Bank preferred stocks are experiencing a wave of redemption.

From a single redemption of 56 billion yuan by Industrial Bank (601166. SH) in 2025, to a total monthly redemption of 45.8 billion yuan by five banks in December of the same year, and then to six banks announcing plans to redeem 135.5 billion yuan in 2026, the redemption of preferred shares is evolving from an isolated phenomenon to an industry trend.

Why have preferred stocks, which used to be a "standard" for banks to supplement other tier one capital, been redeemed in the past two years?

1、 The scale of the 'redemption wave' continues to expand

Bank preferred stock is a Tier 1 capital instrument that combines the dual characteristics of stocks and bonds. Listed banks often issue preferred shares to supplement tier one capital, optimize capital structure, and meet regulatory requirements, and most of them will set redemption clauses, with the right to redeem after 5 years from the date of issuance. Since the pilot program in 2014, a total of 35 preferred shares have been issued by domestic commercial banks, with a total size of 839.15 billion yuan

The centralized redemption of preferred shares in banks did not begin this year. In July 2025, Industrial Bank redeemed three phases of preferred shares in one go, with a total scale of up to 56 billion yuan, setting a record for single redemption within the year; In December of the same year, five banks including Bank of Beijing (601169. SH), Bank of Shanghai (601229. SH), Bank of Hangzhou (600926. SH), Bank of Nanjing (601009. SH), and Bank of Changsha (601577. SH) announced redemptions intensively, totaling 45.8 billion yuan in a single month.

Entering 2026, the pace of redemption will further accelerate. Since the beginning of the year, major banks have successively redeemed and cancelled their preferred stocks, including Guangda Bank's (601818. SH) 35 billion yuan "Guangda You 3" in February, Ping An Bank's (00000 1. SZ) 20 billion yuan "Pingyin You 01" in March, China Merchants Bank's (600036. SH) 27.5 billion yuan "CMB You 1" in April, Beijing Bank's (13 billion yuan) "Beiyin You 2" in July, and Nanjing Bank's 5 billion yuan "Nanyin You 2" in September. Combined with the upcoming October launch of CITIC Bank (601998. SH)'s "CITIC You1", the total scale of six transactions reached 135.5 billion yuan.

Overall, the redemption of preferred shares in banks has evolved from an isolated phenomenon to an industry trend. Huayuan Securities predicts that the redemption scale of bank preferred shares will reach 150 billion to 200 billion yuan in 2026, further increasing compared to 2025, and the "redemption wave" will still be at its peak. As more early issued preferred stocks enter the redemption period, the stock of preferred stocks may continue to shrink.

2、 Under low interest rates, banks recalculate cost accounts

The huge interest rate differential between high interest preferred stocks and the current low interest rate environment is the most direct and core driving force behind the "redemption wave". The preferred stocks issued between 2014 and 2017 generally have a dividend yield ranging from 5% to 6.5%, and even after experiencing interest rate reset, they are still mostly maintained at a high level of 3.50% to 4.50%; In the first half of 2026, the coupon rates for newly issued perpetual bonds and Tier 2 capital bonds (collectively referred to as "perpetual bonds") by banks have generally dropped to below 3%. The average issuance rate for state-owned large banks and joint-stock banks is only 1.99%, and some even as low as 1.88%. Taking China Merchants Bank's "CMB You1" as an example, its dividend yield at the time of issuance was 4.81%, significantly higher than the average coupon rate of 2.43% for bank perpetual bonds in 2025. After redemption, it can reduce rigid dividend expenses by about 1.323 billion yuan per year, directly increasing net profit. Against the backdrop of continuously narrowing net interest margin, the economic consideration of "redeeming old and developing new" is particularly prominent.

In addition to explicit interest costs, tax treatment differences further amplify the cost advantage of perpetual bonds over preferred stocks. Preferred stock dividends cannot be deducted before tax, while perpetual bond interest can be included in pre tax costs, resulting in lower actual post tax financing costs. At the same time, preferred stocks, as other tier one capital, although meet regulatory requirements, their high fixed dividends pose sustained pressure on the stability of bank profits, especially when asset yields decline, which will further erode profits. Therefore, redemption is not only a financial consideration, but also an important measure for banks to improve their return on equity (ROE) and enhance the returns for common shareholders.

Regulatory guidance also provides institutional support for redemption. The "Capital Management Measures for Commercial Banks" (Order No. 4 of 2023 of the State Administration of Financial Supervision and Administration of China) emphasizes the quality and sustainability of capital, and encourages banks to adopt more market-oriented and flexible tools to optimize their capital structure. The redemption clause itself is a legal right designed for preferred stocks. Currently, the capital adequacy ratios of major banks are generally higher than the minimum regulatory requirements, and they can still meet regulatory requirements after redemption, which provides compliance conditions for redemption.

3、 Preferred stock exits, perpetual bonds take over

While preferred stocks are accelerating their exit, perpetual bond issuance is expanding at an unprecedented pace. In the first half of 2026, state-owned banks and joint-stock banks issued a total of 16 perpetual bonds, with a total size of 402 billion yuan. During the same period, 14 issues of Tier 2 capital bonds were issued, with a scale of 524 billion yuan, totaling approximately 926 billion yuan. Perpetual bonds not only have significant advantages in coupon rates, but their issuance process is also becoming increasingly standardized and efficient, with shorter approval cycles and increased market acceptance. They have become the main tool for banks to supplement their other tier one capital.

This' trade in 'is not simply about quantity replacement, but about making bank capital management more flexible. Preferred stocks have both the characteristics of stocks and bonds, but have weak liquidity and limited trading mechanisms, while perpetual bonds, as standardized bonds, have higher liquidity, stronger secondary market pricing ability, and are more mature in accounting treatment, information disclosure, and other aspects. The fixed income team of Huayuan Securities pointed out that most bank preferred stocks have redemption clauses, giving banks flexibility in capital management, allowing them to redeem high cost preferred stocks when capital is sufficient and financing costs decrease, and replace them with lower cost capital instruments. By issuing perpetual bonds in exchange for preferred stocks, banks are essentially evolving towards a more sustainable and market-oriented capital management model.

It is worth noting that the dual track of "redemption+interest rate cut" has become the norm in the industry. In addition to direct redemption, multiple banks have also proactively lowered the face dividend yield of unredeemed preferred shares. In August 2026, Everbright Bank completed a new round of dividend yield reset adjustment for "Everbright You2", reducing coupon rates according to the market-oriented pricing rule of five-year reset. This indicates that banks are adjusting their capital instruments based on changes in market interest rates: for preferred stocks with higher costs that have entered the redemption period, banks can choose to redeem them; For preferred stocks that continue to exist, the dividend yield will be re determined according to the agreement, thereby reducing the cost of capital.

4、 The shortage of fixed income assets is worsening, and the logic of asset management allocation is being reshaped

As a type of "fixed income+" product with unique risk return characteristics and excellent credit qualifications, the large-scale exit of bank preferred stocks is profoundly changing the asset allocation ecology of asset management institutions. Since 2020, the issuance of new preferred stocks by banks has almost stagnated. With the accelerated redemption of existing preferred stocks, the number of tradable targets in the market is decreasing, making high-quality and high-yield assets increasingly rare in the context of "asset shortage".

From the perspective of capital flow, preferred stock investors tend to allocate more of their redemption funds towards perpetual bonds and secondary capital bonds. This will change the composition of bank capital instruments: as the proportion of preferred stocks decreases, the proportion and role of perpetual bonds will further increase, gradually becoming one of the main tools for banks to supplement other tier one capital. For investors, they also need to reconsider whether the investment period is appropriate, the credit risks of different banks, and whether these products are easy to buy and sell. In the future, when allocating such assets, the focus will be more on bank credit and bond yields.

(The author of this article is a researcher at the Jingguan Research Institute)