Reuters: Financial Services and Real Estate: Banks reap rewards of investor change of heart

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Banks reap rewards of investor change of heart Mar 30th 2012, 11:18 By Danielle Robinson Fri Mar 30, 2012 7:18am EDT NEW YORK, March 30 (IFR) - US and international banks made the most of a spectacular turnaround in investor sentiment in the first quarter, issuing more than $141 billion of new senior unsecured bonds in the US investment-grade corporate bond market. That's up more than 200% from the $68 billion issued in the fourth quarter of last year and a decent showing compared with $155 billion in the first quarter of 2011 when all of the biggest European banks had access to the Yankee market. The banks can thank the ECB and its long-term refinancing operation (LTRO) for sparking a global rally in risk assets. "That one event has been a huge game-changer," said Kevin Ryan, co-head of financial institutions capital markets at Morgan Stanley. Now the question is whether credit spreads that remain far wider than comparably-rated industrials can continue to compress. "From a credit standpoint the US banks are better capitalized and their generally less risky balance sheet behavior should be good for spreads," said Scott Kimball, a senior portfolio manager at Taplin, Canida & Habacht. "There is room to tighten further over time, especially versus industrials." Federal Reserve chairman Ben Bernanke's dovish comments this week rekindled expectations that money will continue to flow out of US Treasuries and into corporate bonds. Bank supply is also expected to be negative on a net basis this year. If the eurozone remains relatively calm, then more European banks will gain access, and the credit strength of the US banks should underpin demand for their bonds. "The results of the stress tests have really shown investors just how strong US banks' balance sheets are." said Dan Mead, managing director at Bank of America Merrill Lynch. Bank of America has seen its five-year paper tighten in to 270bp from the 500s area at its widest levels last year. Further significant tightening is possible considering it is still a long way off the high 100s its five-year bonds traded at in the first quarter of 2011. Over the longer term banks will reclaim their pre-crisis low beta status, according to some. Lower profits because of punitive regulations might hurt stock prices, but are a positive for credit fundamentals. "The combination of stable home prices and very high capital levels means that bank credit spreads should again become low beta," said Hans Mikkelsen, senior credit strategist at Bank of America Merrill Lynch. ASIA, EUROPE HEADWINDS But others say poor operating performance may eventually weigh on the attraction of their bonds. "Where banks stand in terms of capital has improved, and that's great news," said Bonnie Baha, senior portfolio manager at DoubleLine Capital. "But having a great capital base is not a business plan in of itself. How are these banks going to make money?" Baha thinks further spread tightening is over for the most part. "You might get a few more basis points in tightening but without meaningful sources of revenue, there is no reason for the US bank spreads to compress. As opposed to providing a lot of total return opportunities, over the longer term the banks are going to trade like utilities. Very limited in terms of scope," she said. Some bankers say the FIG sector can continue to grind tighter, but it might not happen as quickly as everyone thinks. "We are at a crucial juncture in the market where FIG is concerned," said one debt capital markets banker covering the banks. "Bank runs are off the table in Europe and the US economy is improving, but there are still headwinds. Most people believe Europe is in a recession and Asian growth is slowing down. We don't expect a crisis outcome, but after the market has come so far so fast in the last three months there is a question as to whether we flat line a little bit in terms of further spread tightening." Those very headwinds have encouraged banks to front-load their annual funding requirements this year. "It always seems smart to take advantage of the combination of a seasonal rally and very low Treasury rates," said the FIG banker. "Banks know that there's still enough uncertainty in the world to justify raising funds now when market conditions are good, even when the use of proceeds behind the funding might not occur until later in the year." MARCH MADNESS US and Yankee banks pounded the markets with deals as soon as they saw investor sentiment recover in January and February. But the real surprise came in March, as second-tier eurozone banks such as Lloyds gained access to the Yankee market and regional banks joined the Wall Street giants in accessing the bond market. "Our expectations around new issue supply were exceeded," said Saurabh Monga, director in FIG capital markets at Deutsche Bank. "After we got through the stress tests results, the reception for domestic US bank bond deals was quite incredible both from a lack of new issue premium and secondary market trading performance perspective." Many banks raised debt in the first quarter that they don't need until later in the year, reasoning that raising funds in size at record low coupons justified any negative carry incurred by paying the coupons on uninvested funds. "They are being prudent and reducing refinancing risk in case market conditions take a turn for the worse later in the year," said Monga. And as banks know more than any other issuer group, investor sentiment can turn on a dime. For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide...... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook... U.S. municipal bond market report...... Link this Share this Digg this Email Reprints

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