As the profits in underwriting domestic bank debt dwindle, the major Wall Street firms are underwriting more foreign bank securities for issuance here.
The issuance of so-called Yankee bank bonds has surged, and analysts said they expect the momentum to continue as rising interest rates suppress issuance by U.S. banks.
With U.S. banks generally awash in capital, the investment banks have been looking offshore for volume for some time-and the efforts began to pay off in a big way in the first quarter, according to Securities Data Co.
The total value of Yankee bank bond issues underwritten by the top 11 brokerages jumped to $26.2 billion in the first quarter, from $12.8 billion in the fourth quarter and $8.5 billion in the first quarter of 1996.
"Investment banks have significantly increased their research, trading, and investment teams in overseas capital markets," said Matthew H. Burnell of Merrill Lynch & Co. "The meaningful increase in Yankee debt issued in the last 12 months is evidence of those past investments coming to fruition."
Investment bankers said that fees on many Yankee bond deals are negotiated, meaning that the fees are generally high. But they also pointed out that underwriting spreads have been compressed in the last 18 months as competition among U.S. underwriters intensified.
Consolidation in foreign banking is also spurring investment banks to increase their market share in underwriting Yankee bank debt, said credit analyst Christopher M. Reed of Duff & Phelps Credit Rating Co.
"As a result of European economies' emerging out of the economic doldrums, European banks should be in a position to lend more," said Mr. Reed. "And they will require additional capital support for the loan volume that they need to do."
Mr. Burnell noted that foreign banks also want to broaden their investor base.
"Most foreign banks find it easier and cheaper to issue domestically or within their own region," said Mr. Burnell. "But if they issue in the (United States), they gain more name recognition."
Underwriting Yankee bank debt has increased dramatically for a number of big firms. According to Securities Data, Salomon Brothers Inc. underwrote $5.65 billion of Yankee bank bonds in the first quarter, up from $1.17 billion quarter the year earlier; Goldman, Sachs & Co.'s underwriting of foreign bank debt for issuance here increased to $5.08 billion from $3.86 billion.
J.P. Morgan & Co.'s underwriting rose to $4.72 billion in the first quarter from $368.4 million the year earlier; Merrill Lynch's rose to $3.08 billion from $1.02 billion.
Analysts said that other sectors of the Yankee bank bond market are heating up as well.
A $500 million issue of step-up perpetual securities by National Westminster PLC came to market last week.
Market sources also said that Societe Generale came to market Wednesday with a $400 million issue, and Credit Suisse First Boston is said to be coming to market with a $500 million issue of step-up preferred.
Deutsche Morgan Grenfell also issued and underwrote a $500 million Yankee bond deal Tuesday.
Analyst coverage of the bonds also is on the rise.
Bank bond analyst Van B. Hesser of Goldman Sachs said his firm has always had a Yankee bond analyst operating out of its London office. But the New York-based Mr. Hesser has increased his coverage of Yankee banks this past quarter.
"Over the past year, it has become clear to me that our institutional investors are likely to equally ask about bonds from a bank in Thailand as they would Citicorp," Mr. Hesser said. "Given the development of the Yankee bank market, it only makes sense for me to be aware."
Mr. Hesser, noting that Goldman Sachs is focusing its attention on Asian banks, said he expects to be going to Thailand in the next two weeks.