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 the total outstanding amount 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 on 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 tools like perpetual bonds, reflects a shift in bank capital replenishment methods toward more sustainable and flexible market-based models.

Redemptions exceeding 100 billion yuan this year: preferred shares accelerate exit, outstanding amount 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 domestic preferred stock “Zhaoyin You 1,” issued in December 2017, on April 15. 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 of “Everbright You 3” on February 11, and Ping An Bank redeemed 20 billion yuan of “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 compiled by the Daily Economic News, in 2025, banking financial institutions redeemed over 100 billion yuan of domestic and offshore preferred shares. This includes Industrial and Commercial Bank of China and Bank of China, which redeemed a combined $57.2 million of offshore preferred shares; Industrial Bank, which redeemed three series of preferred shares totaling 56 billion yuan in one go; and five city commercial banks—Changsha Bank, Nanjing Bank, Shanghai Bank, Hangzhou Bank, and Bank of Beijing—that collectively redeemed 45.8 billion yuan of preferred shares in December 2025.

A senior banking industry analyst pointed out that this wave of redemptions 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 coinciding timing 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 the banking sector has further decreased to 16, with the total outstanding amount falling below 500 billion yuan.

Historically, the pilot program for commercial bank preferred shares officially started in 2014, mainly to help banks supplement additional Tier 1 capital without diluting common shareholders’ equity. Data indicates that from 2014 to January 2020, 35 preferred shares were issued domestically, raising a total of 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.

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

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

Cost differences are the most direct factor driving redemptions. 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 new perpetual bonds issued by banks 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 tools and older preferred shares.

For example, the preferred share “Zhaoyin You 1” issued 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. It is estimated that fully redeeming 27.5 billion yuan of preferred shares could save the bank 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 only 2.09% for the first five years, and in July, it redeemed three series of preferred shares totaling 56 billion yuan with coupon rates between 3.7% and 5.5%, saving approximately 1.28 billion yuan in annual interest.

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 after-tax cost advantage.

Regulatory evolution also provides policy space for redemption operations. Industry experts say 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. Under the condition of meeting capital adequacy requirements, redeeming high-cost tools and replacing them with more standardized, lower-cost instruments aligns with regulatory guidance.

Simplified issuance procedures also lower the barriers for replacement. 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 3-6 months. This efficiency allows banks to more flexibly seize market interest rate windows and implement “redeem and issue new” capital management strategies.

Challenges in wealth management allocation

Intensive preferred share redemptions not only reshape banks’ liability cost structures but also have 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” pattern has formed in the banking sector: issuing perpetual bonds first, then redeeming preferred shares. This precise timing window effectively avoids a phased decline in capital adequacy ratios and achieves steady capital structure optimization. The capital freed up by redemptions enhances banks’ capital adequacy and utilization 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 thresholds. For example, China Merchants Bank has maintained a core Tier 1 capital adequacy ratio above 12%, well above the 7.5% regulatory minimum, providing a strong safety cushion for redemption operations.

On the market side, perpetual bonds have successfully taken over as the main tools for additional Tier 1 capital replenishment. Data shows that in 2025, the total issuance of “Second Tier Capital Bonds” (second-tier bonds and perpetual bonds) by banks reached approximately 1.76 trillion yuan, surpassing the scale in 2024. The market size of “Second Tier Capital Bonds” is expected to hit 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 products, ensuring sufficient 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, leveraging their credit advantages, face lower risks of liquidity mismatch,” said the analyst. Currently, overall risk appetite for wealth management products remains low, and high-risk assets are rarely invested. After the exit of preferred shares, product yields may decline. Institutions are seeking diversification through multi-asset allocations, including gold, REITs, derivatives, or indirectly participating in equity markets via increased holdings of secondary bond funds and equity ETFs.

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