Wells Fargo & Co. and JPMorgan Chase & Co. have led among the main banks of Wall Street by tapping into the US investment grade market after reporting its third quarter results.
These financial giants came to the debt market after posting solid net interest income and raising its guidance. Wells Fargo issued bonds for a total of US$6,000 million in two sections, while JPMorgan It placed an offer of US$7.25 billion in three parts, as cited by the Bloomberg agency.
Although the big banks were expected to stay on the sidelines due to their strong short-term financing and costly loans, They decided to go into debt in the current environment. The average spread on bonds issued by financial institutions stood at 145 basis points on Friday, 21 basis points higher than the spread on the broader index of high-quality bonds, according to data compiled by Bloomberg. This choice could indicate that they anticipate that borrowing will be more expensive in the future.
Bloomberg Intelligence analyst Arnold Kakuda suggests that the debt issues of these two banks could be related to the need to meet its total loss absorption capacity requirements.
The TLAC rules require banks to hold a certain amount of debt at the level of their holding companies, which can be converted into capital in distressed situations to keep the company operating solvent.
Wells Fargo and JPMorgan are particularly affected by these new regulations, which would affect its debt surpluses, Kakuda said. Despite higher borrowing costs, big banks need to replenish their bail-in-eligible debt for regulatory reasons as they have raised their lending yields, but net interest margins may have peaked as Lenders increase deposit costs.
Average note yields of highly rated U.S. companies closed at 6.1% on Friday, after reaching their highest level since 2009 earlier this month. According to Robert Smalley, analyst at the financial credit desk at UBS Group AG, Recent gains by big banks have favored credit spreads, which could lead to more issuance in the future.
Wells Fargo beat analysts’ expectations for net interest income in the third quarter and again raised its full-year forecasts, taking advantage of the rise in interest rates. JPMorgan also recorded another record quarter in net interest income and raised its forecasts for the year.
“We expect to see more emissions,” Smalley said by email. “Neither Goldman nor Citigroup have issued a 10-year senior benchmark in 2023.”
Wall Street: the eye of investors
Investors remain interested in debt issued by large lenders, considering it a safe haven within the financial sector. Lack of supply has been a big driver of financial sector bond yields so far this year.
As for the outlook, US companies have raised $22.15 billion so far this month, considerably less than the $85 billion expected. Profit outages have partly contributed to this slowdown, But debt issuance by big banks is expected to recover as more lenders report quarterly results.JPMorgan credit strategists Eric Beinstein and Nathaniel Rosenbaum said in a note written Monday.
Kabir Caprihan, the bank’s financial sector analyst, projects a total of between $16 billion and $20 billion in issues from large banks after presenting their results. The issuance could reach $24 billion by the end of the year, according to the note.
“If this turns out to be true, it will not significantly change the supply landscape and could help financial entities reduce the spread gap with non-financial entities,” the analysts added.
Source: Ambito
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