Banking companies have sold $3.6 billion in preferred stock so far this year, easily eclipsing last year's record $3.1 billion.
BankAmerica Corp., already the biggest issuer this year, will further build its 1992 total when it comes to market with a $300 million preferred deal this week.
Preferred stock gives banks the opportunity to build Tier 1 capital while taking advantage of low borrowing rates.
Falling interest rates and improved investor sentiment toward banks have recently pushed preferred stock dividends below 8%, at some banks, for the first time in years.
"Some of this issuance is just opportunistic," said Lawrence Cohn, banking analyst at PaineWebber Inc. "Paying 7.875% forever is awfully attractive money if your return on capital is higher than that and you can leverage it up," he said.
Locking in Low Rate
Preferred stock has no maturity and the price is based on long-term interest rates. The stock typically can be retired in five years; so if rates fall further, the shares could be refinanced then. If rates rise, banks could leave such issues outstanding indefinitely.
"It's hard to believe people will tie up their money forever at these rates, but they will, so it's a good idea to issue," Mr. Cohn said.
Much of the money flooding into preferred stock has come from bank depositors seeking higher yields than are available in certificates of deposits, capital markets specialists said.
BankAmerica is expected to pay a dividend yield on its new preferred issue of about 7.875%, 50 basis points less than the 8.375% dividend on the $365 million of preferred stock it issued in February.
A Big Presence
The San Francisco-based company has been the most prolific preferred stock issuer this year, with $765 million in preferred sold already, 21% of the industry's total.
"In the past, BankAmerica never had as much reliance on preferred stock as other money-center banks," said Mr. Cohn.
He noted that many other banks tapped the market extensively in the mid-1980s when BankAmerica's credit problems made it less attractive to investors.
"They don't need capital to meet regulatory minimums," said Raphael Soifer, banking analyst at Brown Brothers, Harriman & Co.
The additional preferred stock could help raise the bank's credit ratings, Mr. Soifer said. Its senior debt is rated A2 by Moody's Investors Service and A by Standard & Poor's Corp. BankAmerica's total capital ratio was 10.4% at June 30.
Added capital could also support BankAmerica's rumored interest in acquiring a bank in Texas, or in creating a "bad bank" for nonperforming loans acquired in the merger with Security Pacific Corp., said Mr. Soifer.
BankAmerica will issue 12 million depositary shares, each representing one-twentieth of a share of series M cumulative preferred stock. The price will be $25 per share.
The issue will be placed through an underwriting syndicate lead-managed by Merrill Lynch & Co. and co-managed by Bear, Stearns & Co., Kidder, Peabody & Co., Lehman Brothers Inc., PaineWebber, Prudential Securities, Salomon Brothers Inc., Smith Barney, Harris Upham & Co., and Dean Witter Reynolds Inc.