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Corporate credit: Bank funding needs shape spreads
admin | 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.
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.
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