Banks raised a record $11.4 billion in domestic stock and bond issues in the third quarter.
Falling interest rates again provided a golden opportunity for banks to raise capital and refinance debt.
Third-quarter totals squeaked past the previous record of $11.3 billion sold in the preceding quarter.
More than in All of 1991
The record-breaking quarter also pushed total debt and equity offerings for the year to date to $34.7 billion, eclipsing the previous record of $26.8 billion issue for all of 1991, according to Securities Data Co.
Strengthening capital was still the name of the game last quarter, as banks added a total of $6.1 billion, including $2.5 billion of Tier 1 capital.
"Banks like to raise capital when they can because they still remember 1990, when the market was closed to them," said Brent Erensel, banking analyst with UBS Securities.
BankAmerica Corp. alone raised $1.3 billion in capital last quarter through preferred stock and subordinated debt issues. It continued to bolster capital in the wake of its purchase of Security Pacific Corp.
Flexibility for Takeovers
"The consolidation of the industry is an ongoing process, and more capital confers more flexibility for acquiring banks," said Mr. Erensel. "If you want to play, you need strong capital levels."
Only common stock issuance fell sharply in the third quarter, totaling $420 million, compared with $3.1 billion in the first six months of the year.
A combination of weak bank stock performance during the quarter the usual easing of volume during the summer, and a pause after huge stock sales earlier this year caused the drop, Mr. Erensel said.
The American Banker index of bank stocks fell 2.09% in the quarter, compared with a 1.37% fall in the Dow Jones industrial average.
Preferred Issues Soar
But low interest rates allowed banks to raise Tier 1 capital through the preferred stock market, where they issued a record $2.125 billion. BankAmerica alone accounted for $750 million.
Dividends on preferred stock are based on long-term interest rates, so falling rates gave banks the chance to sell preferred at low levels.
For example, BankAmerica paid a dividend of 7.87% for a late September issue of $350 million of preferred stock, 50 basis points lower than the dividend it paid for a February issue of $365 million.
Offerings of subordinated debt in the United States totaled $3.57 billion, as banks refinanced higher-cost debt or sought to raise Tier 2 capital to qualify as "well capitalized" under Federal Deposit Insurance Corp. criteria.
To qualify, banks must have at least 5% leverage, 6% Tier 1, and 10% total capital ratios.
In addition, J.P. Morgan & Co. raised $200 million and Bankers Trust New York Corp. $150 million in floating-rate subordinated debt in the Euro-markets during the quarter.
Banks issued subordinated debt last quarter at some of the lowest interest rates and tightest spreads over U.S. Treasuries in recent years.
BankAmerica completed the lowest-cost issue of the quarter on Sept. 8, when it sold $250 million in 10-year subordinated debt yielding 7.22%, 89 basis points over Treasuries.
Costs Increase
But at the end of the quarter BankAmerica's cost of issuing an additional $300 million of subordinated debt was 31 basis points higher, at 7.53%, 116 basis points over Treasuries.
"The market was awfully sloppy in the last couple of weeks," said Joseph Labriola, bank bond analyst with Kidder, Peabody & Co.
BankAmerica is suffering in part from the $1.6 billion total of subordinated debt it has issued in 1992, which is weighing heavily on the market, said Mr. Labriola.
"BankAmerica could have record earnings for the third quarter, but if they do another subordinated debt deal, the spreads on their bonds won't tighten," he added.
BankAmerica did not suffer alone in the quarter. The yield spread of the Keefe, Bruyette & Woods bank bond index widened from about 95 basis points over Treasuries in late August to 105 at mid-September and about 112 at the end of the month, according to John Works, bank bond analyst with Keefe.
The bond market suffered from turmoil in the European foreign exchange markets. As the dollar weakened and interest rates gyrated last month, investors became more likely to sell bonds to take profits than to buy new issues.
Bank bonds, in particular, suffered from the large supply of new issues this year, a portion of which still sits on underwriters' books and is available at wider spreads than when the bonds were originally marketed, according to investment bankers.
In addition, the sluggish U.S. economy may be prompting some doubts among investors about future bank earnings.
Issuance Seen Continuing
But attractive interest rates and the desire to meet the FDIC "well capitalized" designation will pull a number of banks into the subordinated debt market in the fourth quarter, Mr. Labriola predicted.
Still, Thomas Brown, equity analyst with Donaldson, Lufkin & Jenrette Securities Corp., argued that many banks should put the brakes on plans to raise capital externally.
"Overall the industry is overcapitalized," said Mr. Brown, citing the highest capital ratios in decades.
He said the prospect of healthy earnings and meager growth in assets will push these ratios even higher.
FDIC-insured banks had an average equity-capital-to-assets ratio of 7.23% at the end of June, the highest level in 26 years. Their Tier 1 capital ratio was 9.33% and total capital ratio was 11.57% at the end of June, well above regulatory requirements.
"Instead of raising equity externally, banks will be thinking of ways to use equity internally," predicted Mr. Brown.
"Right now we're at the inflection point. The only thing keeping bank finance officers from changing their capital plans now is history -- they remember when they were undercapitalized," said Mr. Brown.Top Bank Debt(*)UnderwritersFull credit to manager Proceeds Market (billions) shareMerrill Lynch $2.94 33.0%First Boston 1.97 22.1Goldman Sachs 1.20 13.5Lehman Brothers 1.19 13.4Salomon Brothers 0.64 7.2Kidder Peabody 0.35 3.9J.P. Morgan 0.35 3.9Morgan Stanley 0.23 2.5J.C. Bradford 0.20 0.2Citicorp 0.10 0.1Industry total 8.90 100.0(*)Senior, subordinated, and convertibleSource: Securities Data Co.Top Bank Stock(*)UnderwritersFull credit to manager Proceeds Market (millions) shareMerrill Lynch $1797 70.6%Lehman Brothers 573 22.5Oppenheimer 72 2.8Donaldson, Lufkin& Jenrette 54 2.1Stifel Nicolaus 50 2.0Industry total 2,545 100.0(*)Common, preferred, and convertiblepreferredSource: Securities Data Co.
