US banks ready bond issuance flood after earnings

By Will Caiger-Smith

NEW YORK, Jan 12 (IFR) - US banks are facing wider secondary market spreads as they prepare to unleash a deluge of bond issuance after reporting fourth-quarter earnings from Friday.

Deals are expected to come thick and fast as banks strive to meet the Federal Reserve's 2019 deadline for Total Loss Absorbing Capacity requirements.

But market participants do not expect much competing supply, and reckon that banks should be able to shrug off widening in their secondary bonds over the past few days.

"They will start wider given their secondaries are wider, but their pricing power is pretty robust," one DCM (KSE: 024090.KS - news) banker told IFR.

"Even (Taiwan OTC: 6436.TWO - news) though they do multi-billion dollar deals, I wouldn't expect a big impact."

Bank of America Merrill Lynch, JP Morgan and Wells Fargo (Swiss: WFC-USD.SW - news) could kick off proceedings as early as Friday, when they report earnings before the market opens.

Morgan Stanley (Xetra: 885836 - news) reports on Tuesday, after Monday's US holiday, followed by Citigroup (NYSE: C - news) and Goldman Sachs (NYSE: GS-PB - news) on Wednesday and Bank of New York Mellon on Thursday.

State Street will be the last of the eight largest US banks to report earnings on January 25.

Citigroup already printed a US$5.25bn deal last week, including a fixed-to-floating rate 11-year non-call 10 tranche.

That bond was trading 7bp wider than reoffer on Thursday, according to MarketAxess data.

US dollar bank bonds - mostly issued by Yankee banks so far this year - have widened by an average of 2bp since the start of the year, according to Bank of America Merrill Lynch.

Bonds with 10-year maturities have been among the worst performers - and that could also impact pricing on new deals from US money center banks, one syndicate banker said.

A recent 10-year issue sold by Lloyds, for example, is trading 9bp wide of reoffer at T+149bp, while a 10-year trade issued by Sumitomo Mitsui is 15bp wide of reoffer at T+125bp, according to MarketAxess.

"That is probably a result of oversupply, but also because of where the deals priced. The 5/10s curve was very flat," one syndicate banker told IFR.

LIKELY CALL

Banks are widely expected to use callable structures in their upcoming issuance. The call options, added in deals since last August, allow them to retire the debt early before it loses TLAC treatment.

"The majority of TLAC issuance will be in the callable structure," said one bank investor.

Fixed-to-floating coupons like the one used by Citigroup (Swiss: C-USD.SW - news) last week are ideal for callable bonds because they negate interest-rate risk and make it easier for issuers to swap their interest payments to floating rate, said a banker.

"It puts more of a hammer on the call date, it takes interest-rate risk out of it, and it fixes the hedge accounting issues [with swapping to floating rate]," he said.

Banks tend to swap fixed-rate liabilities back to floating rate, but some auditors have not been comfortable with letting them do that past the date of the call option.

The coming issuance is expected to be in holding company format, which counts towards TLAC. Debt issued through bank operating companies does not.

The eight largest US banks have US$113bn of holding company debt maturing in 2017 across all currencies, according to research firm CreditSights.

The firm expects those banks to print US$150bn-US$165bn of new holdco debt in 2017, compared to US$181.5bn last year.

Bank issuance started off shakily in 2016, overshadowed by concerns around whether senior debt would count towards TLAC.

Citigroup, Wells Fargo and Morgan Stanley were the only global US banks to print deals last January, according to IFR data.

BNY Mellon, Goldman Sachs, JP Morgan and BAML followed in February. (Reporting by Will Caiger-Smith; Editing by Marc Carnegie and Natalie Harrison)