(Yicai Global) June 30 -- Chinese commercial banks raised 8 percent more money by issuing bonds in the first six months of this year than a year ago as particularly small and medium-sized lenders are in dire need of capital.

Banks have issued a total of 122 bonds, including perpetual bonds and convertible bonds, to raise CNY894.6 billion (USD138.5 billion) this year as of yesterday, according to financial data provider Wind. Only 12 of the debt instruments were offered by large state-backed banks, and the remainder by small or medium-sized lenders.

Reasons 

More not-so-big banks are on the list of bond issuers, which proves their strong demand for capital but also tells something about the current policies, a senior-level expert in the banking industry told Yicai Global.

Commercial banks have a serious demand for capital against the slowing economic growth and the declining credit asset quality in recent years, said an insider at the asset and liability department of China Merchants Bank.

The hunger is also becoming bigger because banks are earning less money from interest rates amid China's interest rate liberalization and the international climate of low borrowing costs, according to the same source. In other words, net interest margins have fallen. 

Moreover, the banking sector is undervalued so equity financing is limited, according to the CMB insider. This makes bond issuance the most important channel for capital replenishment, the person added.

Targeted Treatment

Authorities should support small and medium-sized banks to supplement capital through multiple channels while optimizing their financing tools, said Wang Tianyu, chairman of Bank of Zhengzhou.

Moreover, regulation could be more targeted. Bond issuance standards and approval requirements could vary regarding the type of issuer, said Wang. Smaller lenders could benefit from more customized treatment, he added. 

Financial Health 

The reason behind the increasing borrowing could be seen in lenders' decreased ability to withstand risks. And that shows in capital adequacy ratios.

Commercial banks' core tier 1 capital adequacy ratio dropped by 0.09 percentage point to 10.6 percent in the first quarter from a quarter earlier, according to data from the China Banking and Insurance Regulatory Commission. Their tier 1 capital adequacy ratio slid 0.13 percentage point to 11.9 percent. The capital adequacy ratio declined by 0.2 percentage point to 14.5 percent.

On average, commercial banks' capital adequacy ratio was 12.7 percent in the first quarter. The number for private banks was 13.1 percent, and the figure for rural lenders was 12.1 percent.

Editor: Emmi Laine, Tang Shihua, Xiao Yi