Hopes of more cost-saving consolidations kept the shine on bank bonds yesterday, but many players viewed the merger-inspired rally as an opportunity to bow out of the banking sector.
Led by Chemical Banking Corp. and Manufacturers Hanover Corp., whose planned merger sparked a broad run-up in the bank sector Monday, bank issues outpaced Treasuries with gains of as much as 1/2 point. Other high-grade corporates marked time through a quiet session, while junk bond issues advanced 1/4 point.
Manufacturers' 10-year paper, which traded at spreads upwards of 250 basis points last week, changed hands about 195 basis points over Treasuries yesterday. Chemical, meanwhile, has seen its risk premium wither to 195 basis points from nearly 270 basis points seven days ago.
Still, traders warn there is more "noise" in the bank market than actual trading, and noted many accounts were scrambling to cover short positions on news of the merger. Moreover, the Chemical- /Manufacturers marriage, while positive for the two New York banks, does not cure the industry of poor asset quality and excess capacity, they say.
"I question how much real buying is going on other than dealers covering shorts and doing clean up," said one New York trader. "I'm not trading a lot of bonds and the market is fairly open."
George A. Ashur, director of corporate bond research at Chase Securities, the securities subsidiary of Chase Manhattan Bank, said, "There's a lot of optimism that the rumors of consolidations will mean good things for capital ratios and economies of scale, but there remains a great deal of overcapacity in the banking area.
"I wouldn't be an aggressive buyer [of bank bonds] unless the security had a specific application to the portfolio and the obligation was a credit that was in an improving mode," Mr. Ashur said. "I think the euphoria is going to subside."
Others were more blunt.
"I would sell SecPac on this, First Interstate, First Union -- all the real-estate regionals," said Russ Ramsey, bank specialist at Friedman, Billings, Ramsey & Co., a Washington, D.C.-based brokerage and investment banking firm. "It's a great opportunity to get out."
Said Ronald Lout, portfolio manager at Invesco Trust Co. in Denver: "If you look at this from the long-term, they're merging out of weakness. I'm just not a big buyer of bank bonds."
Even so, capital markets specialists said some commercial banks, aware that the euphoria may be short-lived, may try to take advantage of investors' sentiments to raise Tier 2 capital with subordinated debt.
"We think the market is very receptive," said Raymond Warner, Salomon Brothers. "Honestly, I would not be surprised" to see banks step in, he said.
Worries over poor second-quarter earnings have sidelined most bank issuers for the past month.
Just yesterday, West Coast banking giants Security Pacific Corp. and Wells Fargo & Co. reported that sharp increases in nonperforming assets resulted in poor showings for the second quarter.
Security Pacific said its earnings slid 76%, in line with the Los Angeles bank's previous estimate. Profits totaled just 30 cents a share, down from $1.59 a share a year earlier.
Robert H. Smith, chairman and chief executive officer, attributed the poor performance to "continued weak economic conditions in the United States, including California, as well as prolonged economic weakness in Australia and the United Kingdom."
SecPac set aside $409.3 million for credit losses in the second quarter, up from $160.7 million a year ago. That brought its total reserve for credit losses to $1.54 billion as of June 30, or 2.5% of loans, from 1.8% a year ago.
Wells Fargo, meanwhile, said its earnings withered to $14 million from $232 million last year. The bank earned just 21 cents a share, down from $4.40 in the second quarter of 1990.
Wells's nonperforming loans rose $404 million, less than the $450 million rise it had predicted three weeks ago.
In the primary market, Clorox Co. found willing buyers for $200 million of 10-year notes.
In a rare trip to the debt market, Clorox offered the noncallable securities as 8.80s to yield just 62 basis points more than the 10-year Treasury note.
The issues, rated A2 by Moody's Investors Service and AA-plus by Standard & Poor's Corp., quickly sold out.
The deal, part of a meager $350 million new-issue slate, followed $1 billion of new paper sold Monday.