After being in the doghouse for several years, bonds of money-center banks have caught up with the rest of the industry.
Ten-year subordinated debt securities of money-center banks now trade at yield premiums of 10 or fewer basis points above issues of other banks with similar credit ratings.
This is a sharp improvement from the extra yield of up to 200 basis points that weaker money-center bonds carried in the secondary market two years ago.
No More 'Money-Center Taint'
"What I think you're seeing here today is there is no longer a money-center taint to these names," said Allerton Smith, analyst at First Boston Corp. "I would say they are on par with their superregional counterparts in terms of spread."
The convergence of yields in the secondary market means money-center banks are no longer handicapped by higher borrowing costs than regional bank issuers when they tap the markets.
The bonds of lower-rated money-center banks such as Citicorp, Chase Manhattan Corp., Chemical Banking Corp., First Chicago Corp. have show the most improvement.
More highly rated money-centers such as J.P. Morgan & Bankers Trust New York Corp., and Republic New York Corp. did not stumble in the 1980s and so have not had a sharp rebound in their bonds.
On Tuesday, 10-year subordinated debt issues of Citicorp, Chemical, First Chicago, and Chase were quoted at 78 to 85 basis points over the 10-year U.S. Treasury note, compared to a 78-basis-point spread for First Union Corp. and a spread of 83 for Fleet Financial Group, according to First Boston.
Triggered by Upgrades
In contrast, at the end of last year, none of those money-centers were trading at a tighter spread than Fleet or First Union, and Citicorp and Chase bonds carried as much as 30 to 50 basis points more yield.
Upgrades this summer Of Citicorp, Chase, and Chemical have triggered the last leg of the rally in money-center bank bonds.
The rating agencies rewarded the big New York banks for the drastic actions they took to recover from sour real estate and Latin American loans, said William King analyst with Merrill Lynch & Co.
Improvements in earnings, asset quality, and expense control have all contributed to the upgrades, he said.
"The money-centers have reinvented themselves," Mr. Smith said.
Change in Focus
He noted that First Chicago, Chase, and Chemical have deemphasized lower margin internationally-based businesses and focused On more stable and profitable activities.
"A lot of what's happened is that money-center banks in general were downgraded the most in the past, and so now that things are getting better they are among the first to get upgraded in an industry where the fundamentals are overwhelmingly positive," Mr. King said.
He noted that lower-rated regional banks such as Shawmut National Corp. and Bank of Boston Corp. have also seen their bank bonds rally in tandem with improving credit ratings since 1992.