Matt Brill, a senior portfolio manager at Invesco, which manages $888 billion, said bank bonds still look like a good buy because most of the securities haven’t fully recovered from December’s market gyrations. But banks have spent years building their capital levels, and any upcoming slowdown in economic growth won’t likely have much impact on lenders’ ability to pay their debt obligations, he said.
“There still is value in the banking space,” Brill said. “The credit market has been very strong and demand for bank paper has been there. Investors have gotten the impression quite early that bank issuance will be underwhelming.”
For years, banks have issued large amounts of debt at their parent companies to meet the requirements of a regulatory rule known as total loss-absorbing capacity, or TLAC. In times of crisis, the parent-company debt would turn into equity to help finance a new, healthy version of the bank. The biggest U.S. banks issued more than $660 billion of this debt between 2015 and 2018, according to Bloomberg data, and have met their requirements.
“With TLAC, the buildup is done," said Pri de Silva, an analyst at CreditSights. “Banks still need to remain in compliance. They will be regular issuers on and off."
Now more bank bond issuance is likely to come in shorter-term debt, maturing in three years or less, sold by the operating banking unit, Bloomberg Intelligence analyst Arnold Kakuda wrote in a note on Tuesday. The regulated banks can often borrow cheaper than their holding companies. Overall issuance of dollar-denominated bank bonds are likely to fall again in 2019 after declining 13 percent to $359 billion last year. That, along with banks’ healthy capital positions, should help risk premiums on the debt compress, said Jon Curran, a portfolio manager at Aberdeen Standard Investments, which manages about $736 billion.
“They’re certainly not giving away these deals,” Curran said. He’s been selectively buying bank bonds when he can find value. “It’s a nice validation. Banks stand on firm fundamental footing.”
This article provided by Bloomberg News.