Additional Tier 1 capital, their high dividend rates 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, reducing the average issuance cycle to 3-6 months. This efficiency allows banks to more flexibly seize market rate windows and implement “redeem and issue new” capital management strategies.

Challenges in wealth management allocation

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

Industry analysts note that a “seamless” matching pattern has formed: banks first issue perpetual bonds, then redeem preferred shares. This precise timing window effectively prevents a phased decline in capital adequacy ratios and facilitates steady capital structure optimization. The capital released from redemptions creates room for banks to improve capital adequacy and efficiency, while the reduction in interest expenses alleviates profit pressure from narrowing net interest margins.

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

On the market acceptance front, perpetual bonds have successfully taken over as the main tool for additional Tier 1 capital replenishment. Data shows that in 2025, total issuance of “Second Tier Capital Bonds” (including Tier 2 bonds and perpetual bonds) reached approximately 1.76 trillion yuan, surpassing 2024’s total. The market scale of “Second Tier Capital Bonds” is expected to hit new highs in 2026.

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

“The redemption of preferred shares is expected to continue,” the analyst predicted. Going forward, remaining preferred shares will mainly fall into two categories: those not yet due for redemption, and those issued by small- and medium-sized banks under capital pressure with limited alternative channels. By early 2027, the market scale of bank preferred shares could further shrink below 1 trillion yuan, gradually fading as a mainstream tool for bank capital replenishment.