Research On The Effect Of Perpetual Bond Financing Of Commercial Banks

Perpetual bond is a relatively mature financial product abroad.Its main role is to replenish capital without diluting equity.It is a financing instrument that combines stock and debt.After the financial crisis in 2008,overseas banks faced greater pressure on capital replenishment.The inherent characteristics of perpetual bonds are very suitable for supplementing other tier 1 capital of the banks,which is widely adopted,and the issuance of perpetual bond subsequently increased rapidly.Domestic perpetual bond was firstly launched by Wuhan Metro Group in 2013,but in the past five years,the application of domestic perpetual bonds has been limited to non-financial industries such as real estate and infrastructure construction.Most are the financial tools of “apparently equity investment,essentially debt investment”.Therefore,the issuance of domestic perpetual bonds is much lower than that of foreign bonds.Until January 25,2019,the Bank of China successfully issued 40 billion non-fixed-term capital bonds(referred to as "perpetual bonds"),which opened the prelude to the issuance of perpetual bonds by Chinese commercial banks.It's the first practical application of perpetual bonds by domestic commercial banks to supplement other Tier 1 capital.Subsequently,other domestic commercial banks followed them.As of December 31,2019,a total of 15 banks had issued perpetual bonds with a total scale of CNY 569.6 billion.Therefore,it's imperative to study the effect of perpetual bond issuance on commercial banks.After combing the literature and analyzing the current development status of perpetual bonds at home and abroad,this thesis focuses on analyzing the capital adequacy ratio of domestic commercial banks and the supplementary pressure they face,so as to summarize their motivations for issuing perpetual bonds.The end of this thesis conducted an empirical analysis of the financial and market effects of perpetual bonds on domestic commercial banks,and a case study of Bank of China.With reference to relevant literatures and financing theories,a variety of factors have been comprehensively considered,it chose an important indicator to measure the profitability of banks-the return on net assets as the dependent variable,the issue of perpetual bonds as the independent variable,finally forming a multivariate regression model with its controlled variable of six financial indicators including the asset-liability ratio,the capital adequacy ratio,operating margin and etc.Through empirical analysis,it is found that the issuance of perpetual bonds has a negative correlation with the improvement of the return on net assets of commercial banks.In other word the return on net assets of commercial banks that issue perpetual bonds is lower than that of unissued commercial banks.This is because raising the capital adequacy ratio cannot solve the fundamental problems encountered by the endogenous growth of commercial banks,and it will not help improve the operating capacity.On the contrary,it will increase financial costs by paying debt interests,and because of the long-term funding,the increasing cash flow will generate agency cost problems and will damage the longterm interests of shareholders,which shows that the financial effect of perpetual bonds financing of commercial banks on their profitability is negative.An empirical analysis of the effect of perpetual bonds issuance on the commercial bank's stock price was made through the event research method.The excess return rate was positive three days before the announcement date and reached its highest value the previous day.Information may be leaked and short-term speculation may exist.The yield turned sharply negative and the lowest value,and then it has been fluctuating slightly around the zero axis,and the cumulative excess yield has been below the zero axis,indicating that long-term investors are not optimistic about the issue of perpetual bonds by commercial banks.This is because perpetual bonds can only optimize the capital structure.It does not fundamentally change the status of the bank's operation and management,nor will it increase the core competitiveness of commercial banks.Instead,it will bring about financial costs such as agency costs and increasing interest expenses.Therefore,investors are unclear or skeptical about perpetual bond financing,and are in a pessimistic state.The issuance of perpetual bonds has a negative impact on the secondary market.Based on the above empirical results,this thesis took the Bank of China as a case and combined the relevant theories to study the characteristics and financial effects of the Bank of China's perpetual bonds.The main purpose is to verify the empirical part's negative correlation to the return on net assets.Firstly,it analyzed the basic elements and characteristics of Bank of China's perpetual bonds,and then analyzed the financial effects of perpetual bonds in this period based on related financing theories.It focused on the financial effects of perpetual bonds.Firstly,the comparative advantage of perpetual debt and preferred stock financing-tax deduction effect was studied,and the conclusion that perpetual debt financing has a significant tax shield effect in Tier 1 capital supplementary instruments has been drawn.Then,from the perspective of capital structure,financial risk,profitability,and per-share indicators,the changes in indicators before and after the issuance were compared and analyzed.It is concluded that perpetual bonds financing can optimize the capital structure,beautify financial statements,increase cash flow and financial leverage.These aspects are significant;it may also increase the short-term profitability and intrinsic value of the company,whereas they are unstable,which confirms the empirical analysis of financial effects.In the long run,the Bank of China should improve the return on net assets and the per share indicators of profitability,such as income,need to be achieved by endogenous growth such as enhancing their own operating capabilities and product innovation.The long-term financial effects of perpetual bonds need further research.