Bank Intensive Redemption of High-Yield Preferred Shares Creates "Direct Substitute" Dilemma for Institutional Asset Management Allocation

Securities Times Reporter Xie Zhongxiang

In a low-interest-rate market environment, more listed banks are joining the ranks of redeeming preferred shares. Recently, China Merchants Bank announced plans to redeem 27.5 billion yuan of preferred shares “Zhaoyin You 1” on April 15 this year. This is the third listed bank this year after China Everbright Bank and Ping An Bank to announce preferred share redemptions.

Securities Times reporter noted that since last year, with the further decline in interest rates on secondary capital bonds, perpetual bonds, and other capital instruments, an increasing number of banks have chosen to proactively redeem high-yield existing preferred shares. Last year, nine banks redeemed over 100 billion yuan of domestic and overseas preferred shares, further shrinking the market size.

In response, industry analysts said this move is a practical choice for commercial banks to “redeem old and issue new” in order to optimize capital structure and reduce financial costs.

Three banks will redeem 82.5 billion yuan

Recently, China Merchants Bank announced it plans to fully redeem its domestic preferred shares “Zhaoyin You 1” on April 15, 2026, with a redemption scale of 27.5 billion yuan. The redemption price will be the face value plus accrued dividends, and all funds will come from the bank’s own capital. The preferred shares, issued in December 2017, have a face dividend rate of 3.62%.

On March 9, Ping An Bank’s “Pingyin You 1” stopped trading, and after completing the redemption of this 20 billion yuan preferred share, it was delisted. On February 11, China Everbright Bank completed the redemption and delisting of its 35 billion yuan preferred shares “Everbright You 3.” In total, these three banks are expected to redeem a combined 82.5 billion yuan of preferred shares this year.

According to Securities Times data, since 2025, two state-owned large banks, four joint-stock banks, and six city commercial banks have redeemed preferred shares, including nine issues of domestic preferred shares totaling 166.8 billion yuan and two issues of overseas dollar-denominated preferred shares totaling $5.72 billion, far exceeding the number and scale of redemptions in previous years. Before 2025, only a few banks actively redeemed some preferred shares.

In fact, as the earliest capital instruments for banks, preferred shares began pilot issuance in October 2014 to supplement Tier 1 capital, serving as the only other Tier 1 capital tool at that time to enhance banks’ lending capacity.

Until 2019, after the introduction of perpetual bonds with no fixed maturity, the options for capital supplementation for listed banks became more diverse. Subsequently, the issuance of bank preferred shares nearly stagnated, and their scale gradually shrank.

According to Wind data compiled by Securities Times, excluding the 10 issues of domestic preferred shares already redeemed or planned for redemption, the remaining stock of bank preferred shares has decreased to 19 issues, with total scale dropping from 645.35 billion yuan at the end of last year to 562.85 billion yuan.

Lower interest rates boost redemption motivation

The collective redemption of preferred shares by listed banks is driven by the banks’ strategic goal to optimize capital structure and reduce financial burdens.

Unlike common stocks, preferred shares have both equity and debt attributes, classified as “hybrid” instruments. Currently, domestic commercial banks’ preferred shares are all issued through private placements, with coupon rates mainly divided into fixed and floating types.

As of now, the 19 remaining preferred shares all adopt a floating rate model based on “benchmark interest rate + fixed premium,” with current dividend yields generally between 3.02% and 4.56%. In comparison, the average annual coupon rate of perpetual bonds issued by banks in 2025 is 2.43%, significantly lower than preferred shares’ financing costs.

Liao Zhiming, Chief Fixed Income Analyst at Huayuan Securities, said that bank preferred shares typically have no maturity date but often include redemption clauses, allowing banks to redeem after five years. This arrangement provides flexibility for capital management, enabling banks to redeem high-cost preferred shares when capital adequacy is sufficient and financing costs decline, replacing them with lower-cost capital instruments.

“In a declining interest rate environment, banks are more motivated to redeem preferred shares. Particularly, preferred shares with higher fixed premiums, due to their higher future interest costs, make banks more eager to redeem old issues and seek lower-cost financing,” Liao said. He expects most banks will actively redeem existing preferred shares in the future.

Luo Feipeng, a researcher at Postal Savings Bank, noted that regulators encourage banks to improve capital quality. Although preferred shares are classified as Tier 2 capital, their high dividend rates exert ongoing pressure on net profits.

Luo explained that after redeeming preferred shares, banks can release capital occupation, improve capital adequacy ratios, and enhance capital efficiency. On one hand, the preferred share structure becomes more standardized and cost-effective, helping banks strengthen risk resistance and regulatory compliance; on the other hand, reduced interest expenses directly boost net profits, easing profitability pressures and providing a more solid capital base for future lending and supporting the real economy.

Difficulty finding “replacement” for wealth management investments

Preferred shares, as income-generating equity assets, are currently a key allocation product for public funds, bank wealth management, insurance funds, and other asset management institutions. However, as the scale of existing preferred shares continues to shrink and coupon yields further decline, the market will find it difficult to identify suitable “replacement” assets.

In fact, the issuers of existing bank preferred shares are all listed banks with generally good credit quality. Some preferred shares offer relatively high fixed spreads, with notable coupon advantages. Currently, supply is relatively scarce, and dividends are tax-exempt, making them attractive overall.

Securities Times reporter noted that some institutions, such as ICBC Wealth Management, still issue multiple preferred share-focused wealth management products. For example, ICBC Wealth Management has about 31 such products, with nine launched since 2026. These are mixed products with a risk level of only R2 (medium-low risk). One example shows that holdings of preferred shares and other equity assets account for as much as 46.7%, along with some non-standard assets, deposits, and certificates of deposit, with an annualized return of 2.58% over the past year.

However, industry insiders remind that investing in bank preferred shares should be done cautiously, considering redemption risks. Liao emphasized that some preferred shares with high fixed premiums are prone to “value destruction” if redeemed early. Preferred shares with lower fixed premiums are less likely to be redeemed prematurely, offering higher safety.

Liao recommends choosing preferred shares with lower fixed premiums and strong credit quality to reduce redemption risk while securing stable dividend income.

From an asset allocation perspective, some wealth management managers believe that diversification across multiple asset classes and strategies is essential to enhance returns. This includes not only increasing holdings of equity assets but also exploring quantitative neutral strategies, commodities, derivatives, cross-border assets, and more complex investment strategies. This trend is not short-term but a necessary evolution for wealth management firms moving beyond the “fund pool-asset pool” model toward true asset management.