Uncategorized

Corporate credit: Bank funding needs shape spreads

| August 17, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

New bank issues pricing in the last three weeks have performed poorly, reversing the short-lived trend from May to July when new issues traded well in secondary. Part of the favorable new issue from May to July was due to the more generous new issue concessions as well as the reluctance of buyers to aggressively chase new deals. The average bank and financial new issue that priced from January through the end of April has seen secondary levels move 20 bp wide from pricing. The average new issue that priced May 1 to July 25 now trades 6 bp tighter. Nevertheless the average bank and finance issuance recently has widened 2 bp from pricing. Part of the recent weakness is due to the melt-down in Turkey and to unfavorable technicals. Case-in-point was the new AER 7-year senior bonds that struggled in the last week to get out of its way in choppy markets the company’s third time coming to market this year.

With this sensitivity of spreads to technicals in mind, the big issuers should potentially see the biggest resistance in spread performance. Funding needs from domestic banks for the remainder of 2018 should be modest (Exhibit 1). That changes somewhat looking ahead at the FY19 funding needs as well, with Citigroup as the clear leader among banks in need of funding over the next 16 months. In its second quarter fixed income investors presentation, Citigroup said it expects to be flat on a net issuance basis for the remainder of 2018.

Exhibit 1: Banks’ unsecured bond maturities 2018-2019

Source: Bloomberg, APS

Notable beneficiaries of low funding needs could be JPM and WFC, with funding needs of only $14 billion to $15 billion each through the end of 2019. While JPM has not provided the same level of guidance as Citigroup, the firm has said it will likely be flat on net issuance through 2019. WFC spreads have recovered well beyond attractive levels, which could be due to low issuance as well as the reduced fear of longer-term supervisory penalties. WFC 10-year senior notes currently trade 3 bp inside JPM, which looks rich given the overhang of consumer banking issues. What’s more, WFC is about 10 bp inside Citigroup senior 10-year notes, which seems to be more of a reflection of technicals rather than fundamentals.

Regional banks should continue to trade rich compared to the SIFI banks as new issues look likely to remain small and infrequent from most regional names. Though USB is likely to be the largest issuer among the regional banks through 2019, spreads should hold up well and trade among the tightest in the domestic bank sector.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles