Banks May Get Profit Boost as Demand for Debt Rises
US banks are taking advantage of improving earnings and growing investor demand to raise billions of dollars in debt at historically low interest rates, a move that could boost the sector’s profits in coming years.
The burst of fundraising in the US is in stark contrast to Europe where banks have struggled to issue debt as the eurozone crisis and worries about the financial industry have undermined market confidence.
The cheap finance locked in by big institutions such as JPMorgan Chase, US Bancorp , Goldman Sachs and Morgan Stanley in recent days marks a remarkable comeback for a sector that was shunned by investors during the financial crisis.
Less than two years after the government was forced to intervene to ease a dramatic credit crunch, US banks sold more than $7 billion in debt last week—the largest weekly total since September 2009, says Dealogic.
US Bancorp, a Minneapolis-based lender, raised $1 billion in five-year bonds at an interest rate of 2.45 per cent—one of the lowest ever paid by a bank.
Lower funding costs boost profits because they increase the margins earned by banks on their loans to consumers, companies and investors.
Wall Street executives say recent debt issues were triggered by “reverse inquiries”—informal approaches by fund managers seeking to raise their exposure to a sector they had largely avoided since the crisis.
“There is a bit of a food-fight among investors to get hold of paper from US banks,” an executive at a big bank said. “After leaving the sector alone for so long, there is renewed appetite.”
With US Treasury yieldsat record lows, investors seek alternatives that offer higher returns. Expectations that the Federal Reserve will keep rates at near-zero have further raised demand for bonds, as a low-interest, low-growth environment is best for such investments.
Recent earnings and the passage of financial rules also contributed to the surge in debt issuance. Goldman, Morgan Stanley and JPMorgan each issued $3 billion in bonds this month.
The spike in fundraising is enabling US banks to replace existing bonds with new, cheaper ones. Jean-Francois Tremblay, a Moody’s analyst, estimates that US banks have refinanced $200 billion of the $372 billion of debt coming due in 2010.
In Europe, analysts say banks have raised only 40 per cent of the 450 billion in euros they need this year.
But since publication of the stress tests there have been signs of improvement. This week BBVA, Spain’s second-biggest bank, sold the first bond by a Spanish lender since April.
Gregory Peters, at Morgan Stanley, said: “The banks that don’t need funding can do it, the smaller banks that do need funding probably can’t.”
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