CITIC Bank to Redeem 35B Yuan High-Dividend Preferred Shares as Banks Shift to Cheaper Capital

Source: Titanium Media | By Yuan Media Hui, Author: Tong Hua

Are Preferred Shares Losing Their Appeal?

A recent announcement by China CITIC Bank has drawn attention: the bank plans to fully redeem 35 billion yuan worth of its "CITIC Preferred 1" preferred shares on October 26.

This is not a simple repayment of principal and interest. It represents a strategic adjustment of CITIC Bank's capital structure — redeeming a high-cost capital instrument with a 4.08% dividend rate, while replacing it with lower-cost perpetual bonds.

CITIC Bank is not alone. A wave of preferred share redemptions is sweeping across China's banking sector, with listed banks such as China Everbright Bank, Ping An Bank, China Merchants Bank, Bank of Beijing, and Bank of Nanjing already leading the charge.

For retail investors in A-shares, these seemingly arcane capital announcements have direct implications for earnings per share (EPS) and shareholder dividends.

A Bigger Dividend Pie?

Many retail investors skim past bank announcements mentioning "preferred shares" or "additional Tier 1 capital," assuming they are irrelevant institutional matters. In reality, common shareholders of CITIC Bank stand to benefit directly from the redemption of "CITIC Preferred 1."

Issued in 2016, "CITIC Preferred 1" entered its second repricing cycle with a fixed dividend rate of 4.08%. On a 35 billion yuan base, the bank must allocate approximately 1.4 billion yuan from after-tax net profit each year to pay dividends to preferred shareholders.

A 4.08% annual yield would outperform virtually all conservative wealth management products available today.

It is important to note that preferred share dividends are paid from after-tax profits. Common shareholders receive the residual net profit attributable to common equity — the "cake" left after preferred dividends are deducted.

By redeeming these high-cost preferred shares, CITIC Bank effectively saves over a billion yuan in mandatory dividend payments annually.

Some may ask: even without redemption, wouldn't the dividend rate drop upon repricing? Is such a drastic move necessary?

Consider the math: even if the dividend rate falls to 2.8% after repricing, it would still be 90 basis points higher than the current ~1.9% rate on perpetual bonds. Moreover, preferred dividends remain an after-tax expense, while perpetual bond interest is tax-deductible.

After redeeming the preferred shares, CITIC Bank's profit base expands, naturally boosting EPS. This means a larger pool for future dividends, benefiting every investor.

In June 2026, CITIC Bank issued 20 billion yuan in perpetual bonds (Tranche 2) with a coupon rate of 1.97%, offsetting the capital gap from the preferred share redemption.

In September, Moody's upgraded CITIC Bank's long-term foreign currency deposit rating to "Baa1" with a "stable" outlook, citing its moderate capital position and a core Tier 1 capital adequacy ratio of 9.37%, which provides a buffer.

CITIC Bank's timing for this capital optimization appears well-calibrated.

Banks' Collective "Gift" to Common Shareholders

Bank preferred shares are Tier 1 capital instruments with characteristics of both stocks and bonds.

Listed banks typically issue preferred shares to supplement Tier 1 capital, optimize capital structure, and meet regulatory requirements. Most include redemption clauses, allowing redemption five years after issuance.

However, CITIC Bank's redemption is far from an isolated case.

Since 2026, a significant "great retreat" from preferred shares has been underway, with multiple banks choosing to redeem high-cost preferred shares.

According to Wind data, major banks have been redeeming and canceling preferred shares since the beginning of the year, including:

• February: China Everbright Bank's 35 billion yuan "Everbright Preferred 3"
• March: Ping An Bank's 20 billion yuan "Ping An Preferred 01"
• April: China Merchants Bank's 27.5 billion yuan "CMB Preferred 1"
• July: Bank of Beijing's 13 billion yuan "Beijing Preferred 2"
• September: Bank of Nanjing's 5 billion yuan "Nanjing Preferred 2"

Together with CITIC Bank's upcoming redemption of "CITIC Preferred 1," these six transactions total 135.5 billion yuan.

Additionally, products such as Jiangsu Bank's "Jiangsu Preferred 1" are approaching their redemption windows.

Huayuan Securities estimates that bank preferred share redemptions in 2026 will reach 150-200 billion yuan, further increasing from 2025 levels, with the redemption wave still at its peak.

Looking back to 2025, Industrial Bank and Bank of Changsha also announced preferred share redemptions. Notably, Industrial Bank redeemed three tranches of preferred shares in a single year, totaling 56 billion yuan.

Why are banks collectively "gifting" common shareholders?

The macroeconomic environment has shifted. Most of these preferred shares were issued between 2014 and 2019, when market interest rates were high, locking in dividend rates of 4%-5.5%.

For example, China Merchants Bank's "CMB Preferred 1" carried a dividend rate of 4.81% at issuance, significantly higher than current bank perpetual bonds or subordinated bonds.

With the banking industry's net interest margin now at a historic low of below 1.5%, and asset-side yields shrinking, maintaining capital instruments with costs above 4% is increasingly uneconomical.

In the past, preferred shares were one of the few options for banks to supplement additional Tier 1 capital. Today, with a richer toolkit and better alternatives available, redeeming preferred shares has become a widespread industry trend in capital optimization.

"Replace Old with New" Benefits Long-Term Shareholder Returns

Where does the money come from to redeem billions in high-cost preferred shares? The answer: bank perpetual bonds with interest rates below 2%.

Wind data shows that since 2026, the combined issuance of bank subordinated bonds and perpetual bonds ("Tier 2 + perpetual") has exceeded 1.8 trillion yuan.

Listed banks are redeeming hundreds of billions in old preferred shares while simultaneously issuing low-cost perpetual bonds, completing a "replace old with new" cycle.

Although both instruments qualify as additional Tier 1 capital and are functionally interchangeable, their financing costs and tax treatments differ significantly. Preferred dividends are paid from after-tax profits, while perpetual bond interest enjoys pre-tax deduction benefits — a tax shield.

For banks, the actual cost of perpetual bonds is substantially lower.

Many major banks and joint-stock banks have issued perpetual bonds with coupon rates below 2%, offering a clear spread advantage over existing preferred shares with rates around 4%. Market data and Tianyancha show:

• ICBC: 20 billion yuan perpetual bond issued in August, coupon rate 1.89%
• Bank of China: 30 billion yuan perpetual bond, coupon rate 1.91%

CITIC Bank's planned redemption of 35 billion yuan in "CITIC Preferred 1" is a microcosm of this broader trend.

The bank is following the same substitution logic — redeeming high-cost preferred shares (dividend rate 4.08%) and issuing low-cost perpetual bonds (20 billion yuan in June 2026, coupon rate 1.97%) — consistent with industry practice.

The outstanding preferred share pool continues to shrink. The total market value of bank preferred shares has fallen below 500 billion yuan. At its peak, there were nearly 70 such products; after two years of sustained redemptions, the number has dropped significantly.

Notably, since Bank of Changsha's issuance in January 2020, no new bank preferred shares have been issued.

From the perspective of common shareholders, this wave of preferred share redemptions and capital replacement by listed banks represents a long-term positive.

By shedding the high-cost capital "burden," banks reduce annual financial expenses. Profits will no longer be persistently eroded by high preferred share dividends. With more retained earnings, both future dividend capacity and internal capital accumulation stand to improve.

Conclusion

Overall, CITIC Bank's redemption of 35 billion yuan in "CITIC Preferred 1" is a well-calibrated move. By seizing the repricing window, shedding the 4.08% high-cost burden, boosting common shareholder profits, and raising EPS — while ensuring capital continuity through rights issues and perpetual bonds — the net benefit is clear.

Across the industry, this is just one chapter in the ongoing bank preferred share redemption wave.

As previously issued high-cost preferred shares continue to enter their redemption windows, the "redeem old preferred shares, issue low-cost perpetual bonds" playbook will keep playing out over the next one to two years.

For common shareholders, the next time you see a bank capital announcement, don't skip it. Hidden between the lines may be opportunities for your own returns.

(Source: Titanium Media)