By Melanie Hilbush, CFA
Despite a meaningful rally in the second quarter, bank spreads are still wide relative to the broader investment-grade corporate market.
In March, the spread differential between the Bloomberg U.S. Investment Grade Banking Index and the Bloomberg U.S. Investment Grade Corporate Index reached 28.75 basis points.
This was not only the widest level in the last five years, but also a three-standard-deviation move from the five-year mean of -12.5bps. Through the end of June, we’ve seen a significant rally in bank equities and credit spreads with the SPDR S&P Regional Banking ETF 14% off its lows and the Bloomberg Investment Grade Banking Index 58 bps off its wides.
Banks that had been most under pressure during earlier volatility led the move tighter over the past two months, with Comerica (CMA) 474bps tighter, Zions (ZION) 338bps tighter and Synovus (SNV) 231bps tighter, according to the Bloomberg U.S. Investment Grade Corporate Index. As a result, spread dispersion within the sector has decreased.
As spreads have tightened, U.S. banks have issued roughly $50 billion in the primary market since the end of March. From a demand perspective, the deals were generally well received by investors, with new issuance greatly oversubscribed.
One of the most telling was from Schwab (SCHW), which priced a deal on May 17. Schwab received a lot of attention and was initially under pressure during recent volatility, so the bank’s ability to price the deal and its strong performance increased investor confidence in both the name and the sector overall. The company priced $2.5 billion across two tranches and the bonds are now 35 to 65bps tighter than at issuance, depending on the tranche.
Despite the rally, bank spreads are still wide relative to the broader investment-grade corporate market. As of June 30, the spread differential between the Bloomberg U.S. Investment Grade Banking Index and the Bloomberg U.S. Investment Grade Corporate Index is 10bps, which is still roughly two standard deviations away from the five-year mean and near levels experienced at the height of pandemic volatility in March 2020.
Banks begin reporting second quarter earnings this week, and while stress tests indicate that the largest U.S. institutions remain strong fundamentally, given the significant move in front-end rates, banks’ securities portfolios could be back in focus.
The Bloomberg Investment Grade Banking Index is dominated by the money center and regional banks with assets over $100 billion, which we believe are best positioned within the sector. To the extent we see elevated volatility around earnings, subsequent new-issue supply could create opportunities in the space.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2023 Neuberger Berman Group LLC. All rights reserved.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.