June 14, 2013 / 6:46 PM / 5 years ago

US bank capital takes a beating in selloff

NEW YORK, June 14 (IFR) - It could be weeks before the market for bank capital securities returns to levels which make sense for US banks to issue more Tier 1 and Tier 2 capital, judging by the beating existing capital securities have suffered in recent weeks.

Some US Tier 1 deals are languishing as much as five points in the red, making the market for capital securities stand out as one of the hardest-hit fixed income asset classes in the recent selloff.

“Investors have suffered anywhere between four to six points of price deterioration, depending on the name and when they bought the latest round of (Tier 1 and 2) deals,” said one DCM coverage banker. “That is not insignificant, and it’ll be interesting to see, when the market comes back, where the first deal prices.”

Citigroup’s US$1.25bn 5.35% perpetual non-call 10-year preferred Tier 1s at par in April were quoted at around US$95.75 on the bid side on Friday, while JP Morgan’s US$1.5bn 5.15% perpetual non-call 10 preferreds issued in the same month were at US$95.25.

Bank of America US$1bn 5.2% perpetual non-call 10 preferreds issued in May were quoted at around 94.5 bid on dollar price.

“What investors will demand for new issue concession on the next deal is anybody’s guess,” said one credit strategist. “It’s taken 15-20bp in new issue concession for senior unsecured bond issues to get done by banks this week, so would it take 30bp? 40bp? I don’t know.”

One bright spot was that demand continues to be propped up by banks redeeming now ineligible Tier 1 trust preferred securities.

The need to replace them with new perpetual non-cumulative preferreds that do qualify as Tier 1 is still huge, according to analysts.

Under Basel 3 banks need a total Tier 1 ratio of 8.5%, 1.5% of which can be in ‘non-common’ equity format.

According to research firm CreditSights, the US’s largest global and regional banks still have the capacity, based on their current levels of eligible non-common Tier 1, to issue as much as US$60bn in coming years.

And it’s likely that banks will look to issue many preferreds as soon as possible, given the upward Treasury rate trajectory.

Nearly half of that capacity relates to Citigroup and JP Morgan, while Bank of America, Wells Fargo and Morgan Stanley account for about a third of it, said CreditSights.

Banks that have filled up less than half of their non-common Tier 1 bucket include Morgan Stanley, KeyCorp, Capital One, Citigroup, SunTrust, State Street, Regions Bank and JP Morgan.

Bank of America and Fifth Third Bancorp have utilized just over half of their Tier 1 eligible preferred stock capacity, while Wells Fago, Goldman Sachs and Bank of New York Mellon all have substantial amounts of preferreds outstanding that qualify as Tier 1 under Basel 3.

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