Stock and debt issuance by banks went into overdrive in the second quarter, with a record $17.2 billion in offerings in the United States.
The beavy volume, up 2 billion from the record set in the previous quarter, was fueled once again by historically low interest rates.
Dozens of banks rushed to lock in the bargain rates, with many institutions refinancing higher-cost debt. Foreign banks were particularly active, issuing $4.8 billion in debt and equity.
With no upturn in rates in sight, conditions are expected to remain favorable for stock and debt issuance, providing one of a number of bright spots for the rebounding industry.
"This is bank heaven, because so many things are going well for the industry right now," said Tony Smith, bond analyst with First Boston Corp. "Credit quality is improving, investor receptivity is improving, and the regulatory environment is showing signs of improvement as well," he said.
Most of the securities issues were in the debt markets. Underwritten senior debt sales totaled a record $9.3 billion, and subordinated debt reached $4.8 billion, the second-highest quarterly total, according to Securities Data Co.
Preferred-stock issuance totaled $2.1 billion, just short of a record, and common stock added up to $1 billion.
Outstanding Bonds Replaced
Many of the bond offerings replaced outstanding debt. About $2.2 billion in subordinated debt was called in the second quarter, equal to almost half of the new subordinated issues.
Among the new issuers that called in debt during the quarter were Citicorp, BankAmerica Corp., Chemical Banking Corp., and Mellon Bank.
Since the beginning of last year, banks' stampede to the stock and debt markets was aimed primarily at bolstering regulatory capital. Now capital generally far exceeds requirements. Even before the latest binge of issues, total capital ratios at 40 large banking companies averaged 12.96% at the end of the first quarter, up from 11.10% at the end of 1991, according to First Boston Corp.
Shift to Senior Debt Seen
In the next few quarters, banks are likely to reduce their offerings of subordinated debt, which counts as capital, and instead to turn to less expensive senior debt as a source of funding, experts said.
"Until asset growth prospects improve, it appears that the banks have now achieved capital targets and will deemphasize capital-building efforts," said Jay Weintraub, a Merrill Lynch bank analyst, in a recent report.
Cost savings from refinancings will help banks bolster their bottom lines. For example, Citicorp expects to save about $13 million on an annualized basis from some $1.1 billion in refinancings so far this year, an executive said, adding that further refinancings this year should double that figure.
In the equity market last quarter, Chase Manhattan Bank's $750 million issue in the United States and overseas was the largest offering.
There was also a resurgence in common stock issues by community banks, with six issues of $10 million or less in the quarter.
Except for banks involved in acquisitions, industry observers do not foresee large common stock sales in the second half of the year. "We are expecting most banks to generate capital internally more quickly than they need to deploy it," said John Leonard, a stock analyst with Salomon Brothers Inc.
Benchmark Yield Drops
The quarter saw ideal conditions for new issues of intermediate-term debt. Not only did interest rates fall, but the spread narrowed between the yields on U.S. Treasury securities and new offerings - meaning that investor demand for bank issues was especially strong.
The yield on the 10-year Treasury note fell about 30 basis points in the quarter to 5.78%. The average yield spread for a group of major bank subordinated bonds tracked by Keefe, Bruyette & Woods Inc. tightened by 4 basis points, to 84 basis points.
Investors were buoyed by improving credit ratings. In the first half of the year, for instance, Standard & Poor's Corp. upgraded 13 U.S. banks while downgrading only four. And on Friday, Moody's Investor Service upgraded both Chemical Banking Corp. and Chase Manhattan Corp. (See related story on page 1.)
Banks' aggressive refinancing of debt also contributed to the bank bond sector's good performance by reducing the net new supply of bonds available.
Foreign banks accounted for a substantial portion of debt and equity issuance in the quarter. More than half of the $2.1 billion in preferred stock issues were by Spanish and British banks attracted by low longterm rates.
Three foreign banks accounted for $232 million of the total $1 billion of common stock sold in the second quarter.
In the subordinated debt market, ABN Amro, Bank of Nova Scotia, and Westdeutsche Landesbank Girozentrale issued a total of $1 billion.
Industry observers expect foreign banks to remain active. "I think you will see Yankee bank issuance pick up in the remainder of 1993 and into 1994," said Joseph Labriola, bond analyst with Kidder, Peabody & Co.
Foreign banks are generally faced with weak domestic economies and would like to raise capital to offset deteriorating credit quality. At the same time, "Yankee," or foreign, issues can offer better yields to investors, compared with similar-quality domestic issues.
Credit Lyonnais is readying the sale of $100 million to $150 million of preferred stock through a private placement qualifying under rule 144A, and is likely to launch the sale after it is taken off rating watch from Standard & Poor's, as early as this week, according to market sources.
Another European bank is aiming to tap the preferred market within the next two weeks, said a market source.
An Italian bank is reportedly mulling a placement of more than $250 million of subordinated debt in the U.S., Sudwestdeutsche Landesbank of Germany has filed for a $250 million registration to issue debt in this country, and Kansalli-Osake Pankki of Finland is also mulling a U.S. capital markets issue, say market sources.