Chinese banks to issue capital securities significantly until end-2015: Fitch

Issuance likely in foreign and local currency.

Fitch Ratings has recently published a report outlining how it would apply the agency's global hybrid criteria when rating Basel III compliant capital securities issued by Chinese banks.

According to a release from Fitch Ratings, Fitch expects significant issuance of capital securities - both Additional Tier 1 (AT1) and Tier 2 (T2) - by Chinese banks between now and end-2015.

Issuance is likely to be in both foreign and local currency, with a sizeable amount raised in offshore markets. The issuance also aims to address some characteristics specific to Chinese banks, such as high leverage, strong credit growth and pressure on internal capital generation.

Here's more from Fitch Ratings:

As profit growth slows, banks will want to build buffers to offset potential future impairments and, generally, fortify their balance sheets in what is a challenging operating environment.

The refinancing of legacy capital securities and volatile equity markets are other reasons the banks would contemplate issuing new capital securities.

Given the prospect of a wave of new issuance, Fitch considers it appropriate to outline its intended rating approach given that the agency can take a nuanced approach in certain markets to reflect local dynamics, such as the regulatory framework, statutory/contractual terms peculiar to securities issued, as well as the systemic importance and state ownership of banks.

For T2 securities, Fitch would anchor from the higher of the support-driven Issuer Default Rating (IDR) or Viability Rating (VR) of a systemically important Chinese bank, such as the state banks.

This reflects expectations that Chinese authorities would extend support to the bank before it triggers point of non-viability (PONV), such determination of which is at the discretion of local regulators.

For less systemically important banks, Fitch would anchor from the VR, which is the typical anchor for banks in most markets.

For AT1 securities, Fitch would anchor from the VR regardless of systemic importance. This reflects greater going-concern non-performance risk attached to coupon suspension relative to both PONV and the Common Equity Tier (CET) 1 conversion trigger of 5.125%.