Investor wariness about banks has spread to the bond market.

Just prior to the release of bank third-quarter earnings reports, the spread between Arated bank subordinated debt and treasury securities widened by between 3 and 7 basis points for 10-year paper, according to a report by Keefe, Bruyette & Woods Inc.

Although the spreads have receded since then for many banks, Keefe Bruyette vice president Eric J. Grubelich said a few continue to be penalized due to concern over such worries as competition in the commercial loan business, rising interest rates and unrealized securities losses.

"There has been a little bit of tightening," he said of the spreads. "They've widened out and come back in for some banks. But you have to look at it on a case-by-case basis."

The spread over treasuries of the subordinated debt of PNC Bank Corp., widened 3 basis points in the first two weeks of the month, but narrowed 2 basis points last week, when the Pittsburgh-based bank reported unrealized securities losses equal to about 11% of equity for the second quarter.

Mr. Grubelich pointed out that one of the main factors affecting bank debt was investor uncertainty over banks' unrealized losses on securities holdings. Although those fears appeared to have been borne out in PNC's results, its debt recovered some ground. Generally the unrealized losses of the top 50 banks represented a smaller percentage of equity, Mr. Grubelich said.

Bank of Boston Corp. reported unrealized losses of less than 1% of equity capital, Mr. Grubelich said. Wells Fargo & Co.'s reported losses were about 3.9% of equity, and Keycorp's were at 4.8% of equity.

Mr. Grubelich said he thinks two of the banks in particular, Wells Fargo and Keycorp, will continue to perform well and their subordinated debt will be upgraded to a single "A" rating.

"Both these banks will continue to hold up well in terms of overall credit performance," he said.

"Should either Wells or Key widen more than their single 'A' rated peers, each should be considered a prime purchase for buyand-hold fixed-income investors," he said.

Wells Fargo's balance sheet risk' has moderated from decreased loan leverage and from a higher percentage of lower-risk consumer lending, the analyst said.

The reduction in its balance sheet risk profile, he said, while partially a function of the economic slowdown in its home state of California, is partly reflected in the bank's 10% Tier 1 capital ratio.

"With modest balance sheet growth and a large amount of holding company liquidity, further reduction in holding company debt is likely to continue through normal maturities," Mr. Grubelich said.

The analyst also noted that last year's merger of Keycorp and Society Corp. created an institution with a "solid blend" of commercial and consumer lending and stable sources of fee income driven by its trust business.

"Key's multiregional asset and deposit base, coupled with a lowrisk lending profile, provide a core foundation for stable and balanced earnings and asset quality performance over the long term," the analyst said.

Mr. Grubelich said banks in general are in good shape.

"Asset quality remains top notch," he said. "There's no indication of a slowdown yet."

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