Banks issued less debt and equity in 3d quarter.

Banks slowed their dash to the capital market in the third quarter, as debt and equity issuance dropped to $12.9 billion, 25% lower than in the previous quarter.

"Banks are not supplementing their regulatory capital levels right now because their risk-weighted assets are not going up and their balance sheet sizes are not going up," said Allerton Smith, a CS First Boston bond analyst.

Falling most sharply from the second quarter were equity issues. Common stock offerings dropped to a minuscule $83 million, compared with $1 billion in the second quarter. In the first six months of 1993, banks issued $1.7 billion of common shares.

Shares Held Their Own

The fall in common stock issuance came despite a fairly good quarter for stock prices, with regional bank shares holding steady and money-center shares up 14%, near their highest levels of the year.

In the third quarter, banks issued $700 million in preferred stock, down from more than $2 billion in the previous quarter. Senior debt offerings totaled $7.3 billion, $2 billion lower than the record set in the previous quarter.

That's still high compared with recent periods. The quarterly volume of senior debt issuance did not top $5.6 billion for any period in 1992.

Only subordinated debt volume held steady quarter over quarter, at $4.8 billion versus $4.7 billion in the second quarter.

Capital-Raising Record

Despite the sharp dropoff in the quarter, banks have raised a record $45.1 billion in the U.S. capital markets so far this year.

That's more than was raised in all of 1992, a record-setting year in which banks issued $44.5 billion in securities, according to Securities Data Co.

"Many banks have reached comfortable total capital levels, and are only looking to issue new subordinated debt for refinancings or in the event they do acquisitions for cash," said Fred Sherrill, capital markets specialist at CS First Boston.

Large banks that account for most equity issuance have rebuilt capital levels over the last two years.

For instance, the average equity-to-assets ratio rose to 6% at June 30, 1993, from 4.99% three years earlier for banks with assets of more than $10 billion, according to the Federal Deposit Insurance Corp.

At smaller banks, those with assets between $1 billion and $10 billion, the equity ratio has risen to 7.48% from 6.52% during that time.

Sign of Increasing Comfort

The increase in the use of cash for acquisitions, in place of deals paid for completely in stock, is one sign of banks' increasing comfort with their capital levels.

Mergers that include cash payments are more likely to dilute equity capital ratios if the target bank has lower capital than the acquirer, said Mr. Smith.

Bank of Boston Corp. and Amsouth Bancorp. are among the banks that entered agreements for partial or all-cash acquisitions in the quarter.

Bank of Boston has said it does not think capital raising is needed to support its pending cash purchase of BankWorcester Corp., although regulators will have the last word on the matter.

While the issuance of subordinated debt hasn't trailed off, a substantial part of the new bond issues are being used to refinance more expensive debt, rather than raising Tier 2 capital.

For instance, Chase Manhattan Corp. issued $650 million of subordinated debt in the United States and $100 million in the Euromarkets during the third quarter for refinancing purposes, said Arjun Mathrani, executive vice president and treasurer.

The bank in the quarter redeemed or announced plans to redeem $611 million in subordinated debt, he said.

When the redemptions are completed, Chase will have reduced its cost of capital by about 150 basis points and extended its maturity, said Mr. Mathrani.

Chase's debt issues came on the heels of a credit rating upgrade by Moody's Investor Service.

Moody's in July raised Chase's debt ratings after the company raised $750 million in a common stock offering in the second quarter.

The ratings upgrade, to Baa2 from Baa3 for subordinated debt, allowed the bank to lower its borrowing costs, said Mr. Mathrani.

Investor Demand a Factor

Another factor in the heavy level of third-quarter subordinated debt issuance was investor demand for floating rate issues that carried minimum rates, called floors. This so-called floored-floater structure debuted in July, and a total of six issues totalling $1 billion were sold during the quarter, according to Securities Data.

Canadian banks also accounted for $850 million in new subordinated debt issues during the quarter. Toronto-Dominion Bank, Bank of Nova Scotia, and Bank of Montreal each issued subordinated debt.

"It was an opportune time for them," said Mr. Smith of CS First Boston. "The Canadian economy is beginning to grow again, and they have put the Olympia & York problems behind them and have shown a strong improvement in credit quality." Top Underwriters of Bank Debt Third-quarter data; full creditto lead manager Proceeds Market (millions) shareMerrill Lynch $3,877 32.1%Goldman Sachs 1,847 15.3CS First Boston 1,701 14.1Lehman Brothers 1,687 14.0Morgan Stanley 650 5.4Kldder Peabody 534 4.4Salomon Brothers 523 4.3Bear Stearns 400 3.3NationsBank 300 2.5J.P.Morgan 200 1.7Top 10 total 11,718 97.1Industry total $12,090 100.0 Source: Securities Data Co. Top Underwriters of Bank Stock Third-quarter data; full creditto lead manager Proceeds Market (millions) shareMerrill Lynch $600.0 76.6%Goldman Sachs 100.0 12.8Kemper Securities 36.0 4.6Keefe, Bruyette& Woods 20.1 2.6Stifel Nicolaus 10.6 1.4Daln Bosworth 7.4 0.9Roney & Co. 5.2 0.7Lehman Brothers 4.1 0.5Industry total $783.3 100.0 Source: Securities Data Co.

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