Upbeat Outlook Boost Hunger For Bank Equity
If you issue, they will come.
That's the message bankers are hearing from investors these days. The window for new equity issues that opened in the first half of this year shows no sign of closing. And investors are snapping up fresh bank debt even as returns are falling.
"This is the most attractive time this year for bank equity and debt," said Robert A. Baer Jr., a managing director with Merrill Lynch & Co.
The explanation is twofold: lower interest rates and more investor confidence in the banking industry. Since January, bank stocks have soared as to 10-year Treasury bill has plummetted - to 7.6% recently.
Seasoned for Lucky Numbers
Meanwhile, institutional investors are flush with cash they need to invest before yearend, and banks are among the lucky recipients.
NCNB Corp. has tapped the receptive climate for bank debt. The Charlotte, N.C., banking company raised $300 million of 10-year notes a few weeks ago - after boosting the issue by $50 million to satisfy hungry investors. The 9.12% coupon represented a skimpy 165-basis-point spread over comparable treasuries.
"This is the cheapest subordinated debt I have," said John E. Mack, senior vice president and treasurer.
Single Digits Spell Success
NCNB is ony one of the major banks and banking companies that has broken the 10% coupon barrier this year for subordinated debt. BankAmerica, Barnett Banks, and First Union all sold debt at single-digit percentages.
Some weaker banking companies, notably First Interstate Bankcorp and Security Pacific, issued debt at more than 10% coupon rate. Any debt issue paying single-digit rates is considered a whopping success in bankers' eyes.
NCNB Corp. managed to pull in oversubscribers even though the bank took the risky move of issuing the debt the week before it reported third-quarter earnings.
Investors usually prefer to sit on the sidelines pending an earnings announcements, especially when earnings are volatile.
Downturn for Typical Spread
Confidence in banks, not prevailing interests rates, sets the risk premium reflected in the spread between between the T-bill rate and the coupon rate on a debenture.
A typical spread today for a healthy bank is around 170 basis points over a comparable Treasury, judging from the debt that has been sold this year.
"That is a lot lower than it would have been six months ago," Mr. Mack said of the cost of his recent debt issue.
A year ago, wary investors were demanding up to 400-basis-point premiums before they would sink a nickel into bank debt. And as recently as July 1991, NCNB's subordinated notes carried a 10.20% coupon.
"Spreads were wide because banks were out of favor with investors," Mr. Baer said.
Even if investors' confidence continues to grow and interest rates fall, however, experts doubt that banks' subordinated debt will slip under 9%-a return so meager that investors may opt for less risky investments.
Demand also has spilled over into the equity arena.
First Union, in Charlotte, N.C., recently completed a stock offering after boosting the number of shares. The offering fetched $235 million needed to finance the purchase of deposits and assets from Southeast Banking Corp.
Benefits in Many Sizes
"We are pleased to have raised more than we expected," said Margaret Norris, a First Union vice president.
Small banks also are benefiting from a bull market in bank securities. Tiny Collective Bancorp in Egg Harbor, N. J., for example, announced last Thursday that it is increasing a planned public offering to more than 2.2 million common shares from 1.5 million.
Bank stocks have attracted investors throughout the year, and the generally good third-quarter earnings brought in more buyers. Many bank stocks are at or near a 52-week high. J.P. Morgan and Bankers Trust, two favorites among investors, have gained roughly 20% in value over the past two months. The two banks did not outperform the Standard & Poor's 500 for the first eight months of the year.
Some big institutional investors such as Wells Fargo say they have increased investments in bank stocks in the past several months, in some cases overweighting exposure to banks with respect to the S&P 500. These investors said that many high-performing banking companies have undervalued stock, which makes a good long-term buy.