Analysts Predicting Bank Debt Rally

Bank bond analysts expect bank debt to rally in coming weeks after a summer of sluggish performance.

Bank corporate bonds and capital securities have languished primarily because of thin volume, which is common in summer months, and nervous dealers looking to empty their inventory for fresh supply.

In a recent report, Ethan M. Heisler of Salomon Brothers Inc. urged clients to stock up on bank paper because he expects spreads to tighten by as much as 5 basis points.

Mr. Heisler said he expects the hike in yield because bank bonds will be scarce this month and are currently undervalued.

"I don't see a lot of supply on the domestic side," said Mr. Heisler. "Most of the major banks have already issued quite a bit of subordinated debt and trust-preferred securities, and if they are tapping the market they are tapping medium-term-note programs," which are privately placed deals.

Banks bonds, he argued, are cheap "and they don't reflect all of the upgrades or the fact that the credit card scare is dying down."

Additionally, the market has yet to factor in the sweep of consolidation, said Mr. Heisler.

Some of his picks include PNC Bank Corp., Fleet Financial Group, and Mercantile Bancorp., St. Louis.

"Credit fundamentals are strong, and the banks may be partners in a merger which could be positive for ratings," said Mr. Heisler. "Trading in the mid-70s, each bank offers acquirers a leading regional bank franchise with move-right-in amenities such as efficient operations, great sales culture, and strong base of noninterest income."

Other banks that he said look like strong takeover candidates include North Fork Savings and Long Island Savings Bank, both in New York.

"A merger between these two credits could lead to an upgrade for Long Island Savings," he wrote.

At the same time, Mr. Heisler told investors to sell Wachovia, which Standard & Poor's recently placed on negative outlook because of the bank's ambitious acquisition plan.

Other analysts noted that the most attractive buys in the sector include trust-preferred securities, which have taken a beaten in the last couple of weeks.

Bank bond analyst Michael Leit of Prudential Securities noted that most bank corporate bonds are strong buys because of their credit fundamentals.

However, "it is difficult to get people interested in them," he said. "With trust-preferred securities, investors are getting pretty decent yield for the rating."

Mr. Heisler said that capital securities, which have been pummeled in recent weeks, also are a good buy.

"Buy Wells Fargo," he said. "Although the credit story is tarnished because of the company's missteps on integrating First Interstate, the general credit trend remains positive."

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