Since March 2026, multiple listed banks, including China Merchants Bank and Ping An Bank, have successively announced redemptions of preferred shares, continuing a trend that began in 2025. Data shows that as of March 17, the number of outstanding bank preferred shares has fallen to 16, with the total scale dropping below 500 billion yuan, a significant contraction from the peak of nearly 8.4 trillion yuan in 2020.
This shift is closely related to the market interest rate environment. Preferred shares issued between 2014 and 2019 mostly carried dividend rates between 5% and 6.5%, while the issuance rates for alternative instruments like bank perpetual bonds have now generally fallen below 3%. Against the backdrop of persistently narrowing net interest margins, banks' need to optimize their capital structure and reduce financing costs through "redeeming old issues and issuing new ones" has become increasingly prominent.
Simultaneously, regulatory efforts to standardize and marketize capital replenishment tools, along with the simplification of the perpetual bond issuance process, have facilitated this wave of preferred share redemptions. Industry analysis indicates that the gradual decline in preferred stock scale, coupled with the expansion of instruments like perpetual bonds, reflects an evolution in the banking sector's capital replenishment methods towards a more sustainable and flexible market-oriented model.
On March 14, 2026, China Merchants Bank announced its intention to fully redeem 275 million domestically issued non-public preferred shares ("CMB Pref 1") on April 15, representing a total of 27.5 billion yuan raised in December 2017. This marks the third listed bank to announce a preferred share redemption this year. Previously, China Everbright Bank completed the redemption and delisting of 35 billion yuan in "CEB Pref 3" on February 11, and Ping An Bank redeemed 20 billion yuan in "PAB Pref 1" on March 9. The estimated redemption scale from these three joint-stock banks alone reaches 82.5 billion yuan for the year.
Extending the timeline reveals an even more substantial redemption trend. Statistics show that throughout 2025, banking financial institutions redeemed over 100 billion yuan in domestic and overseas preferred shares combined. This included 5.72 billion USD in overseas preferred shares redeemed by two major state-owned banks, Industrial and Commercial Bank of China and Bank of China, a one-time redemption of three tranches of preferred shares totaling 56 billion yuan by Industrial Bank, and a concentrated redemption of 45.8 billion yuan in preferred shares by five city commercial banks—Bank of Changsha, Bank of Nanjing, Bank of Shanghai, Bank of Hangzhou, and Bank of Beijing—in December 2025.
A senior banking researcher pointed out that this redemption wave follows a clear temporal pattern. Most bank preferred shares include redemption clauses exercisable after five years from issuance. Given that 2018-2019 was a peak period for preferred share issuance, 2024-2025 naturally became the first concentrated redemption window. This temporal clustering has amplified the perceived intensity of the redemptions in the market.
As redemption operations proceed intensively, the outstanding scale of the preferred stock market continues to shrink. Statistics indicate that as of March 17, the number of outstanding bank preferred shares has further decreased to 16, with the total scale falling below 500 billion yuan.
Historically, the commercial bank preferred share pilot program officially launched in 2014, primarily aimed at helping banks supplement their Additional Tier 1 capital without diluting common shareholders' equity. Data shows that between 2014 and January 2020, 35 bank preferred shares were issued in the domestic market, raising a total of 839.15 billion yuan. However, since Bank of Changsha issued the final batch of preferred shares in 2020, the issuance of preferred shares by listed banks has entered a six-year "issuance hiatus."
Behind the collective redemption of preferred shares by listed banks lies an active financial strategy adjustment driven by profound changes in the interest rate environment. Unlike common stock, preferred shares possess characteristics of both equity and debt, belonging to a "quasi-equity, quasi-debt" category. Their dividend payments constitute a rigid financial burden for banks.
Cost disparity is the most direct factor driving redemptions. The aforementioned banking researcher analyzed that the coupon dividend rates for bank preferred shares issued between 2014 and 2017 were generally between 5% and 6.5%. Even after potential rate resets, they often remained high, around 3.5% to 4.5%. In the current market environment, the coupon rates for newly issued bank perpetual bonds are significantly lower. The average coupon rate for bank perpetual bonds throughout 2025 was only 2.43%, with rates ranging as low as 2.0% to 2.9%. This creates a spread of over 3 percentage points between the old and new instruments.
A specific example: the "CMB Pref 1" redeemed by China Merchants Bank had an initial coupon dividend rate of 4.81% at issuance, which adjusted down to 3.62% in 2022. Nevertheless, this rate remains higher than current market financing costs. Estimates suggest that after fully redeeming the 27.5 billion yuan in preferred shares, China Merchants Bank could reduce its annual dividend expenditure by nearly 1 billion yuan. Industrial Bank's replacement operation is even more representative. The bank issued 30 billion yuan in new perpetual bonds in June 2025 with a front-end coupon rate of just 2.09% for the first five years, and then in July redeemed three tranches of preferred shares totaling 56 billion yuan with rates between 3.7% and 5.5%, potentially saving approximately 1.28 billion yuan in annual interest expense.
Beyond the explicit coupon rate difference, differing tax treatments further widen the gap in actual financing costs. Interest payments on perpetual bonds are tax-deductible, whereas preferred share dividends are not. This makes the actual after-tax cost advantage of perpetual bonds even more pronounced.
Evolving regulatory guidance has also provided policy space for redemption operations. The banking researcher stated that regulators continuously encourage banks to improve capital quality and optimize the structure of capital instruments. Although preferred shares qualify as Additional Tier 1 capital, their high dividend rates exert continuous pressure on net profit. Provided that capital adequacy ratios meet requirements, redeeming high-cost instruments and replacing them with more standardized, lower-cost varieties aligns with regulatory encouragement.
Simplified operational procedures have also lowered the threshold for replacement. Compared to preferred shares, which require "dual-line approval" from the China Securities Regulatory Commission and the National Financial Regulatory Administration with an average issuance cycle of up to 13 months, perpetual bonds only need approval from the National Financial Regulatory Administration. This significantly streamlines the process, shortening the average issuance cycle to 3-6 months. This efficiency gain allows banks to more flexibly capture favorable market interest rate windows and implement "redeem old, issue new" capital management strategies.
The intensive redemption of preferred shares is not only reshaping banks' liability cost structures but also having a profound impact on asset allocation patterns in the capital markets. As the supply of high-yield preferred shares continues to shrink, institutional investors who have long relied on such assets for stable returns are facing increasingly severe asset allocation challenges.
Industry researchers note that the banking sector has now established a seamless model of "issuing perpetual bonds first, followed by redeeming preferred shares." This precisely matched timing window effectively avoids temporary declines in capital adequacy ratios and enables a smooth optimization of the capital structure. The capital previously occupied by the redeemed instruments creates room for banks to enhance their capital adequacy ratios and usage efficiency, while the direct reduction in interest expense alleviates profit pressure stemming from narrowing net interest margins.
However, redemptions are not unconditional. The prerequisite for a bank to execute a redemption is that its capital adequacy level is already sufficiently robust, with key metrics significantly above regulatory minimums. For example, China Merchants Bank has maintained its Core Tier 1 capital adequacy ratio consistently above 12%, far exceeding the 7.5% regulatory requirement, providing a substantial safety cushion for the redemption operation.
In terms of market absorption, perpetual bonds have successfully taken over as the primary tool for supplementing Additional Tier 1 capital. Data shows that in 2025, the total issuance scale of "Tier 2 and perpetual bonds" by various banks reached approximately 1.76 trillion yuan, surpassing the 2024 volume. The market size for these instruments is expected to reach new highs in 2026.
"Under the current low-interest-rate environment, the yields on perpetual bonds are quite attractive to long-term funds like insurance and wealth management products, ensuring generally sufficient market absorption. However, some small and medium-sized banks might face issuance pressures due to insufficient market recognition. Major state-owned banks and leading joint-stock banks, leveraging their credit advantages, face lower risks of liquidity mismatch," the researcher mentioned. He added that overall risk appetite in the wealth management sector is currently low, with almost no investment in high-risk assets. Following the exit of preferred shares, product yields face downward risks. Institutions are seeking breakthroughs through multi-asset allocation strategies, including deploying into alternative assets like gold, REITs, and derivatives, or indirectly participating in the equity market by increasing allocations to secondary bond funds and equity ETFs.
"The redemption process for preferred shares is expected to continue," the person projected. Subsequently, the preferred shares remaining on the market will likely concentrate in two categories: firstly, those that have not yet entered their redemption period; and secondly, instruments issued by some small and medium-sized banks facing significant capital replenishment pressures and lacking immediate alternative channels. By early 2027, the market size for bank preferred shares may further contract to below 100 billion yuan, gradually fading from the mainstream toolkit for bank capital supplementation.