March 8, 2013 / 3:51 PM / in 5 years

REFILE-US banks expected to step up with perp preferreds

By Danielle Robinson

March 8 (IFR) - A slew of perpetual preferred deals is expected to hit the market once the Federal Reserve releases results of its review of capital management plans from the 18 biggest US banks.

The Fed on Thursday released the initial results of its annual stress test, known as Comprehensive Capital Analysis and Review, or CCAR.

All but Ally Financial showed they could keep their Tier 1 common capital above 5.00% in a scenario in which nine quarters of a crisis send unemployment to 12.1%, equity prices plunge by more than 50%, housing costs drop more than 20% and the largest trading firms suffer a sharp market shock.

Next Thursday the Fed will release the second stage of CCAR, which is its approval or otherwise of the banks’ capital plans.

Many banks are expected to include proposals to redeem Trust Preferred Securities (TruPS) now that they no longer qualify as Tier 1 capital.

Barclays credit strategist Brian Monteleone expects redemptions to gather steam in the next two months. He estimates that banks still have $28bn in high-coupon callable trust preferreds outstanding after a large volume of redemptions in 2012.

Some of those redemptions will be replaced by the issuance of new Tier 1 capital, in the form of non-cumulative perpetual preferreds.

Underwriters have been urging banks to get their preferred deals done as soon as possible, before any rate rise sends the high-beta securities plunging in price.

Underwriters contacted by IFR also said a number of regional banks have preferred issues in the pipeline and ready to go.

The results of the stress tests could also prompt some senior unsecured issuance, as banks look to take advantage of any spread tightening on the back of the stress test results.

The biggest banks’ benchmark 10-year bonds rallied on Friday morning following the stress test release.

JP Morgan 3.2% 2023s are three basis points tighter at Treasuries plus 119 basis point, Citigroup’s 4.05% 2022s are four basis points tighter at Treasuries plus 154 basis points and Bank of America’s 3.3% 2023s are 2 basis points tighter at Treasuries plus 133 basis points.

The biggest pre-tax losses estimated under the stress test were at Bank of America at US$51.8bn, JPMorgan at US$32.2bn and Citigroup at US28.6bn, largely due to loan loss provisioning and trading losses.

Wells Fargo showed the highest loan provisioning losses but they were balanced out as the bank did not suffer the trading losses the bigger three showed.

The 18 banks’ aggregate Tier 1 common capital would hit a low of 7.4% under the hypothetical stress scenario. That was much better than an actual 5.6% at the end of 2008, the Fed said.

Morgan Stanley had a 5.7% Tier 1 common ratio and Goldman Sachs 5.8%, the two lowest outcomes above the 5.00% threshold. They were followed by JPMorgan at 6.3%.

Bank of America achieved a 6.8% Tier 1 level and Citigroup 8.3%.

Ally had a 1.5% ratio.

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