Amid the recent turmoil, bankers have been on the sidelines of the capital markets and are likely to remain there beyond the end of the year, market experts say.
The reasons are clear: In addition to being well capitalized, banks are wary of the high cost of issuing subordinated debt or trust-preferred securities right now.
"The market is choppy, and banks simply don't need the money," said Stanley T. August, who heads First Union Capital Markets. "There is no reason for them to test the market now."
Bank bond analyst Michael Leit of Prudential Securities Inc. agreed. "I think the trend for banks is to wait a little bit longer," he said. "There has been very little done in high-grade corporate bonds generally. In the past two weeks, there were almost no deals done."
Market observers say issuance of subordinated debt and trust-preferred securities has declined sharply this year.
Issuance of trust-preferred securities by the top 25 banks has been at a standstill since June, and new activity in subordinated debt has fallen off dramatically in the last few months.
Banks have issued just $2 million of subordinated debt so far this month, which is down from $20 million in debt in October and $23 million in September, according to Securities Data Co.
Most banks preferred to issue trust-preferred securities late last year and early this year, because it was much cheaper than subordinated debt and met regulatory requirements. .
Traditionally banks issued $10 billion to $15 billion worth of subordinated debt a year, said bank bond analysts Van Hesser of Goldman Sachs & Co. However, trust-preferred securities issuance ballooned in excess of $30 billion.
That amount clearly was more than was needed, said bank bond analyst Allerton G. Smith of Donaldson Lufkin Jenrette.
"Three billion dollars in capital notes have matured this year, and they have been replaced many times over in the first six months of the year, so banks' appetite for securities qualifying for regulatory capital has been fully satisfied."
Mr. Smith said the cost to issue debt has ratcheted up recently as a result of the turmoil in the Asian markets, which drove down yields and boosted prices.
"Within the last couple of years, spreads have widened by 15 to 20 basis points," said Mr. Smith. "Banks that were considering coming to market yearend have been deterred by the spread to Treasuries."
Mr. Hesser of Goldman Sachs said, however, that banks still continue to go to the capital markets.
"Long-term deposits continue to be flat, and loan growth has been modest," Mr. Hesser said. "So there has been quite a bit of issuance of one- to five-year debt."
Mr. Hesser said banks issued $96 billion in debt with maturities less than five years last year, compared with $195 billion so far this year.
"Banks don't need to issue costlier forms of debt when they have filled the gap with senior debt," Mr. Hesser said.
"However, we do expect a recovery of subordinated debt in 1998," he said. "We do expect market conditions to get better in 1998, and there is over $50 billion in subordinated debt to be issued by U.S. banks, which will have to refinanced as it matures."
