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 the redemption of preferred shares.

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 are choosing 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 existing market size.

In response, industry analysts said that 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 issued a notice stating that it plans to fully redeem the 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’s 35 billion yuan preferred shares “Everbright You 3” were also redeemed and delisted. In other words, these three banks are expected to redeem a total of 82.5 billion yuan of preferred shares this year.

According to Securities Times statistics, 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 other Tier 1 capital. At that time, they were the only other Tier 1 capital tool for commercial banks, aimed at increasing their 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 domestic preferred share issues that have been redeemed or planned for redemption, the remaining preferred shares in banks have 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, belonging to a “quasi-equity, quasi-debt” category. 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 bank perpetual bonds 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 usually 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 refinance at lower rates,” 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 other Tier 1 capital, their high dividend yields exert ongoing pressure on net profits.

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

Difficulty finding “replacement” for preferred shares in wealth management

Preferred shares, as income-generating equity assets, are currently an important allocation item for public funds, bank wealth management products, and insurance funds. 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 exempt from income tax, making them highly attractive for allocation.

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 up to 31 related products, with nine new products issued since 2026. These are all hybrid products with risk levels rated only R2 (medium-low risk). For example, one product holds preferred shares and other equity assets accounting 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 also warn that investing in bank preferred shares should be approached defensively, fully considering “redemption risk.” 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 by banks, offering higher safety.

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

From an asset allocation perspective, some wealth management managers believe that increasing yields should be achieved through diversified multi-asset strategies. This involves not only increasing equity assets but also exploring quantitative neutral, commodities, derivatives, cross-border assets, and other complex strategies. This trend is not short-term but a necessary evolution for wealth management firms moving away from the “fund pool-asset pool” model toward true asset management.